1. The BANK owns my home!
This question was the #1 question asked for many years by nervous and uninformed borrowers. As a matter of fact, this was also the understanding of many CFP’s and CPA’s that I trained over the years.
After around 2015, this question has been asked way less. As a matter of fact, I don’t think a student has asked this question in all of 2017 with all the classes I have trained.
That is due to the fact that, education is working. As more and more people take out Reverse Mortgages and have a great experience, they in turn share that positive experience with their family and friends.
The answer to the question, “Does the bank own my home with a Reverse Mortgage?” The answer is a resounding NO, NO, NO!
The borrower still owns their home just as if they held a traditional “forward” mortgage that we are all familiar with.
The borrower can do any of the many things (and more) with their home with a Reverse Mortgage. Those questions are answered below.
2. I understand that I can receive payments for the rest of my life?
The answer may surprise you but there is a cap on the age. It’s 150! 😊
Like any mortgage, in order to receive Reverse Mortgage payments, the borrower has to have enough equity in their home to start receiving payments. There are times when a borrower qualifies for just enough to pay off a current forward mortgage and there is nothing left over for payments to them.
That may sound like we used all of their equity, but nothing could be farther from the truth. For example:
We have a borrower that is 70 years old. They have a home valued at $600,000 and have a regular forward mortgage with a balance of $350,000 and they are making monthly payments of $3,800 a month for the next 15 years. The P&I part of their payment is $2,000 and the rest is taxes and insurance. (This is just an example, actual #’s will vary).
If this borrower qualifies for a $350,000 Reverse Mortgage, then we would be paying off his forward mortgage and he would not have any money left to access from the Reverse Mortgage. But that does NOT mean that he does not have any equity left in his home. If he sold his house tomorrow he would get $500,000 and owe $350,000 on the Reverse Mortgage. He would have $150,000 in equity. Same as if he sold his home with the “forward” mortgage of $350,000.
But what the borrower DOES get here is a positive monthly cash flow of $2,000.00 because he has no mortgage payments to make any more. He still has to pay taxes and insurance, but so does anyone who owns a home. *** There are some cases where the borrower will not have to make those payments either!
3. Does everyone on the Reverse Mortgage have to be at least 62 in order to qualify?
Until sometime around 2016, the answer was yes…but HUD changed their guidelines where a co-borrower under 62 can be on the loan. For example, a husband is 67 and his wife is 60. Under the old rules, the wife would have to be removed from the title of the home in order for the husband to qualify alone.
As you can imagine, this caused unforeseen issues when the husband died. So now, HUD allows us to make the Reverse Mortgage with the wife of 60 on the loan with a few restrictions. For one, if they are receiving money every month or have a line of credit available, all that goes away if the husband dies first, BUT, the wife can continue to live in the property for the rest of her life without making any mortgage payments (just has to pay taxes and insurance).
If the wife passed first in this example, the husband would continue to receive all the benefits for the rest of his life.
4. Do I have to live in my home while I have the Reverse Mortgage?
The answer is YES. Your home MUST be your primary residence during the entire time it is in effect. That does not mean that you cannot own other properties, all it means is that the home you have the Reverse Mortgage on, is listed on your tax returns as your primary home.
5. What happens if my Reverse Mortgage balance goes higher than the value of my home? Who owes the extra money?
Great question. The answer is that no one has to pay that extra money back. Not you, not your family, not any of your assets can be used, etc.
Why? Because these are NON-RECOURSE loans. With FHA Reverse Mortgages all borrowers pay MIP insurance into a fund held by HUD. That insurance money is what is used to pay lenders any money above the value of the home that is owed.
6. How do I get my money from a Reverse Mortgage?
There are actually several different ways for a borrower to access their money. Let’s use an example where the borrower has a home that is 100% free and clear. They qualify (in this example only) for $200,000. Up until about 2015, borrowers could take ALL that money at closing. However, HUD realized that many borrowers used all their money that year and did not pay their taxes and insurance. This caused problems for the homeowners and the Reverse Mortgage product was not designed to create more problems, but rather to help the elderly to age in place by accessing the equity in their homes without having to sell their homes.
So today, if a borrower qualified for $200,000 and had no mandatory obligations to pay off at the time of closing, today they are allowed to access up to 60% the first year. In this example, the borrower could ask for $120,000 cash at closing.
The remaining $80,000 would go into a line of credit if the borrower chose the adjustable rate Reverse Mortgage (I estimate that over 90% of all Reverse Mortgages are probably ARM’s. It just gives the borrower WAY more options and access to their money.
Other ways to access their money are:
Tenure Payment – (One size payment for the rest of their lives – or 150 years of age, whatever comes first!) Let’s say they qualify for $1,500 a month in payments. As long as the borrower does not take any money from the LOC the borrower will receive this amount as long as they live in the home. If they are in a nursing home or out of the house for more than a year living elsewhere the loan would come due.
Term Payment – Let’s say the borrower want MORE than the $1,500 every month. They can opt to take a term payment of say $10,000 a month for as long as it lasts.
Line of Credit (LOC) – The borrower can elect to take no payments and leave their money in a LOC. The LOC balance will GROW in value over time. Why? Because the borrower gets older every year AND HUD gives an artificial increase (appreciation) in home value of 4% a year.
Combination of the Above – The borrower can elect to take a partial lump sum now and take the rest as either a term or tenure payment.
By the way, a really great feature/benefit with a Reverse Mortgage is that the borrower can change how they receive their money for only a $20 fee. They do NOT have to refinance their home again to change how they access their money.
7. What’s the most I can qualify for on my home?
That depends on several factors such as the age of the youngest borrow, the value of the home and the interest rate at the time of the loan.
Currently, a borrower at age 62 will qualify for a little over 50% of the home value. If the interests rate goes down or the borrower was older or the home had a higher value (up to a certain point) the borrower would qualify for more money.
There is no top age limit that a borrower can take out a Reverse Mortgage but HUD does cap the % that can be borrowed at about 75% LTV on a home up to $636,000 in value when a borrower is 90 years old.
Homes over $636,000 are still eligible for a Reverse Mortgage but the loan amount is based on the home value UP TO $636,000.
So a borrower at age 62 with a home value of $400,000 might qualify for $200,000 but a borrower of the same age with a home value of $636,000 might qualify for $318,000. And a borrower at age 62 with a home value of $1,000,000 would qualify for a max of $318,000 also. Any value above that is just equity for the borrower.
8. I own a two family home and rent out the apartment on the second floor. Can I still get a Reverse Mortgage?
100% YES! As a matter of fact, you can own up to a four family home and get a Reverse Mortgage as long as you live there as your primary residence!
9. Will this affect my Medicaid?
It is possible that a Reverse Mortgage could affect your Medicaid status. We caution all borrowers to consult with a professional in that field before they proceed with a Reverse Mortgage.
10. If my wife and I are receiving $2,000 a month in payments and one of us dies, does that amount get cut in half?
The answer is NO. The remaining borrower, as long as they were over 62 at the time of the Reverse Mortgage, will continue to collect the full $2,000 for the rest of their lives.
If you’d like to contact Doug Vairo for questions, or for help with a Reverse Mortgage or other mortgage products, he can be reached at: