Looking for Help Understanding Reverse Mortgages?
We get it, reverse mortgages can be very confusing products. Here at Federated Reverse Mortgage, we like to call ourselves the reverse mortgage educators. Our goal is that every senior understands all the benefits, costs, and other things to consider when making their decision.
To help seniors and their loved ones understand, we have compiled a list of things below that you need to know! Remember, always feel free to contact us at any time and one of our experts will be happy to answer any questions you have and walk you through the whole process.
What is a Reverse Mortgage
A reverse mortgage is a loan that allows seniors the option to stop making mortgage payments. There are some important things that you should know regarding these loans. First and foremost, the bank does NOT own your home. You are still on title and own the home. Similar to any loan, you are still required to pay your taxes and insurance on time, but the difference is you are now no longer required to make principal and interest payments on the loan for as long as you live in the home or when the reverse mortgage becomes due (when does that happen?)
Due to the fact that no payments are required, the loan balance grows over time instead of decreasing. Payments are never required on the loan, but the borrower always has the option of making payments at anytime they please.
If you would rather watch a video, you can watch the video below to learn more.
What are the Requirements for a Reverse Mortgage?
Before borrowers get too far into the process they want to know, am I eligible for a reverse mortgage? Below are the requirements:
- Be 62 years or older (55 in some instances)
- Live in the home as their primary residence (What does this mean?)
- Keep the home maintained (What does that mean?)
- Pay their property taxes and insurance in time
Furthermore, if you have a spouse who lives with you who is under 62, they are required to be on the loan as well. This ensures that they will not be forced to move out if the other borrower dies or is moved to a long term care facility.
What is the Difference Between a Reverse and a Forward Mortgage
The biggest difference between a forward and reverse mortgage is the monthly payments. On a reverse mortgage, the monthly principal and interest payments become optional. Instead of a typical mortgage where payments are required and the loan decreasing, the loan balance increases by the payment if the borrower chooses not to make payments.
Let’s look at an example. Let’s say Bob takes out a reverse mortgage, which will be for about less than 50% of the value of his home. His home will appreciate, on average, about 3-4% each year (though that number was almost 17% in 2021). In this example, the equity that Bob owns in his home is still increasing even though he is not making these monthly payments. The value of his home may even be outgrowing the loan balance, which creates more cash flow in retirement. This also means that Bob will still have equity that he can pass down to his heirs.
If you would rather watch a video, you can watch the video below to learn more.
How Much Equity Can I Access Using a Reverse Mortgage?
The amount of money that you get from a reverse mortgage depends on multiple factors. HUD has a calculation that takes age, interest rate, and home value into consideration. How do these all affect how much you can make? We will explain here below
A major factor in how much money the borrower is allowed to take out is age. Due to the fact that payments are optional on a reverse mortgage, the loan grows year after year. As a result, the younger the borrower is the less money they have access to. This is simply because the amount the interest can accrue for a 65 year old is significantly higher than a borrower who is 85.
Interest rate is another factor in the HUD’s calculation. This has similar reasoning to age, as a 5% interest rate is going to accrue more interest than an interest rate of 3.5% year after year. For this reason, a lower interest rate is going to allow the borrower to have access to more money.
This is a more self explanatory one, but there are some conditions with it. Obviously, the more your home is valued at the more you will have access to. However, the HUD does have a maximum lending limit of $970,800 for HECM reverse mortgages. That means that even if your house is worth $3,000,000, your loan will still be based off a $970,800 home value. If your house has a value well over $970,800, a proprietary reverse mortgage may be right for you.
Reverse Mortgage Payment Options
In a reverse mortgage, the borrower has a few options when it comes to how they will receive their funds. Below, we cover the different options they have.
The first option the borrower has is cash at closing. This is a direct deposit into the bank account of the borrower. The borrower is limited to 60% of their principal limit in cash in the first year. After 12, months, they have access to the rest of the funds. This is most commonly used in a HECM for purchase scenario.
Line of Credit
The next and most popular option for the borrower to receive their funds is a line of credit. A line of credit is just funds that the borrower can pull from as they please. The borrower is again limited to only 60% of their principal limit in the first year. A major advantage of the line of credit option is that whatever funds are left in there will grow at the interest rate of the borrowers loan.
A reverse mortgage also allows you the option of dispersing your funds as monthly payments over a term you decide. The term can even be a lifetime term, where HUD uses a calculation your monthly payment based on your age, home value, and interest rate.
Mixture of the Above
The final option is a mixture of the above. For example, let’s say the borrowers available principal limit is $100,000. They have the option to take $20,000 as cash, disperse $15,000 to be paid out monthly for the next 5 years, and leave $65,000 in a line of credit.
Reverse Mortgage List of Terms
Reverse mortgages can be very confusing products, and they are especially confusing because of the terms they use. Below, we cover many of the terms that people are tripped up by. They are listed in alphabetical order.
The amortization schedule is a chart given to every borrower in the application package. This chart shows you how your loan will accrue interest over time, as well as estimates to how your line of credit and equity will grow.
These are estimates because the line of credit growth is based on if you never take any money out of it. The equity is based on an approximation of how much your house will appreciate over the life of the loan.
AMC (Appraisal Management Company)
AMCs are companies that your lender orders your appraisal through. An appraisal is an evaluation done to estimate the value of your home using comparable sales.
The HUD requires the use of an independent appraiser to do these evaluations, so lenders must work with AMCs so that they do not come in direct contact with the appraisers. Once the AMC is contacted, they reach out to one of the appraisers they use and they contact the borrower and set up a time to come do the appraisal.
Application documents are documents the borrower signs that lock in their blended rate and also includes your Good Faith Estimate. These documents should be looked over closely as they include very important information. If you have questions about your lenders application documents feel free to contact us.
Asset dissipation is another option for borrowers who are unable to pass the financial assessment This allows borrowers to use their current assets, retirement accounts, savings accounts, etc., and HUD has a formula that will tell you how much can be used for annual income. This helps some borrowers pass the residual income test which qualifies them for a reverse mortgage.
The blended rate is a combination of your rate + the MIP. This is the total rate that your loan grows at every month.
Case numbers are unique IDs assigned by the HUD to your home. This case number is attached to your home, so even if you decide to change lenders during the process, you keep the same case number.
If your property is a condo, HECM reverse mortgages require that your condominium association is approved by the FHA. To check if your condo is approved, click here. If your condo is not approved, no problem! We have worked with several condos and helped them through the process of becoming FHA approved.
The first step of the reverse mortgage process is for the borrower to go to counseling. This is where a third party HUD approved counselor will walk you through your reverse mortgage and everything you need to know. Once completed, the borrower receives a counseling certificate that they sign. This allows them to move forward and sign their application documents.
To find counselors in your area, follow this link and enter your ZIP code.
The deferral period of a reverse mortgage is when the main borrower passes or is moved to a long term care facility while a non-borrowing spouse is still living in the home. During the deferral period, the non-borrowing spouse is allowed to stay in the home, but they do not have access to the line of credit funds. This deferral period lasts until the non-borrowing spouse passes or moves, allowing them to stay in the house as long as they continue to pay taxes and insurance and keep the home maintained.
The financial assessment is used to make sure borrowers qualify for a reverse mortgage. This assessment includes a credit check as well as a residual income test. Residual income requirements differ based on family size.
There are still ways to help if you do not meet the credit requirements or have enough residual income. A LESA can be used as well as asset dissipation to help the borrower qualify for a reverse mortgage.
Fixed Rate Product
The fixed rate product is, as the name implies, a fixed interest rate. The borrower at closing agrees to one fixed interest rate and that rate is locked in for the life of the loan. The line of credit option is not available to those who choose to get a fixed rate, their only option is cash at closing.
GFE (Good Faith Estimate)
The Good Faith Estimate, or GFE, is included in your application documents. This is an estimate of total closing costs. Borrowers should carefully look these documents over to make sure that they are what was agreed upon between them and their lender. If you have questions about your GFE, contact us today.
The HUD (United States Department of Housing and Urban Development) is the government agency that regulates reverse mortgages. The FHA is a specific branch of HUD that deals with reverse mortgages. HUD and FHA are used interchangeably when talking about reverse mortgages.
MIP (Mortgage Insurance Premium)
The MIP is what makes HECM reverse mortgages possible. This is what ensures that no matter what happens to the housing market, you or your heirs will never have to pay back the debt if the loan outgrows the value of your home.
There are two parts to MIP. First, is financed into the closing costs, this part is 2% of your max claim amount (lower of your house value or the $970,800 maximum). The second is part of your blended rate. It is an additional 0.5% added to your interest rate.
LESA (Life Expectancy Set Aside)
A LESA is an option that allows borrowers who are unable to pass the financial assessment. A LESA is an account that pays the borrowers taxes and insurances for the expected lifetime of the youngest borrower. There is no charge for a LESA, but it limits how much money you can receive due to the money being set aside.
The margin is the part of your variable rate that your lender controls. The borrower and lender agree to a margin in the application documents and this stays consistent for the life of the loan. This number is added to the index to determine your interest rate each month. Contact us if you have questions about if your margin is fair or for a list of available margins.
NBS (Non-Borrowing Spouse)
Eligible non-borrowing spouses are spouses of borrowers who are not eligible to be borrowers themselves. This can be due to age, credit or any other reason. If the non-borrowing spouse is the only one left at the home, the loan goes into a deferral period. This means they can stay in the home, but do not have access to funds in the line of credit.
The principal limit is the amount of money the borrower will receive in a reverse mortgage. This number is based on the borrower’s age, interest rate, and property value. The borrower will only have access to 60% of the principal limit in the first year.
In order to be eligible for a reverse mortgage, the home must be the borrower’s primary residence. This means you must live there for over half of the year and where your legal ID says your address is.
Proposal documents are sent out before the borrower goes to counseling. They include preliminary information like the amortization schedule and an estimate of closing costs (these numbers are not official until the GFE.
Residual income is the monthly amount you have leftover after all required payments are made each month. On top of your current debts, there is an additional charge of $0.14 per square foot to estimate utility costs.
Once debts are totaled, they are subtracted from income and residual income is calculated. The amount of residual income required depends on your family size and where you live.
Right of Rescission
The borrower has three days after signing all closing documents to rescind or cancel their loan. The loan cannot be funded until these three days have passed. The lender must oblige and cancel any loan within this period.
Short at Closing
Sometimes, the lien on the property and the closing costs are greater than the principal limit. A reverse mortgage can still happen, but the borrower will need to come up with the difference with cash at closing.
Third Party Closing Costs
These are closing costs that do not go to the lender or the HUD. These are costs that, as the name implies, go to a third party. This third party can be an appraiser, title companies, etc. Like all other closing costs in a reverse mortgage, these are financed into the loan.
Lenders cannot adjust these fees at all and they have no control over the amount. To find out what your closing costs would be, contact us today.
Once your application docs are signed and submitted by your lender, the loan is sent to an underwriter. An underwriter looks at every detail of the loan and they report back to the lender with anything that is missing. These conditions need to be cleared in order for the loan to close.
Variable Rate Product
The variable rate product is a product with changing interest rates. There are two parts to the interest in a variable rate product, the index and the margin. The index is the variable part of the interest rate, your rate will change monthly based on what the index is currently at. Your lender has no control over the index. On the other hand, the margin is what your lender decides. The margin is given to you at the beginning and stays consistent throughout the duration of the loan. The index + the margin gives you your total interest rate in a variable program.
The Reverse Mortgage Process
Getting a reverse mortgage can seem daunting and unattainable at first, but here at Federated Reverse Mortgage we are here to help you understand and work through this process. Let’s break down the process to make this process more understandable.
Choosing your lender
The first step is picking which lender is right for you. This is a very important step that the borrower should put some time into. What does this look like? It is more than just comparing the interest rates, there are many important factors in this decision.
A very important step is how good the company’s customer service is. There is no way to 100% know how good a company’s service is, but a great place to start is Google reviews. Most companies today have a page on Google that allows people not only to rate them, but also to leave reviews. Click here to view Federated Reverse Mortgage’s 5 star rating and read our Google reviews.
Another obviously very important step in comparing lenders is comparing interest rates and closing costs. It is important to consider more than just the lowest possible interest rate or lowest possible closing costs, but a balance between them is very important. Some companies offer a very low interest rate, but come with very high closing costs. On the other hand, some companies offer low closing costs, but a very high interest rate.
At Federated Reverse Mortgage, we make it easy to compare. Use our free reverse mortgage evaluator for a free breakdown of what we can offer you.
The next step that can be done either before or after you decide which lender you want to go with is counseling. All HECM reverse mortgages require counseling from a HUD approved third party counselor. This is an appointment that is typically done on the phone and the counselor will walk you through a reverse mortgage step-by-step. In some states, there is a required 7-day cool off period where your lender cannot work on your loan for 7 days after counseling. Once this is done, you get a certificate and are able to move forward.
This appointment can help you decide which lender as well as present you with questions you can be asking your lender. To find counselors in your area, follow this link and enter your ZIP code.
The next step once the borrower and their lender agree on a fair deal is the signing of application documents. The signing of application documents has become much easier since e-signing has been introduced. The borrower will receive an email and just click through each signature and date. That being said, these documents should still be carefully looked over.
There are a few important things that especially need to be closely reviewed in your application package, first of which is the comparison. The comparison shows you what your interest rate is and also a total closing costs amount. This is important to view because it includes the Good Faith Estimate, which is the final number for closing costs. Make sure that these closing costs are what you previously agreed upon with your lender.
Once these documents are signed, the lender will move forward with ordering your title and appraisal as well as sending your loan to underwriting.
Closing and Funding the Loan
Once all of the underwriting conditions are cleared, your loan is clear to close. This just means that the lender will receive a package of closing documents for you to sign. Your lender will schedule a time that works for you for a notary to visit your home or meet up at a place convenient for you to sign all of your documents. After you sign these documents, the 3 day right of recission starts.
Once this period ends if you choose not to cancel the loan, your cash will be wired into your bank account or your line of credit will become available, depending on which payment option you chose.
Why Federated Reverse Mortgage?
You have probably received many flyers or seen many ads for reverse mortgage companies, so why choose us? Here at Federated Reverse Mortgage, our whole business operation is centered around you. There will never be any pressure to enter into a deal and you will always get honest advice.
We call ourselves “The Reverse Mortgage Educators” for a reason. Our job is not to convince you to get a reverse mortgage, because we know they are not right for every situation. We will present you with the options you have and the option we feel is best for your needs.
Do you have a financial advisor that you trust? We encourage all borrowers we work with to have their financial advisor contact us in order to allow them to give the borrower their input.
Don’t just take our word for it, view our reviews from people who we helped through this process. Whether they decided in the end to get a reverse mortgage or not, we were able to help inform them on how they can best achieve their financial goals. Feel free to contact us or fill out a free reverse mortgage evaluator to compare your options.
Informational Videos on Reverse Mortgages
Some people find it easier to learn from watching videos, so below we have included videos covering important topics on reverse mortgages.
How Does a Reverse Mortgage Work?
How Can You Use the Funds From a Reverse Mortgage?
Reverse vs. Traditional Mortgages
Are Reverse Mortgages Safe?