Senior homeowners wishing to supplement their retirement income will find reverse mortgages lucrative. However, this financial product is not for everyone. You need to comply with the reverse mortgage eligibility requirements to qualify for this type of loan. Below, we will look at everything you must know about this financial product through this reverse mortgage guide.
What reverse mortgage is
It is a type of loan that you borrow against the equity in your home. The loan proceeds you get from the reverse mortgage will first pay off the existing mortgage, and you can employ the remaining money as you like. Since the loan proceeds pay off your current mortgage, you do not have to make a monthly mortgage payment. However, you will still have to bear the home maintenance costs, homeowners insurance, and property taxes. The loan is not due until you move out of the home, fail to uphold the loan responsibilities, pass away, or sell the property.
Homeowners who opt for the reverse mortgage do not have to bear a monthly payment or sell their homes. They can continue living in the house, but the loan must be repaid when the borrower sells, move out of the home, or dies. One of the most popular reverse mortgage types is the Home Equity Conversion Mortgage (HECM). You will learn about it and other types later in this reverse mortgage guide.
How reverse mortgage works
Qualified homeowners cannot borrow the entire value of their home, even if the mortgage is paid off. Hence, the principal limit, or the maximum amount the homeowner can make use of, varies based on the following factors:
- Age of the eligible non-borrowing spouse or the youngest brother
- Current reverse mortgage interest rates
- Home’s value
- HECM mortgage limit
Hence, the homeowners will receive a higher amount when the following criteria are met:
- They are older.
- It is an expensive property
- The reverse mortgage interest rates are low.
- You opt for variable HECM rare.
On the contrary, if you opt for a HECM with a fixed interest rate, you will get a lump-sum payment in a single disbursement.
Reverse mortgage eligibility and rules
Not everyone can get a reverse mortgage. There are fundamental reverse mortgage eligibility criteria you must know before applying. Thus, to get the reverse mortgage, you must adhere to the obligations listed below:
- Pay homeowner’s insurance.
- Keep the home in good repair.
- Pay property taxes.
- Live on the property as your primary residence.
Hence, contrary to the traditional mortgage, your good credit, employment, and income are not assessed for qualification.
How can one qualify
You must meet the following requirements for qualification:
- The home should have substantial equity built up.
- One of the borrowers should be 62 years of age or older.
- The property should be your primary residence.
- The home should be a single-family residence, a townhouse, an FHA-approved condominium, a two- to four-unit property wherein borrowers occupy one of the units or a manufactured home that meets the stated requirements.
- The property should be in good condition.
- Borrowers must prove they can bear the maintenance costs, HOA fees, homeowners’ insurance, and property taxes.
Reverse mortgage types
You will find three reverse mortgage types:
- Home equity conversion mortgage: This is the most popular kind and has a high upfront cost. However, you can use its proceeds for any purpose. Further, you can select how you withdraw the money: a line of credit, fixed monthly payments, or both together. The federal government backs it.
- Proprietary reverse mortgage: It is a private loan. The government does not back it, but you receive a higher loan advance here, especially if you own a higher-value property.
- Single-purpose reverse mortgage: It is less prevalent than the other two reverse mortgage types. Non-profit organizations and local and state government agencies offer these. It is less expensive than the other two, but borrowers can use the loan to cover only a specific purpose.
