Reverse mortgages are special types of loans. They are limited to homeowners who are at least 62 years old. These mortgages permit the owners to take a portion of their home equity and convert it to cash. The seniors may use these mortgage proceeds in any way that they like.
The government came up with these unique products because they were looking for a way to help out retired individuals who did not have enough income. The idea was that they might unlock the wealth they had built up in their houses to provide for health care, outside home care, or ordinary monthly costs of living.
These loans are referred to as reverse mortgages because the home owners do not send a lender monthly payments. These are the opposite of traditional mortgages. Lenders provide the borrower with payments instead. The home owners have several advantages. They do not have to repay the loan until they either no longer live in the home or sell it. They also do not make any regular monthly payments against the balance of the loan. The borrowers are required to keep up with their homeowners insurance, property taxes, and any association or homeowner fees.
The most common type of reverse mortgages are known as HECM Home Equity Conversion Mortgages. The U.S. HUD Housing and Urban Development designed and oversees these. These are not loans from the government. Rather they are mortgage loans that lenders provide with insurance from the FHA Federal Housing Administration. In these particular types, borrowers accrue a 1.25% insurance fee as part of the balance on the loan. This increases the loan balance annually.
This insurance is useful for two protections. In case the lender can not make the monthly payment, it provides for it. Should the house resale value be insufficient to pay back the final loan balance at the end, it makes the lender whole. The government and its insurance fund would then clear any balance that remained.
These HECMs comprise the majority of such reverse mortgages in the United States. Included in their regulations is that the senior borrowers must undergo third party counseling to help them with all of the documents and agreements.
The other type of reverse mortgage is a Proprietary Reverse Mortgage. The mortgage lenders that provide these also insure them privately. This means that they do not have to follow the regulations as with the HECMs. The majority of firms that offer these mortgages choose to honor the identical consumer protections featured in the HECM program. This means that mandatory counseling is usually a part of their programs.
These types are also known as jumbo reverse mortgages. Seniors with larger value houses go with these kinds since there is a $625,500 maximum loan limit on the government’s HECMs. Two companies in the country presently offer these types of PRMs. These are the Orange, California based American Advisors Group and the Tulsa, Oklahoma based America Reverse Mortgage.
Regardless of the type of reverse mortgage, the lenders have to put potential borrowers through a financial assessment before making the loan. This is so that they can be certain the seniors will be able to pay the future homeowners insurance and taxes and afford to live in the house for the loan’s life. To do this, lenders consider all of the income streams of the borrower. This includes their Social Security, investments, and any pensions. The home owners are also required to give the lender their tax returns and bank statements so that expenses and income may be properly documented.