As an apparent justification to its name, Reverse Mortgage (RM) follows an almost an inverse method of a contemporary mortgage loan. Having opted for RM, the borrowers are not required to make payments for the mortgage loan they have borrowed. Instead, the loan allows the borrowers to seek a mortgage loan accessing the equity built in their home while using the estate also as the collateral.
Aimed specifically at benefiting elders, it’s a life saver for most who want to use their estate as a medium to aid their day-to-day expenses. As they are not required to make the monthly payments until their demise, or till their decision to sell, or move out of the home, the interest gets added to the loan balance every month.
The increasing loan balance can grow to surpass the value of the estate. In such case, however, the borrower is under no obligation to pay the additional balance in excess of the value of the home. Understandably it sounds complicated, and for this very reason, the borrowers should ask and clarify their doubts before opting for the reverse mortgage. Discussed below are some of the questions an applicant can seek to clarify before applying.
1. Would the estate remain under the ownership of the applicant?
The home will always remain under the ownership of the person applying for the reverse mortgage even after getting the loan. Yet it is important to clarify the same with the loan officer, as there are some complexities involved based on various situations. Going by the method followed in RM, the borrower along with the co-owner, who in most cases is the spouse, is not required to make the monthly payments. The borrowers can do this as long as they live in that house. In the case of demise of the borrower, the ownership explicitly gets transferred to the surviving co-owner and remains until he or she also passes away. The ownership may get ceased by the lender if the borrowers decide to move out of the house or sell it.
2. How could the Reverse Mortgage affect the heirs of the borrower?
The explanation can be quite a handful if the applicants want to know how the reverse mortgage would affect their heirs. It also turns complicated if a borrower passes away even before the home equals or exceeds the amount of the loan. As this is usually the case, the heirs of the borrower have many options. They can repay the bank either by selling the house to retain the excess amount or can get the property refinanced from another lender. They may also continue to stay in the house or rent it out.
3. Can the co-owner continue to stay at home while the borrower moves out?
Applicants could be interested to know how the ownership would get transferred in case the borrower moves to a memory care facility or assisted living, while the surviving co-owner still continues to live in the home. This can help the owners have a detailed understanding of how the ownership would get transferred when one of the co-owners is not around.
4. How can the borrower collect the proceeds of the RM?
The borrower may want to use the proceeds of the loan in many ways. He or she could either use it to finance their day-to-day expenditure, use it to go on a vacation, to pay off the medical bills, or even finance the education of their kids or grandchildren. In this case, it is important to ask the lender the method in which they can access the proceeds. A reverse mortgage, being intricate than a traditional loan, also provides various methods for the same. The borrowers can either get a lump sum amount or opt for monthly payments. In the latter option, the loan amount will be divided into small payments and could be paid out as long as the borrower continues to stay in the house, or for certain duration, usually 8-10 years. Also, the borrower can opt for a line of credit, even for a hybrid of monthly payments and the line of credit.
5. Who and what types of houses are eligible for RM?
Borrowers aged 62 & above, and who own a home, which must be their primary residence, can qualify for the HECM (Home Equity Conversion Mortgage) reverse mortgage. It follows the standard FHA eligibility requirements for various types of property that include 1–4 family dwellings and condominiums approved by FHA. The planned unit development (PUD) homes along with manufactured homes meeting the FHA standards can also qualify.
- As there are various misconceptions associated with Reverse Mortgage, the borrowers should ask and clarify their doubts before opting for it.
- While most of the frequently asked queries about the loan are proactively covered by the loan bankers or loan consultants, there are some specific questions an applicant can seek to clarify before applying.