Reverse Mortgages (HECM)
A home equity conversion mortgage (reverse mortgage) is a financial tool for many homeowners age 62 and over. This site was designed to help you determine if a reverse mortgage right for you.

A reverse mortgage is a loan against your home that requires no repayment for as long as you live there. It is insured by the FHA (Federal Housing Administration) for homeowners ages 62 or older. It is different from other types of loans because the borrower does not make loan payments during the loan.

According to the AARP’s 2006 survey, reverse mortgages are most often used to pay for medical and daily living expenses. Homeowners who have an existing mortgage also use the reverse mortgage to fully pay off the existing mortgage and eliminate monthly payments.

A reverse mortgage is basically a loan that uses a home’s equity as collateral. The loan amount is a percentage of the property’s market value. That percentage is determined by the age of the homeowner based on life expectancy among other factors. The loan does not generally have to be repaid until 6 months after the last surviving homeowner moves out of the property or passes away. At that time, the estate typically sells the home to repay the balance of the reverse mortgage and the remaining equity is inherited by the heirs to the estate. The estate is not personally liable for any additional mortgage debt if the home sells for less than the payoff amount of the reverse mortgage.

Reverse mortgage eligibility

To be eligible for a reverse mortgage, the FHA requires that all homeowners be 62 or older. If there is a mortgage on the home, it can be paid off with the proceeds of the reverse mortgage. Minimum income and credit score requirements are not considered in a reverse mortgage application.

Eligible homes

Almost all single family homes are eligible, however, some types of properties have restrictions such as condominiums or co-ops. Mobile or manufactured homes are not eligible for our reverse mortgage program.

Reverse mortgages vs home equity loans

Home equity loans and traditional  mortgages have strict requirements for income and creditworthiness because the homeowner must be able make payments to repay the loan. A reverse mortgage has no minimum income or credit requirements because the homeowner no longer makes a monthly mortgage payment.

The amount that can be borrowed from a reverse mortgage is set by an FHA formula that use age, interest rates, principal limits and the appraised value of the property.

As noted previously, with traditional loans the homeowner is required to make monthly payments. With a reverse mortgage the loan is not generally due for repayment for as long as at least one homeowner lives in the home as a primary residence and maintain it. However, the homeowner must stay current on real estate taxes, insurance, and maintenance.

Time limits on reverse mortgages

Reverse mortgages can not be outlived. Generally, as long as one homeowner lives in the home (while staying current on taxes and insurance) then the loan is not due.

Inheritance

When the loan becomes due, the estate chooses to either repay the reverse mortgage or sell the home.

If the home sells for more than the balance of the reverse mortgage, the remaining equity passes to the heirs. If the home sells for less than the owed balance, the lender must take a loss and request reimbursement from FHA.

A reverse mortgage is “non-recourse” meaning that no other assets are liable to repay it. For example, second homes, investments, and cash cannot be required from the estate to pay off the reverse mortgage.

Distribution of funds

The proceeds of a reverse mortgage can be distributed in any combination of:

Line of Credit – draw as needed up to the maximum eligible amount.

Lump sum – a lump sum of cash disbursement at close.

Tenure – monthly payments for an unlimited number of years.

Term – monthly payments for a specific number of years.

 

A reverse mortgage, like a traditional mortgage, is a loan made by a lender to a homeowner using the home as security or collateral.

In a traditional mortgage, the bank may lend up to 80% of the property’s value to the homeowner and expects that the homeowner will use their income to pay down the debt over time. With a reverse mortgage, the lender loans less (usually 60%) and expects that the reverse mortgage balance will grow over time because the homeowner is not making payments.

A reverse mortgage generally does not require repayment until the last homeowner has passed away or moved out of the property. Consequently, life expectancy is a huge part of the lender’s calculation of how much to lend. That is why a 62 year old can borrow a substantially lower percentage of their property’s value than an 80 year old.