A reverse mortgage is helpful for senior homeowners to tap into their equity. Unlike a home equity loan, it does not require repayment until the home changes ownership, such as when the current owner passes away or sells the property.
As this is a major financial decision, it is crucial to understand the reverse mortgage loan process before applying to ensure your assets are protected. Today, we will explore reverse mortgages to prepare you for the application process.
Preparation Before Applying for Reverse Mortgages
Before applying for a reverse mortgage, you’ll need to check that you are eligible and find a suitable lender that meets your needs. Any borrower getting a Federal Housing Administration (FHA) loan must participate in a reverse mortgage counseling session through a Housing and Urban Development (HUD)-approved counselor.
Eligibility Requirements
Unlike a traditional mortgage, a reverse mortgage is specifically for individuals over 62. If you have a spouse under the age limit, they will be considered a non-borrowing spouse and will not be responsible for the loan.
A reverse mortgage is for homeowners with at least 50% home equity. Some mortgage lenders may allow for higher percentages. You can only get a reverse mortgage on a primary residence, not a vacation home, meaning you must live in the property most of the year.
Lastly, you must be free of any federal debt to secure a reverse mortgage. You must also use the loan sum to pay off student debt or unpaid taxes.
Researching Lenders
Home Equity Conversion Mortgages (HECMs) are the safest type of reverse mortgage as they are backed by the FHA, a division of the Department of Housing and Urban Development (HUD).
You should work with an FHA-approved lender to secure a loan. When identifying potential lenders, research their track records and speak to a loan officer about their experience administering these specialized loan products.
Financial Counseling
Though you will need to undergo mandatory reverse mortgage counseling, it’s a good idea to speak to a financial counselor beforehand to answer any questions. These professionals can assess your goals in securing funding, inform you of potential issues, and walk you through the particulars of getting an appraisal and signing the documents.
Reverse Mortgage Process
The reverse mortgage application process is slightly different than obtaining a conventional loan. However, many elements are similar, including assessing your creditworthiness and underwriting the loan.
Initial Application
On your reverse mortgage loan application, you will provide details about your home and your financial standing. Some standard documentation needed are:
- photo identification like a driver’s license;
- home address;
- proof that it’s your primary residence (as vacation homes are not eligible for a reverse mortgage).
A completed application form legally authorizes the lender to investigate the property and your financials. Your lender must provide a good faith estimate (GFE) within three business days of receiving your application. They’re not allowed to charge you expenses other than the credit report. The GFE tells you how much you may receive from the reverse mortgage.
Mandatory Counseling Session
The government recognizes the risk of scams regarding reverse mortgages, so all borrowers looking for a HECM must undergo a counseling session with a HUD-approved counselor.
This third-party counselor will ensure you fully understand the implications of a reverse mortgage. For example, you must continue to pay some expenses on the property. You should also know that this is a lien on your home, meaning you can lose your house if you face financial difficulties.
The HUD counseling session typically takes one hour or longer. After that, you’ll receive a reverse mortgage counseling certificate valid for 180 days after signing.
Appraisal
Next, the property will undergo the reverse mortgage appraisal process with an FHA-approved appraiser. An appraisal assesses how much equity you have in the property and how much you might receive.
Underwriting
After the appraisal, your reverse mortgage goes through the underwriting process, during which the underwriter reviews your loan details and eligibility.
For example, they will perform a title search with the applicable title company to ensure you are legally allowed to take out a reverse mortgage. They will also look for any outstanding liens that may prevent you from completing the reverse mortgage process.
You must ensure you have homeowner’s insurance and can pay your property taxes. You may need to provide additional documentation before your loan goes through the final approval process and you schedule your closing date.
Choosing Your Reverse Mortgage Loan Payout Option
With a reverse mortgage, you have several different payout options. You can receive everything upfront, in monthly installments, as a line of credit, or a combination of the above. This flexibility makes a reverse mortgage a powerful and versatile tool for older homeowners.
Lump Sum
A lump sum means you’ll receive all your loan proceeds upfront to use as needed. You may need urgent home repairs, medical bills, or other pressing needs. However, it’s important to note you must still use this money carefully as it’s a lien against your home.
Lump sum payments are best used if you know exactly how you will use the money and don’t expect to have future financial needs.
Line of Credit
Like a credit card, this option allows you to access money when needed rather than all at once. You may utilize it for occasional necessities, such as a sudden medical expense or a longer-term renovation project.
Monthly Payments
With this option, you’ll receive a monthly payment, much like another form of income. As it is a lien, you won’t have to pay taxes on this money, and you’ll be able to predict your expenses more easily.
Combination
You can choose a combination of the above payout options. For example, depending on your specific needs, you may receive a large upfront payment and set up the rest as a monthly sum.
Closing on the Loan
Many states require a seven-day waiting period to protect consumers before you can schedule your final closing date. At this time, you’ll sign all the final closing documents and review your obligations as a borrower.
Reviewing Loan Documents
Your closing agent, who may work for an attorney or title agency, will walk you through the loan’s particulars. Review the closing documents carefully to fully understand all the terms and conditions, interest rates, etc. Once satisfied, you’ll sign the documents in the presence of a mobile notary, and the reverse mortgage process is complete.
Closing Costs
Generally, a lender cannot charge you more than $2,500 or 2% of the first $200,000 loan, with 1% allowed after the first $200,000. You must also pay for the title search, counseling, appraisal, credit report, notary, and attorney fees.
Receiving Your Funds
After your final closing date, you have three days to cancel the loan (this is called your right to rescission). If you proceed with the loan, the funds will be dispersed after this period. In many cases, you can only access up to 60% of the total money available in the first year, which is meant to protect you from outliving your reverse mortgage.
After Closing
While a reverse mortgage is a convenient way to pay for necessities, it comes with some obligations you should be aware of.
Ongoing Property Responsibilities
After receiving your reverse mortgage, you must still maintain the property, which includes paying real estate taxes and keeping your homeowner’s insurance policy active. Failure to do so may result in losing your home.
Loan Repayment
A reverse mortgage will come due when the borrowers no longer occupy the home, whether they passed away, transferred the title to someone else, or sold the house. While this is convenient for the borrowers in many cases, it may lead to issues for your heirs. They’ll have to repay the loan or surrender a claim if they can’t afford the mortgage.
Before taking out a reverse mortgage, consider speaking to an attorney about these issues. By planning for the future, you’ll protect your heirs from financial difficulties.
The Bottom Line
Arnaiz Mortgage is here to assist you with all your mortgage needs, including reverse mortgages. We’re renowned for excellent customer service, competitive rates, and helpful advice to ensure you make the right decision for your future needs.
Get a quote to see how much you can afford or learn more about our process. Contact us online or call (623) 806-4645 to discuss your options.