Your Guide to Getting a Reverse Mortgage
When your are planning for retirement and worried about the loss of income that comes with the territory, then a reverse mortgage may be worth looking into.
26/05/2021
If you’re planning your retirement and worried about the loss of income that comes with the territory, then a reverse mortgage may be worth looking into. A reverse mortgage allows you to borrow a regular income against your home’s equity, and it is therefore a good option for those who are property rich but cash poor. Here is your guide to deciding whether a reverse mortgage is right for you and how to get one if you decide it’s the right option.
Where to Get a Reverse Mortgage
The most common type of reverse mortgage is a Home Equity Conversion Mortgage, or HECM. This type of reverse mortgage is insured by the FHA and requires that you use a lender from the FHA’s approved list. While there are non-HECM reverse mortgages available, these are generally considered far riskier than HECMs. You won’t have the same protections from the FHA and non-approved lenders will often use unscrupulous tactics, so choosing a non-HECM reverse mortgage isn’t generally recommended.
Qualifying for a HECM
There are a number of prerequisites before you can consider getting a reverse mortgage. You must be 62 or older and be using the property being used for the reverse mortgage as your primary residence. You must own your home or have paid off the vast majority of your mortgage and not have any delinquent federal debts. You must show the lender that your home is up to all FHA property standards and that you will be able to continue paying your homeowners insurance, property taxes, any remaining mortgage fees, and other property maintenance costs. Finally, you will be required to attend a counseling session with an FHA-approved HECM counselor. According to All Reverse Mortgage, “the purpose of the counseling is to ensure that all borrowers and spouses understand what a reverse mortgage is and their obligations when they have one.”
Evaluating Your Application
Your application for a reverse mortgage will naturally be evaluated by your chosen reverse mortgage lender. This includes a credit check and evaluating your history of paying for your mortgage and other debts or loans. Lenders will also evaluate your income, including 401(k), Social Security, and pay stubs if you or your spouse is still working, to ensure that you will be able to keep up with property maintenance. After finding that you are in the position to take on a reverse mortgage, the lender will have your property appraised to determine how large your reverse mortgage will be able to be.
How Much You Can Borrow
There are a number of factors that determine how much you will be able to borrow on a reverse mortgage. The FHA’s HECM borrowing limit is currently capped at $822,375, while riskier non-HECM reverse mortgage lenders may allow you to borrow more. It should be noted, however, that the amount you are allowed to borrow will vary depending on how much your property is worth, current interest rates, and the age of the youngest borrower. It is therefore suggested that you wait until both you and your spouse are both over the age of 62 - and this age advantage continues until 75, so holding out longer will get you a better deal on your reverse mortgage.
How Funds are Distributed
When it comes to disbursements, the FHA offers a few different plans, so you should carefully evaluate your retirement plans and financial outlook to see which will be the best fit for you. There are two broad types of reverse mortgages, fixed-rate mortgages, and adjustable-rate mortgages. With fixed-rated reverse mortgages, the FHA will give you one lump sum, meaning that you will need a greater degree of financial planning in advance.
With an adjustable-rate mortgage, there are a few main options. Tenure gives you monthly payments for as long as you or your spouse remain in the mortgaged property, term gives you monthly payments for a predetermined amount of time, and a line of credit gives you flexible payments when you need them until an upper limit has been reached. There are also the options of modified tenure and modified term, which give you both the monthly payments of tenure and term as well as a line of credit.