Reverse Mortgages for Seniors

You can receive free information from the Department of Housing and Urban Development (HUD) about Reverse Mortgages by calling 1-888-466-3487, toll-free. If you are interested in a reverse mortgage, beware of scam artists that charge thousands of dollars for information that is free from ElderCare Online and HUD. To report fraud or abuse in the reverse mortgage program, call HUD toll-free 1-888-466-3487. HUD funds housing counseling agencies throughout the country who can give you advice on buying, renting, defaults and foreclosures, and reverse mortgages. Just contact the housing counseling center closest to you or call toll-free 1-800-569-4287.

How HUD's Reverse Mortgage Program Works

Homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining are eligible to participate in HUD's reverse mortgage program. The program allows homeowners to borrow against the equity in their homes. Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit. Homeowners whose circumstances change can restructure their payment options.

Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the borrower lives in the home. Lenders recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.

The size of reverse mortgage loans is determined by the borrower's age, the interest rate, and the home's value. The older a borrower, the larger the percentage of the home's value that can be borrowed. For example, based on a loan at today's interest rates of approximately 9 percent, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent of the home's value, and an 85-year-old could borrow up to 56 percent of the home's value.

There are no asset or income limitations on borrowers receiving HUD's reverse mortgages. There are also no limits on the value of homes qualifying for a HUD reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area, which varies from $81,548 to $160,950, depending on local housing costs. As a result, owners of higher-priced homes can't borrow any more than owners of homes valued at the FHA limit.

HUD's reverse mortgage program collects funds from insurance premiums charged to borrowers. Senior citizens are charged 2 percent of the home's value as an up-front payment plus one-half percent on the loan balance each year. These amounts are usually paid by the lender and charged to the borrower's principal balance. FHA's reverse mortgage insurance makes HUD's program less expensive to borrowers than the smaller reverse mortgage programs run by private lenders without FHA insurance.

Top Ten Things to Know If You're Interested in a Reverse Mortgage

1. What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets a homeowner convert the equity in his or her home into cash. The equity built up over years of home mortgage payments can be paid to the homeowner: in a lump sum, in a stream of payments, or as a supplement to Social Security or other retirement funds. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrowers no longer use the home as their principal residence. HUD's reverse mortgage provides these benefits, and it is federally-insured as well.

2. Can I qualify for a HUD reverse mortgage?
To be eligible for a HUD reverse mortgage, HUD's Federal Housing Administration requires that you are a homeowner 62 years of age or older; have a very low outstanding mortgage balance or own your home free and clear; and that you meet with a HUD-approved counseling agency -- to make sure you understand what a HUD Reverse Mortgage will mean for you. Call 1-888-466-3487, toll free, for more information.

3. Can I apply if I didn't buy my present house with FHA mortgage insurance?
Yes. While your property must meet FHA minimum standards, it doesn't matter if you didn't buy it with an FHA-insured mortgage. Your new HUD reverse mortgage will be a new FHA-insured mortgage loan.

4. What if I own a condominium, not a single-family home?
You can still qualify for HUD's reverse mortgage program. An eligible property must be your principal residence, but can be a single-family residence; a one- to four-unit dwelling with one unit occupied by the borrower; a manufactured home (mobile home); a unit in FHA-approved condominiums; and Planned Unit Developments. Your property must meet FHA minimum property standards, but you can fund repairs from your reverse mortgage.

5. What's the difference between a reverse mortgage and a bank home equity loan?
With a traditional second mortgage, or a home equity line of credit, you must have sufficient income to qualify for the loan, and you are required to make monthly mortgage payments. A reverse mortgage works very differently. The reverse mortgage pays you, and it is available regardless of your current income. You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes and other conventional payments like utilities, but with an FHA-insured HUD Reverse Mortgage, you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."

6. Can the lender take my home away if I outlive the loan?
No! You cannot outlive the loan agreement, and no debt from a Reverse Mortgage will passed along to the estate or heirs. You cannot be forced to sell your home to pay off the mortgage loan even if the loan balance grows to exceed the value of the property. And, HUD's Federal Housing Administration guarantees that you'll receive all the payments that are owed to you.

7. Will I still have an estate that I can leave to my heirs?
When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other finance charges, to the lender. All proceeds beyond what you owe belong to you or your estate. This means the remaining equity in your home can be passed on to your heirs. None of your other assets will be affected by HUD's reverse mortgage loan. No debt will ever be passed along to the estate or heirs. You retain ownership of your home, and may sell or move at any time.

8. How much money can I get from my home?
A borrower who uses an FHA-insured HECM will receive a reverse mortgage amount based on a formula which includes a Maximum Claim Amount. In general, this means the maximum amount you can receive will be determined by factors including the age of the borrower(s), and the appraised value of the property (or the maximum FHA mortgage amount for your area, if lower). For example, based on a loan at recent interest rates, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent, and an 85- year-old could borrow up to 56 percent. You should discuss the formula with your lender and your HUD-approved housing counselor.

9. What if I want to take out more equity from my home than the FHA-insured mortgage limits for my area?
Like FHA's home mortgage programs, HUD's reverse mortgage is primarily intended for low- and moderate-income families. For instance, FHA maximum home mortgage amounts range from $78,660 to $155,250, depending whether the home is in a standard housing-cost area, or an area determined by FHA to be a high-cost area. An owner with a property valued well beyond the FHA mortgage limits, and who has a large amount of equity, will not receive as much cash from a HECM as they might from another reputable private or public agency. Reverse mortgage programs are available in most states of the nation, including the District of Columbia and Puerto Rico, through HUD-approved lenders or highly regarded organizations like Fannie Mae. However, anyone interested in a reverse mortgage is encouraged to speak with a HUD-approved housing counseling agency first.

10. Should I use an estate planning service to find a reverse mortgage? I've been contacted by a firm that will give me the name of a lender for a "small percentage" of the loan?
HUD does NOT recommend using an estate planning service, or any service that charges a fee just for referring a borrower to a lender! HUD provides this information without cost, and HUD-approved housing-counseling agencies are available for free, or at minimal cost, to provide counseling and free referral to a list of HUD-approved lenders. Before you agree to pay a fee for a simple referral, call 1-888-466-3487, toll-free, for the name and location of a HUD-approved housing counseling agency near you.

Free Reverse Mortgage Calculator

For additional consumer information on reverse mortgages, visit the National Center for Home Equity Conversion. The NCHEC is an independent, nonprofit organization established in 1981 to educate consumers about reverse mortgages. It grew out of the first reverse mortgage research projects sponsored by the United States Administration on Aging.

The website -- at http://www.reverse.org -- provides free information on reverse mortgage alternatives, a reverse mortgage calculator, guidance, news, standards and sources.

Available from ElderCare Online™              www.ec-online.net             ©1998 Prism Innovations, Inc.