What is a Reverse Mortgage?

What is a Reverse Mortgage?

A reverse mortgage, supplied by the Federal Housing Administration and referred to as home equity conversion mortgage program, also known as a HECM, is a loan that allows certain qualified home owners to take part of their home’s equity as cash. Reverse mortgages allow elderly people to to access the home equity they have accrued until they pass on, sell the property, or move out of the home. There are no required mortgage payments on a reverse mortgage so instead the interest is added to the remaining balance each month. It should be noted, that the owner of the house must continue to pay real estate taxes, home owners insurance, flood insurance, and association dues.

Who is Eligible for a Reverse Mortgage?

Eligibility for A Reverse Mortgage is decided first and foremost by age. The minimum age to qualify for Reverse Mortgage is 62 and must occupy the property as the principal residence. The property in question must also have either be paid off or have a small remaining balance remaining, which is up to the discretion of the lender. A Reverse Mortgage must also follow the Federal Housing Administration standards for qualifying property types, which usually means most one to four family dwellings, approved condominiums, and planned unit developments. If one has built their house it also qualifies on standard Federal Housing Administration guidelines.

What is the Standard Loan Size for a Reverse Mortgage?

The total amount of money a borrower can receive under a home equity conversion mortgage program approved reverse mortgage is referred to as the principal limit. This principal limit is decided using the the maximum claim amount, the expected average interest rate, and the age of the youngest borrower.  This maximum claim amount is insured up too $625,000 by the HUD.  The maximum claim is then multiplied by a principal limit factor to determine what is known as the principal limit. This principal limit is the total that the borrower can convert to cash. The interest rate on a reverse mortgage can be fixed or adjustable, and when adjustable are normally focused on shorter adjustment terms.

When this process is over there are several ways in which the borrower can receive the cash they need, including:

  • in a lump sum in cash,
  • as a cash advance every month in a fixed sum,
  • as a line of credit,
  • some combination of the above options.

What Happens the Loan Comes Due?

The loan comes due when the borrower dies, sells the property, or moves out of the house for more then a consecutive months. The loan can also be declared due if the property taxes are failed to be paid or fails to pay hazard insurance on the property in question. Once the loan becomes payable, it usually falls to the heir of the estate or can be turned over to the lender. If the property is acquired by the lender, the heirs to the estate have no claim to the property.