Reverse mortgages are governed by the Federal Housing Administration’s Home Equity Conversion Mortgage program. The FHA sets guidelines and rules determining who qualifies and what homes are eligible, as well as the terms of the loans. The HECM program can help some senior homeowners enjoy their retirement years with less financial stress.
How Reverse Mortgages Work
A reverse mortgage allows you to take cash from the equity in your home without paying it back with the regular scheduled payments that a home equity loan would require. The loan is paid off when your home is sold, or at a point in time when you’re no longer living there. The home doesn’t become part of your estate and you can’t leave it to heirs -- you’re effectively giving it to the mortgage company at some future time when you won’t need it anymore, such as after your death or if you move into an assisted living facility.
Meanwhile, the cash is yours to do with as you like. You can take the proceeds in a lump sum, in regular monthly installments for a fixed period of time or indefinitely, as a line of credit, or in a combination of these ways. There are closing costs, but you can include them in the mortgage balance -- you don’t have to come up with the cash up front. Interest accrues over the life of the loan and comes due at the time of sale. You’re still responsible for paying your property taxes, insurance and the costs of your home’s maintenance.
Reverse mortgages are only available to homeowners age 62 or older. If you’re married, this requirement can be met by either you or your spouse. If you’re disabled and collecting Social Security disability insurance, this doesn’t change the rules -- you or your spouse must still be at least 62 years old. However, health conditions and disability don’t disqualify you either. You must actually live in the home as your primary residence, but if you and your spouse or partner take out the mortgage together, it’s OK if only one of you continues to reside there. You must prove that you have sufficient income to continue paying for property taxes, maintenance and insurance.
The FHA requires that homeowners sit down with an HECM counselor approved by the Department of Housing and Urban Development before signing up for a reverse mortgage. HUD -- which oversees the FHA -- wants to know that you’re educated in all the benefits and costs of the mortgage you’re about to commit to.
The FHA sets rules regarding your property, too. The key factor is that you must have sufficient equity in your home to cover the loan proceeds plus interest and other fees and closing costs. This typically means you’ve paid your mortgage off or owe very little on the loan. If you do have an existing mortgage, part of your loan proceeds must go to paying it off so your reverse mortgage lender holds the primary lien on the property.
Most properties are eligible, including single family homes and manufactured homes built after June 1976 that meet FHA requirements. Homes with two to four units are eligible as long as you live in one of the units. Condominiums are OK if approved by HUD. Co-ops don’t qualify. Your property must be in good condition and the lender may require an inspection.
- ReverseMortgageGuides: Eligibility Requirements
- HUD.gov: FHA Reverse Mortgages (HECMs) for Seniors
- Consumer Financial Protection Bureau: Can Anyone Apply for a Reverse Mortgage Loan?
- National Reverse Mortgage Lenders Association: Most Frequently Asked Questions
- HUD.gov: The Federal Housing Administration (FHA)
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