First, let’s review a standard ‘forward’ mortgage. You borrow money and promise to pay it back (typically monthly & amortized over 15 to 30 years). You allow a Deed of Trust to be recorded against your property as a security instrument. The deed of trust allows the lender to foreclose if you don’t pay according to the terms. A reverse mortgage works exactly the same except the terms of how the loan is paid back is different. Instead of making monthly payments, you let the interest accrue onto the loan balance. You agree to pay the lender when you move away permanently, sell or the last remaining borrower passes away. You also agree to pay your property taxes, homeowners insurance and keep up the general maintenance of your home. With both types of loans, there is no transfer of title.
To be eligible, you and your spouse must be at least 62 years old and have substantial equity in your home, or in the case of a reverse mortgage for purchase, a large down payment. For the exact loan to value (LTV) for a reverse mortgage, please request a personal profile. Because there are no mortgage payments required, the lender isn’t interested in your ability to make payments so your income or credit are not a determining factor in qualifying for the reverse mortgage. Although judgments must be addressed and you can’t be delinquent on any federal loan.
If you meet these qualifications, your home will be appraised and the amount available to you will be based on the appraised value or maximum claim amount, whichever is less. Currently, the national HECM maximum claim amount is $625,500 until Dec. 31, 2011, and scheduled to drop to $417,000 on January 1, 2012. The amount available to you will be a calculation based on your appraised value or maximum claim amount, the age of the youngest borrower and the expected interest rate at the time the loan documents are drawn.
You decide on the rate type, fixed or variable and the payment plan that suits you best, lump sum, line of credit, monthly payment or combination. The fixed rate option requires a lump sum draw at closing.
“But what about my heirs?” That’s a question I hear all the time. Please understand that you are not putting any liability on the heirs of your home. There are two possibilities when your loan matures (upon sale, move, or death) either you have equity left or you don’t, your loan balance may even be higher than your home value depending if your home appreciates or not. If there is equity remaining, your heirs may sell the home and keep the profits or keep the home and pay off the reverse mortgage, probably through refinancing. There are no deficiency judgments as the home alone stands for the debt.
A reverse mortgage is safe! With an FHA-insured HUD Reverse Mortgage, you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment." You must understand your obligations, including occupying your home as your primary residence, keeping up maintenance of your home and keep property taxes and homeowners insurance current.