Reverse Mortgage Guide With Types and Requirements
Reverse Mortgage Essentials
Can I lose my home with a reverse mortgage?
Yes. Borrowers can lose their home to foreclosure with a reverse mortgage for several reasons. The most common source of foreclosures on a home with a reverse mortgage is failure to keep the property in good repair or to pay property taxes.
Why can’t reverse mortgages be transferred?
Reverse mortgages are designed to reduce risks to the insurer. If, for example, the borrower receives more money from the loan than their home is worth when it is eventually sold, that would leave the FHA on the hook for the difference.
How does divorce affect a reverse mortgage?
When a divorcing couple has a reverse mortgage debt, they'll need to decide whether one of them will stay in the home or whether they'll sell it. The spouse who retains the home and is listed as a co-borrower on the reverse mortgage won't pay anything toward it as long as they live in the home.
Can I change my reverse mortgage payment plan?
Yes, during your loan term, you can change the way you receive your reverse mortgage proceeds without refinancing your loan, as long as you are switching among the adjustable rate plans. You cannot switch between an adjustable- and fixed-rate plan after closing.
Can I run out of equity on my reverse mortgage?
Yes, it is possible to run out of equity. The CFPB warns that younger retirees with longer life expectancies have a greater chance of using up all of their home equity with a reverse mortgage. Ideally, you'll have a plan for how to use the money before you get a reverse mortgage.
Can I hire my own appraiser?
When you apply for a reverse mortgage, the lender will arrange for a professional appraisal. You are free to hire your own appraiser, but the verdict of the lender’s appraiser will be the one that counts for obtaining a reverse mortgage and determining the amount.
FHA Reverse Mortgage Loans
The Federal Housing Administration (FHA) insures the most common type of reverse mortgage, known as a home equity conversion mortgage, or HECM.The insurance protects the lender in case the borrower defaults on the loan.
Total Annual Loan Cost (TALC)
Total annual loan cost (TALC) is the projected cost annual percentage cost of a reverse mortgage. The TALC will include costs such as origination fees, closing costs, appraisal fees, and mortgage insurance premiums.
Reverse Mortgage Net Principal Limit
The maximum amount of money a borrower can receive from a reverse mortgage is called the net principal limit. A reverse mortgage net principal limit tends to be substantially lower than the home's appraised market value.
Term Payment Plan
In a term payment plan, a reverse mortgage borrower receives a monthly payment borrowed against the value of their home for a set period of time. Term payment plans are better suited for individuals who are older, do not rely on a reverse mortgage as their sole source of funds, and have a strong idea of how much longer they will be living in their home.
An adjustment date is the date on which a financial change under a contract or transaction is scheduled to occur. Certain costs—such as property taxes, the transfer of utilities, the effective date of insurance, and loan interest charges—have a basis on the adjustment date.
Home Equity Conversion Mortgage (HECM)
The most common type of reverse mortgage, home equity conversion mortgages are insured by the Federal Housing Administration. HECMs allow seniors to convert the equity in their homes into a sum of cash based on the home’s appraised value. Borrowers must be at least 62 years old.
Single-Disbursement Lump-Sum Payment Plan
A single-disbursement lump-sum payment plan, which carries a single fixed interest rate, allows the borrower to receive all reverse mortgage proceeds as a large amount of money when the loan closes.