There are several types of mortgage loans available for buyers and homeowners. But, there’s one that operates differently than most loans. The reverse mortgage allows the bank to repurchase the home from the homeowner through monthly payments.
There are a few essential things you should know if you’ve considered choosing a reverse mortgage to help stay afloat in your retirement years or if you need help avoiding foreclosure.
What are the requirements for a reverse mortgage?
Not all homeowners qualify for a reverse mortgage. To get a reverse mortgage, applicants must:
- Be at least 62 years old
- Live in the property as their primary residence
- Upkeep the home and property (maintenance and landscaping)
- Continue making property taxes and any HOA fees
- Proceeds from your reverse mortgage should be able to pay off any remaining balance you owe on your property
How does a reverse mortgage work?
When you qualify for a reverse mortgage, you are selling back the equity in your home to the bank. Once your loan is approved, you can choose to receive payments from your lender as a line of credit, in a lump sum, or distributed as monthly payments. The homeowner doesn’t have to repay the loan, except for specific situations.
Types of reverse mortgages
There are several types of reverse mortgages. The differences primarily relate to how the money is distributed.
Lump-sum: The borrower receives the entirety of the loan in one payment. The lump-sum option is the only option that provides a fixed interest rate. Since most borrowers aren’t likely to repay the loan, this may only be important if you have a beneficiary who may want to repay your balance to retain the property.
Equal monthly payments: The lender sends monthly payments to the borrower so long as they live in the house. A variation on this type of reverse mortgage allows for a line of credit that the borrower can use if they need additional funds before their next payment.
Term payments: The lender provides equal monthly payments for a set number of years (10, 20, etc.) Borrowers may also opt to add a line of credit to this type of payment to allow for flexible income as needed.
What’s the difference between a reverse mortgage and a home equity loan or home equity line of credit?
You don’t need to have excellent credit or a reliable source of income to qualify for a reverse mortgage. You just need to be able to finish paying off the remainder of your mortgage with any proceeds from the loan.
Additionally, borrowers only repay if they move from the home or sell it. Beneficiaries can pay the balance to retain ownership of the property.
Line of credit: The borrower can take as much or as little money as needed. They (or their beneficiary) only pay interest on the amount used.
How the loan is repaid
The balance on your reverse mortgage comes if at least one of two things happens:
- The homeowner dies
- The homeowner moves
When the homeowner dies, a surviving spouse may be able to stay in the home. If you are the surviving spouse, you’ll need to be proactive to avoid complications. If you want to stay in the house, you should provide your spouse’s death certificate, a will, a marriage certificate, and/or a court order. You should submit the documentation within 90 days. You may consider asking a lawyer for assistance.
If you were not married when your partner died, you might not be able to stay in the home without paying off the loan. An attorney can help determine what rights you have.
If the homeowner dies with no surviving spouse but has heirs, the beneficiaries have two options:
- Repay the lender and keep the home or
- Sell the house, repay whatever portion is owed to the bank and keep the rest.
If the owner or beneficiaries can’t or don’t want to repay any amount used on the reverse mortgage, the lender can take the property. Heirs and homeowners are not responsible for any difference between the reverse mortgage loan and the home’s sales price. So, if the borrower or an heir sells the property and the sales price is less than the balance owed, the lender cannot seek additional compensation from the heir or homeowner.
There are some unique rules and requirements that apply to a reverse mortgage. If you are the borrower, married to the borrower, or a beneficiary, you should understand the rules and how they affect the status of the reverse mortgage.
The borrower must use the house with the reverse mortgage as their primary residence. If they sell the home or live outside it (including in a long-term care facility) for more than 12 consecutive months, the lender can recall the loan and demand repayment.
Dangers of a Reverse Mortgage
For many seniors who want to avoid foreclosure, can’t sell their home, or simply want to generate additional income to spend their retirement years focusing on other things, a reverse mortgage can be an attractive option.
A reverse mortgage might be a good fit if:
- You have no heir or beneficiary
- Your heirs are okay with selling your home once you pass away
- You want to avoid foreclosure, and you have substantial equity in the home
- You don’t plan to move
- You’re in reasonably good health and don’t anticipate needing to move to a long-term care facility
However, there are some considerable dangers to a reverse mortgage you should consider.
Your heirs could pay capital gains on inherited property: If you know your children or another beneficiary won’t keep your home after you’ve passed, it might be wiser to sell the house now and put any profits into an investment account. Your beneficiaries may avoid capital gains tax by selling the property immediately. Still, if there is a reverse mortgage, they may not receive any money from the sale if the balance on the loan is higher than the property value.
Your lender could ask for payment if you need to move to a care facility: If you become ill and require long-term care in a nursing home or long-term care facility and stay for more than 12 consecutive months, your lender can call the loan and require you repay the balance. Talk to your lender to determine the maximum amount of time you can live outside of the property before they can ask for repayment.
Loan fees and interest can reduce the amount of cash you access: You may not get as much money from a reverse mortgage as you think. Loan fees, closing costs, and interest rates, can reduce the amount you can access.
You may not qualify for government programs: Some programs, like Medicaid, use assets to determine eligibility for assistance. You should contact your accountant to ensure that taking out a reverse mortgage won’t negatively affect other benefits.
Your spouse or partner could lose their home: The surviving spouse or partner could lose their home once you pass. Before you sign any loans, make sure you understand how your partner, spouse, or children living with you will be affected when you die.
If you want to avoid foreclosure or inherited a property with a reverse mortgage, selling your property quickly could help. Reach out today to find out what type of options you may have.