Reverse Mortgage Frequently Asked Questions and Answers
Many people we work with are unfamiliar with mortgage provisions and reverse mortgage facts, so here is a list of questions that we often hear. Want to know more? Check out our blog, or send us your mortgage question directly!
How much money can I receive?
The amount depends on (1) the age(s) of the borrowers and non-borrowing spouses, (2) the market value of the property, and (3) current interest rates.
How long does the process take?
The time from application to closing depends on how long it takes to get the borrower documentation, outside reports, and the underwriting approval. Generally, this takes 30 – 60 days. However, expedited approval can be arranged if an emergency situation exists.
Who is eligible for a reverse mortgage loan?
Homeowners 62 years of age or older, who reside in the property, have sufficient equity in their home, and have sufficient financial resources to meet financial assessment guidelines.
What are the upfront costs?
The upfront costs depend on the reverse mortgage program and rate selected. The costs may include an origination fee, mortgage insurance premium, and normal settlement costs necessary to close the loan. However, some programs feature reduced upfront costs or no upfront costs. Your Reverse Mortgage Consultant will explain all the options available to you.
Can a reverse mortgage be used if there is a current mortgage, home equity line of credit, or other lien on the property?
Yes. However, any current obligations secured by the property will have to be paid off. The proceeds from the reverse mortgage may be used to pay these obligations. This will reduce the net cash available, but payment obligations that have been required by the current debt will be eliminated.
What if the property is owned by a trust?
The trust documents must be reviewed and approved. A living or revocable trust will usually be accepted. However, an irrevocable trust may not be acceptable. However, some irrevocable trusts may be accepted with language modifications. The key is to have the trust documents reviewed at the outset.
Are there any restrictions on how I can use the money?
No, there are no restrictions. The funds may be used for any purpose the borrowers choose.
What are my obligations after the loan closes?
Unlike traditional mortgages, no principal or interest payments need be made to the lender at any time. However, you are responsible for (1) keeping the homeowner’s insurance and property taxes current, (2) keeping the property properly maintained, and (3) residing in the property as your principal residence – notifying the lender if you will be away for an extended period of time.
What happens if/when my spouse or I die, or move to a long-term care facility?
As long as the property continues to be the principal residence of one of the borrowers, the loan cannot be called due as long as the loan remains in good standing.
Does the lender take my house?
No. This is a common misconception. A reverse mortgage is a loan secured by the property just like any other mortgage you may have had. The title ownership remains in your name, and the eventual payoff to the lender will be the loan balance, or the home value, whichever is less.
What events would cause the loan to be called and repayment required?
Repayment of the loan can be required if: (1) the property ceases to be the principal residence of at least one borrower, (2) the borrower fails to keep the hazard (homeowners) insurance and property taxes current, or (3) the borrower fails to keep the property properly maintained.
Will I have any income tax liability for the proceeds I receive from a reverse mortgage?
No. Currently the IRS treats funds received from a reverse mortgage to be advances from a loan, and therefore not taxable income. You should consult your tax advisor for your specific situation
Since the interest charged is for home interest, can it be deducted for tax purposes?
The interest charged will accrue and will be deductible when the loan balance and accrued interest are repaid. However, you should consult with your tax advisor on this and all other tax matters.
Will a reverse mortgage affect my Medicaid, SSI, or other needs-based program benefits?
No. The proceeds from a reverse mortgage do not affect these or most needs-based programs as long as the monthly cash advances are properly spent down and not accumulated. The rules for these programs vary, so you should consult with your local Council on Aging or a financial advisor to be sure.
How much will be due when the loan has to be repaid?
The loan balance owed includes the total of all cash advances made, plus the accumulated interest and insurance charges. The total balance owed will be the LESSOR of the outstanding loan balance, or the value of the property. If the final value is less than the loan balance, the FHA insurance will cover the difference (deficiency) protecting both the lender and the borrowers from loss or further liability.
What happens if the loan balance becomes greater than the value of the property?
Reverse mortgages are non-recourse loans. This means that the borrower can never owe more than the value of the home. Nor can the loan be called due if home values decline and the home becomes “undervalued”. Moreover, any undrawn funds in the line of credit remain available to the borrowers should property values decline in the future; effectively, this provides a hedge against property value declines.
What happens if the home sale proceeds exceed the balance owed when the home is sold?
Any surplus proceeds from the sale of the home that exceed the balance owed goes to the borrower. FHA insured HECM reverse mortgages prohibit any shared appreciation payments to the lender or any party other than the owners.
Will my estate or my heirs have to sell the property to repay the loan?
No. Your heirs can keep the property if they desire. The loan will have to be repaid, but this can be done with other funds they may have, or they can refinance the property with a conventional mortgage loan. Depending on the circumstances at the time, the heirs can choose to keep, sell, or assign the property in the event there is not sufficient value.
