A reverse mortgage is a  loan for senior homeowners that uses a home’s equity as collateral. The loan amount is a percentage of the property’s value determined by the age of the youngest homeowner, among other factors. The loan is typically not due until the last surviving homeowner moves out of the property or passes away. When that happens, the estate has about 6months to repay the balance or sell the home to pay off the balance. All of the remaining equity is then inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage.

Eligibility

To be eligible for an FHA insured reverse mortgage,  all homeowners must be over the age of 62. The property must either be owned free and clear or have a mortgage balance that is no more than approximately 65% of the home’s value, that must be repaid at the time of closing.

Eligible home types

Most home types are eligible. Mobile homes must be built within the last 30 years, the land must be owned, it must be on a permanent foundation and it must be FHA approved.

Difference between a reverse mortgage and home equity loan

Generally a home equity loan, a second mortgage or a home equity line of credit all have much more strict requirements for income and credit worthiness. A reverse mortgage has credit score and generally no income requirements. Also, instead of making monthly payments, the homeowner will receive payments until the loan becomes due.

The amount that can be borrowed is determined by age, the current interest rate and the appraised value of the property. In general, the older the homeowner, the lower the interest rate. The more valuable the home, the higher the amount will be.

Outliving the reverse mortgage

A reverse mortgage cannot be outlived, so long as at least one homeowner lives in the home as the primary residence.

Estate Inheritance

In the event of a death or if the home ceases to be the primary residence, the homeowner’s estate can choose to repay the reverse mortgage outright or put the home on the market to repay the reverse mortgage.

If the equity in the home is worth more than the balance of the loan, the remaining equity automatically will go to the heirs. No other assets are affected by a reverse mortgage.  If the sale of the home is not enough to pay off the reverse mortgage, the lender can file a claim with the FHA to cover the loss.

Loan Limit

The amount that is available depends on three things: age, current interest rate and the value of the home.

Distribution of money from a reverse mortgage

There are a few ways to receive the proceeds and you can mix and match if you wish

• Lump sum: a lump sum of cash at closing
• Tenure: equal monthly payments as long as the homeowner lives in the home
• Term: equal monthly payments for a fixed number of years
• Line of Credit: Draw any amount at any time until it is finished