In addition, if the value of the home appreciates and becomes worth more than the balance of the reverse mortgage loan, you or your heirs can receive the difference, Boies explains. Over time, reverse mortgage balances come due and are payable. You can repay the loan with your savings. Instead, you can choose, as many borrowers do, to sell the house and use the profits to pay off the balance.
You keep any funds that remain after payment. If the loan balance is greater than the selling price of the home, borrowers who have the federally insured version of a reverse mortgage, also known as a mortgage capital conversion mortgage (HECM), receive additional protections. A HECM reverse mortgage ensures that borrowers are only responsible for the amount their home is being sold for, even if the loan balance exceeds this amount. The insurance, backed by the Federal Housing Administration (FHA), covers the remaining balance of the loan.
Anything you don't use in your line of credit will continue to grow, allowing you to borrow up to the maximum amount indicated on your mortgage. Also called the Federal Housing Administration (FHA) reverse mortgage, this type of mortgage is only available through an FHA-approved lender. The Department of Housing and Urban Development (HUD) requires that all potential reverse mortgage borrowers complete a HUD-approved counseling session. Mortgage Equity Conversion (HECM) mortgages, the most common type of reverse mortgage, come with a series of one-time fees and ongoing costs.
Whenever a reverse mortgage includes an eligible non-borrower spouse, their age should be used to calculate the loan amount, as the possibility of deferment increases the chance that the loan balance will exceed the value of the home. Ideally, anyone interested in applying for a reverse mortgage should take the time to thoroughly learn how these loans work. But what happens if the opposite happens and the loan balance exceeds the value of the property? If your reverse mortgage is a HECM, you will never be responsible for a deficit. The lump sum option offers 60 percent of your maximum loan amount in a single lump sum when you close your reverse mortgage.
This amount is the lower between the balance of the reverse mortgage or 95 percent of the assessed value of the property. The Consumer Financial Protection Office (CFPB) warns homeowners against reverse mortgage scams, which can target unsuspecting seniors to fraudulently hand over money. While reverse mortgages don't have income or credit rating requirements, they do have rules about who qualifies. The most important are origination fees, closing costs and mortgage insurance premiums, along with the interest that the loan accrues on the loan balance.
Since you don't need good credit or a big income to qualify, it's easier to buy a rental property with a reverse mortgage than it is to try to get a real estate investment loan. Instead, you can take out a loan of up to 60% or more if you use the money to pay your term mortgage. When you start learning about a reverse mortgage and its associated benefits, your initial impression may be that the loan product is “too good to be true.”.