According to AARP, 10,000 Americans turn 65 years old every day. And as more people head into their “golden years,” the idea of a reverse mortgage could make sense for homeowners.
In this month’s “Lending a Hand” column, I will explain the ins and outs of a reverse mortgage product — Home Equity Conversion Mortgage — how it works and why the mortgage type could be the smart choice for certain homeowners as we look toward 2019.
Reverse mortgages are available for people age 62 and older to borrow against the equity in their home without having to make monthly payments. The borrower receives the funds; interest and mortgage insurance accrues, but the homeowner doesn’t owe the outstanding balance until the last borrower leaves the home, sells or passes away. The loan may also come due if the homeowner fails to pay homeowners insurance, association fees, other property charges, or doesn’t keep the property in livable condition.
Reverse mortgages gained a poor reputation in the 1980s due to unregulated mortgage programs and unscrupulous mortgage lenders who took advantage of seniors. When the Federal Housing Administration took over in 1989, the organization set in place more regulations and protections.
Today, the reverse mortgage option is still a smart choice. As long as you pay real estate taxes, and other normal property charges, you are not responsible for a monthly mortgage payment. Instead, you could receive money from the value of your home as either a lump sum or through monthly payments.
If you hope to obtain a reverse mortgage in 2019, you should know about new guidelines put forth by the Federal Housing Administration, which insures all reverse mortgages.
To qualify for a reverse mortgage, the FHA now requires borrowers to meet residual income guidelines or have compensating circumstances (such as cash reserves). The borrower may also need to submit to a Life Expectancy Set Aside, a portion of the proceeds designated to pay property taxes and homeowners insurance for the life of the loan.
Here’s an example of a reverse mortgage situation. Our company had a recent client (a woman in her 80s) who realized she would soon lose her monthly income of $600. She owned her home free and clear (in other words, she did not owe a mortgage). This enabled her to take out a reverse mortgage and receive $1,000 a month. The income will last for 12 years. She also received a $50,000 line of credit to use at her discretion.
To start your own reverse mortgage process, you must first meet with a Housing and Urban Development-approved counselor to ensure you understand the specifics of the mortgage. The meeting with the counselor is one more safeguard to ensure you act in your own best interest.
A reverse mortgage isn’t for everyone. But for some people, it may be the perfect option.
Shikma Rubin is a loan officer at Tidewater Home Funding in Chesapeake. She specializes in lending for the millennial generation. Sign up today for Shikma’s free webinar, “First-Time Homebuyer Crash Course,” at shikmarubin.com/webinar. You can reach her at srubin@tidewaterhomefunding.com or 757-490-4726.