What Is A Reverse Mortgage? (Part 3)

What Is A Reverse Mortgage? (Part 3)
A 12 Part Series

• A reverse mortgage sells the home to the bank
  
  False. With a reverse mortgage, the homeowners keep the home in their names. The lender adds a mortgage lien against the property for the amount that is borrowed so that the lender will eventually get paid back when the property is sold. 
  
  
• Heirs will not inherit the home
  
  False. The estate inherits the home upon your death. There will be a lien on the title for the balance due of the reverse mortgage. The balance owed is whatever proceeds were distributed through the reverse mortgage plus interest.
  
  A reverse mortgage is a "non-recourse" loan which means the only asset guaranteeing the loan is the property itself. The repayment amount cannot exceed the value of the borrower's home at the time the loan is repaid. If the property value is less than the balance of the reverse mortgage, the lender can not request other assets from the estate for the balance owed. Instead, the lender makes an insurance claim to the FHA for the balance due.
  
  For example, let's assume someone takes out a reverse mortgage and owes $50,000 after 5 years. The homeowner then passes away, and the estate sells the house for $250,000. The lender gets $50,000 and the estate inherits $200,000.
  
  
• The homeowner could be forced out of the home
  
  False. Borrowers who take out a reverse mortgage will still own and continue to live in their own home. The FHA reverse mortgage was created to allow seniors to keep and live in their own homes for the remainder of their lives. Because the homeowner receives payments from a reverse mortgage instead of making payments to a lender, the homeowner can never be foreclosed on or evicted for non-payment.
  
  
• Someone can outlive a reverse mortgage
  
  False. The reverse mortgage becomes due when all homeowners have permanently moved out of the property or passed away. There is no time limit.
  
  
• Social Security and Medicare will be affected 
  
  False. Because a reverse mortgage is not considered income, government entitlement programs such as Social Security and Medicare are not affected. However, need-based programs such as Medicaid can be affected.
  
  Payments from a reverse mortgage may be counted as income for purposes of Medicaid whether or not they are spent within the month they are received. This shouldn't be treated as income because a reverse mortgage simply withdraws equity from your home. But the state may view it differently because the funds come in a regular monthly check. To remain eligible for Medicaid, the homeowner needs to manage how much is withdrawn from the reverse mortgage each month to ensure they do not exceed the Medicaid limits.
  
  You should consult with an elder lawyer in your state if you have any concern about how a reverse mortgage will affect your eligibility for federal benefits.
  
  
• The homeowner pays taxes on a reverse mortgage
  
  False. The proceeds from a reverse mortgage are paid from the equity in your home. It is not considered income and, therefore, is not taxable. Furthermore, the interest on reverse mortgage is tax deductible when it is repaid.
  
  
• There are large out-of-pocket expenses
  
  False. Typically, the only out-of-pocket expenses are the cost of the counseling and the appraisal. If requested, many lenders will allow you to finance these costs into the loan, but you will still be required to pay them upfront.
  
  
• A reverse mortgage is similar to a home equity loan
  
  False. The only similarity between a reverse mortgage and a home equity loan is that both use the home's equity as collateral. The differences are as follows:
  
  
  • Any homeowner can apply for a home equity loan. All homeowners on title must be at least 62 years of age to apply for a reverse mortgage.
  • A home equity loan must be repaid in monthly payments over a period of time. A reverse mortgage is not paid back until the homeowner moves out of the property or passes away
  • A home equity loan requires stable income and a solid credit score. A reverse mortgage does not consider income or credit.
  • A home equity loan charges no closing costs but has a higher interest rate over the life of the loan. A reverse mortgage charges upfront closing costs but has lower interest over the course of the loan.

 
Frequently Asked Questions about Reverse Mortgages: 

• Q. If a homeowner is not 62, but they are on permanent disability. Can they qualify?
  
  A. No. The FHA only looks at the person's age to determine eligibility for a reverse mortgage. There are no exceptions for disability or Social Security status.
  
  
• Q. Can someone qualify if they have a mortgage?
  
  A. Yes. More than half of people who take out a reverse mortgage use it to pay off their existing mortgage so they can stop making monthly payments.
  
  
• Q. Do all 62-year olds who own their home qualify?
  
  A. No. About one-third of homeowners who want to get a reverse mortgage are not eligible because they don't have enough equity built up in their home. The younger the homeowner is, the more equity they need to have to qualify.
  
  
• Q. Can I apply if I didn't buy my present house with FHA mortgage insurance?
  
  A. Yes. It doesn't matter what type of mortgage you currently have. It will be paid off with the refinance. Your new mortgage will be an FHA-insured Home Equity Conversion Mortgage (HECM) - also known as a reverse mortgage.
  
  
• Q. What happens if there isn't enough home equity to qualify?
  
  A. This is called a "shortfall." This means that the reverse mortgage would not provide enough money to pay off the existing mortgage on the home - it is coming up "short." In this situation, some homeowners chose to make up the difference by paying down the balance on their mortgage by the amount of the shortfall so that they can qualify for the reverse mortgage. However, most people who want a reverse mortgage and have a shortfall don't have enough money to do this.
  
  
• Q. Can the lender take my home away if I outlive the loan?
  
  A. No. You do not need to repay the loan as long as you and/or any of the borrowers continue to live in the house and keep the taxes and insurance current. You can never owe more than the value of your home at the time you or your heirs sell the home. 

Next: Part 4 - Pros and Cons of a Reverse Mortgage
 

Part 1 - Definition of a Reverse Mortgage
Part 2 - Reverse Mortgage Eligibility Requirements

If you're 62 or older and are looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, to pay for healthcare expenses, or even to buy your retirement home, then consider getting a reverse mortgage. Find out how a reverse mortgage can use the equity in your home to pay you.