BOULDER – In 1988, Federal Housing Administration (FHA) reverse mortgage insurance legislation was signed by President Reagan. The only reverse mortgage insured by the Federal Government is called the Home Equity Conversion Mortgage (HECM) and is only available through an FHA approved lender. Although reverse mortgages have been around for some time, they are gaining popularity now as Baby Boomers grow older and have a high demand for cash to maintain their standard of living. Over time, the reverse mortgage product has evolved into a financial tool that has helped many people. If you are over 62 years of age, you could be a candidate for a reverse mortgage. The home must be your personal residence and must meet HUD’s guidelines. The reverse mortgage process is fairly complicated and in fact, it is required for the borrower to take a class so that they have a complete understanding of the process.
A reverse mortgage can be secured by your present home, but it can even be used for the purchase of a different home. A reverse mortgage might help you stay in your home longer, or you could sell your larger home and downsize using a reverse mortgage to buy your next home.
Many seniors are dependent on social security but are finding that it is not enough to cover their expenses. A reverse mortgage can be a useful tool to supplement social security by providing additional income. This loan is designed for seniors that need to eliminate a mortgage payment and need a source of income while staying in their present home. The potential loan amount is determined using a percentage of the home’s value. The percentage varies based on the age of the youngest homeowner. The homeowner still owns the home and can sell it anytime they choose.
Typically, the homeowner will never pay off the loan. Rather, the estate of the homeowner will do that. If there is any remaining equity after death, the equity passes to the estate. If the home eventually sells for less than the balance of the reverse mortgage, the estate is not liable for that shortfall.
To get a reverse mortgage, your house does not have to be free and clear, but there does need to be enough equity to pay off the existing mortgage and still have enough to draw upon. The loan amount available is determined by the age of the homeowners, current interest rates, and the appraised value of the home. The maximum loan amount will be subject to FHA loan limits.
There are several reverse mortgage calculators on the internet. However, a full-time Certified Reverse Mortgage Professional (CRMP) should be consulted for calculations based on current formulas.
Reverse mortgages can certainly help low-income families, but the reverse mortgage has become an important part of overall financial plans for many families.
Generally, the amount of equity in the home determines qualification, which is why it can be a great help to low-income seniors. There is no employment requirement in order to qualify for a reverse mortgage, however, the homeowner needs to demonstrate the ability to pay HOA fees, taxes and insurance on the property, or set up a reserve to ensure that those expenses will be paid. The amount of reserve is based on a life expectancy formula.
In my upcoming article, Part 2 of this series, I will discuss in more detail the benefits and disadvantages of a reverse mortgage.
To learn more, see my podcast video with Premier Lending’s Jessica Shanahan, mortgage loan officer, who explains reverse mortgages at: bit.ly/2Gpqq9d.
By Duane Duggan, RE/MAX of Boulder. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail Duane at DuaneDuggan@boulderco.com, call 303.441.5611 or visit boulderco.com.