A FHA insured reverse mortgage is a government insured loan that is only available to homeowners that are 62+ years of age. The maximum loan size is determined by age, home value and interest rate. The lowest percentage of home value available is at age 62 while the largest percentage available is at age 90+.
The proceeds of the loan must first be used to pay off any mandatory obligations (i.e. mortgage, lien or property taxes currently due). All remaining proceeds may be used for any purpose. If no mandatory obligations exist, all proceeds may go to the borrower.
There are no monthly repayments* on a reverse mortgage. The loan only becomes due and payable upon a maturity event (i.e. the death of the last borrower, the sale of the home, failure to pay the property taxes or keep the house insured).
The purpose of the government insurance is to pay off the remaining loan balance if there is more owed on the reverse mortgage balance than what can be obtained from the sale of the home.
Although we don’t know your specific situation, there are 5 categories that most reasons fall within. They are the following:
You may wish to discuss your situation or ideas with a reverse mortgage loan officer to assist you in determining if a reverse mortgage is right for you.
* all references to no monthly payments throughout this educational brochure refer to repayments of principal, interest and mortgage insurance. Reverse mortgage borrowers are responsible for all ongoing property related charges such as property taxes, insurance, utilities, maintenance, HOA dues, etc.
Through the years, we have heard many stories from our applicants about why they are interested in obtaining a reverse mortgage. Below are some recent reasons we have received or heard from reverse mortgage borrowers:
* all references to no monthly payments throughout this educational brochure refer to repayments of principal, interest and mortgage insurance. Reverse mortgage borrowers are responsible for all ongoing property related charges such as property taxes, insurance, utilities, maintenance, HOA dues, etc.
Age qualification: All reverse mortgage borrowers must be at least 62 years old. In Texas, if one spouse is younger than 62, a reverse cannot be obtained by either spouse unless the younger spouse qualifies as a non-eligible, non-borrowing spouse. Generally, this applies to spouses permanently living separately and apart from each other.
Primary lien: A reverse mortgage must be the primary lien on the home. Any existing mortgage must be paid off using the proceeds from the reverse mortgage. (Reverse mortgage proceeds can be used,)
Occupancy requirements: The property used as collateral for the reverse mortgage must be the primary residence. Vacation homes and investor properties do not qualify, however you may own other properties.
Taxes and Insurance: You must remain current on your real estate taxes, homeowners insurance, and other mandatory obligations, including condominium fees, or you are susceptible to default.
Property Condition: You are responsible for completing any mandatory repairs that are required during the underwriting process and maintaining the condition of the property after the loan is in place.
Conveyance of the mortgaged property by will or operation of law to the estate or heir after mortgagor's death: When a reverse mortgage becomes due and payable as a result of the last of the borrower or borrower's spouse to die and the property is conveyed by will or operation of law to the estate or heirs (including a surviving spouse who is not on title and therefore not obligated on the HECM note) that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property.
The amount of proceeds you receive is based on the appraised current value of your home, your age and current interest rates. Call or email us for a quick free quote. We will need the following information:
There are three options for how a borrower may choose to receive the proceeds from a reverse mortgage. They are a full lump sum, line of credit or a stream of monthly payments.
The full lump sum is very simple. All proceeds are taken at closing and there are no remaining funds available.
The line of credit allows a borrower to take funds when needed subject to the terms of the loan. This has several advantages. First, the available line of credit will grow or increase at a rate that is equal to the interest rate and FHA mortgage insurance rate combined. For example, if the line of credit has $100,000 available and the combined interest and FHA mortgage insurance rates add up to 5.00% per year, at the end of year one, there would be $105,000 in the line of credit available due to this growth of the credit line. The second advantage is that using this option allows a borrower to minimize the loan charges that accrue on the balance by only taking money when needed from the loan. A third advantage is that if a borrower voluntarily repays part of the loan balance, they may again redraw that money, if needed, from the line of credit.
The monthly income option is also quite simple. The borrower may choose the lowest monthly payment option which is a payment for life (regardless of how long) or a term payment such as 60 months. The shorter the term, the higher the monthly payment will be. Interest and FHA mortgage insurance will only accrue on the money that has been advanced to the borrower.
There two types of FHA insured reverse mortgages. They are a Standard and a Purchase.
The Standard is used for the majority of all reverse mortgage transactions. This type of reverse mortgage is used when the borrower already owns the home at the time of application. This is considered a refinance regardless of whether the applicant has a mortgage or not. If a mortgage exists, the proceeds must first be used to pay off the balance with the remaining proceeds going to the borrower. If no mortgage exists, all proceeds may go directly to the borrower. The Standard reverse mortgage may also be used to refinance an existing reverse mortgage if your property value has increased significantly and additional money is available.
The Purchase is a reverse mortgage used for the purpose of purchasing a home. Although a large down payment is required, the benefits of using a reverse for purchase are that the borrower will have no monthly repayments*, less funds are consumed from the borrower’s savings than when paying cash for the house and it is easier to qualify for a reverse mortgage than a traditional mortgage with a monthly payment requirement.
As will most conventional, FHA or VA loans, you retain title and ownership to your home when obtaining a reverse mortgage.
The amount of funds that a person is eligible for depends on age (or, in the case of couples the age of the younger spouse), the value of the home, the interest rate and upfront costs. The older you are, the more proceeds you may receive.
There is a limit on the amount of funds you can access during the initial year. If you are eligible for a $100,000 loan, for example, you can take $60,000, or 60 percent of that sum. There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, that exceed the 60 percent limit. You must pay off these "mandatory obligations" before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount – in which case that's an extra $10,000, or 10 percent of $100,000.
Loan proceeds can be taken as a lump sum, as a line of credit or as fixed monthly payments, either for a fixed amount of time or for as long as you remain in the home. You can also combine these options, for example, taking part of the proceeds as a lump sum and leaving the balance in a line of credit.
Fees can be paid out of the loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. Generally, your only out-of-pocket expense during the application process is the appraisal fee and a charge for counseling, depending on the counseling organization you work with. Very low-income homeowners may be exempted from being charged for counseling.
When you ultimately pay off the loan, the final balance equals the amount of funds borrowed, plus annual mortgage insurance premiums and interest. The loan balance grows as you live in the home. In other words, when you sell or leave the house, you owe more than you originally borrowed.
With an FHA insured reverse mortgage, you never have to pay back more than the appraised value of the home or the sale price, regardless of how high the balance grows. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the federal government absorbs that loss. The government pays for it with proceeds from its FHA mortgage insurance fund, which is funded by the reverse mortgage loans.
You are responsible for paying property taxes, all required property insurance, monthly and annual maintenance fees, and other financial charges. Any lapse in these policies can trigger a default on your loan.
Reverse for Purchase now available in Texas
For years, Texas has been the only state in the nation where a reverse mortgage could not be used to purchase a home. In November, 2013, through a vote of the general population, Texans overwhelmingly voted to change the state constitution to allow for the Federal Housing Administration’s (FHA) reverse mortgage loan type to be used for the purchase of a primary residence homestead property.
Prior to this change in the Texas law, those interested in obtaining a reverse mortgage for the purchase of their new home had to first purchase a home with cash or a purchase loan and then refinance with a reverse mortgage. This resulted in two sets of transaction fees and closing costs for the homeowner which future homebuyers will no longer have to incur.
Financial Assessment and Tax & Insurance Set-Asides
As the reverse mortgage volume has grown, HUD has noticed a significant growth in the defaults of borrower’s ability to maintain the property taxes and insurance coverage. Consequently, effective 4/27/2015, HUD added a layer of qualification for a reverse mortgage by analyzing an applicant’s willingness and ability to comply with the requirements of the loan (i.e. pay the property taxes and homeowner’s insurance and maintain the condition of the property).
This additional review is called a “Financial Assessment”. HUD now requires items such as credit history, income, assets and monthly payment obligations to be included as part of this assessment and part of the underwriting process. In cases where the financial assessment has determined that the history of willingness or ability does not exist, a reserve for payment of property taxes and insurance in future years during the term of the loan must be set aside out of the proceeds from the reverse mortgage.
Texas Non-Borrowing Spouses (spouses under the age of 62)
HUD has announced changes that now allow for 62+ age applicants with spouses less than 62 to obtain a reverse mortgage loan within certain parameters. For borrowers with Eligible Non-Borrowing Spouses, the age of the younger spouse is used to determine the amount available. An Eligible Non-Borrowing Spouse must:
Texas exclusion – Texas borrowers with an Eligible Non-Borrowing Spouse are currently unable to obtain a reverse mortgage in the State of Texas at this time. However, borrowers with an Ineligible Non-Borrowing Spouse may obtain a reverse mortgage. An example of this would include a married couple living separately and apart from each other.
There are two charges that accrue or are added to the loan balance after the loan is obtained. They are interest and FHA mortgage insurance.
Interest and FHA mortgage insurance is added to the loan balance every month and the result becomes the new principal loan balance. For example, if the current loan balance is $50,000 and the interest and FHA mortgage insurance charges for the month are $47.30, the new principal balance for the calculation the following month will be $50,047.30. This is referred to as compounding. For reverse mortgages, compounding occurs on a monthly basis since no payments* are being made by the borrower to pay for these charges.
The cost or rate of FHA mortgage insurance is .5% (½ of 1 percent) per year. 1/12th of this rate is multiplied by the loan balance each month and added to the balance as mentioned above.
The interest rate is expressed or quoted by the lender as an annual rate. The borrower may choose a fixed rate or an adjustable interest rate. Again, 1/12th of the annual interest rate is multiplied by the loan balance each month and added to the balance.
The fixed rate provides a stable interest rate for the life of the loan but is more restrictive in terms of options for taking the money available from the loan. The borrower may only choose to take the full lump sum of money available with the fixed interest rate. The line of credit or monthly payments to the borrower is not available using a fixed rate of interest.
The adjustable rate will adjust each month based on the LIBOR index. This provides a little more risk in terms of interest rate stability but historically, the costs of accrued interest on the adjustable rate reverse mortgage loans have been significantly lower than the accrued costs of interest on the fixed rate loans. With the adjustable interest rate, a borrower may choose any of the three payout options which include lump sum, line of credit or monthly payments.
Generally speaking, choosing a reverse mortgage with the lowest interest rate (fixed or adjustable) provides a borrower with the most benefits. Here’s why-
First and most obvious, less interest will accrue on the loan balance when you choose the lowest rate available, causing the loan balance to grow at a slower pace than if you chose a higher rate.
Second and perhaps more importantly, the maximum amount available (% of home value) occurs when interest rates are 3.06% or less. More specifically, for an adjustable rate loan, this refers to the “Expected Rate” rather than the Note Rate because the Expected Rate is used to determine the amount available. For fixed rate loans, the Expected Rate and the Note Rate are the same. For adjustable rate loans, the Expected Rate is calculated by adding the margin that you choose (i.e. 2.000%, 2.125%, 2.25%, etc.) to the 10 Year Swap index while the Note Rate is calculated by adding the margin to the 1 Month or 1 Year LIBOR index.
An exception to the general rule of choosing the lowest interest rate may occur when someone is taking a very small initial draw at closing and is looking for the largest possible growth on the unused line of credit. Since the unused line of credit continues to increase at a rate that is equal to the sum of the interest rate and FHA mortgage insurance rate, a borrower can obtain only the highest growth rate by choosing the highest adjustable rate of interest available, or more specifically, by choosing the highest margin available. If you are considering this, ask your mortgage company for a list of the interest rate margins available.
Most closing costs may be financed as part of the reverse mortgage transaction and collected at closing out of the loan proceeds. They include the following:
Origination Fee– The origination fee covers a lender’s operating expenses associated with originating a reverse mortgage. FHA’s maximum origination fee allowed is 2% of the initial $200,000 of the home's value and 1% of the remaining value, with a cap of $6,000. Several of the calculations and fees on a FHA insured reverse mortgage are based on the Maximum Claim Amount which is the value of the home at the time of the loan, but which currently has a maximum limit of $765,600.
FHA Mortgage Insurance Premium – The Initial Mortgage Insurance Premium (IMIP) is a fee paid by the borrower to the Federal Housing Administration (FHA), an agency of the federal government, to provide certain protections for both the lender and the borrower in a HECM reverse mortgage. If the company servicing the loan is interrupted, FHA assumes responsibility for the loan, providing the borrower with uninterrupted access to proceeds from his or her reverse mortgage. In cases where the sale of the home is not enough to pay off the reverse mortgage balance, the insurance protects the borrower or estate from owing more than the sale price by covering losses incurred by the lender.
The IMIP is equal to 2% of the appraised value of the home, subject to a value cap of $765,600.
Example: On a $200,000 home value, 2% is $4,000.
Appraisal Fee – An appraiser is responsible for assigning a current market value to your home. Appraisal fees vary by region, type and value of home, but average $600. The appraisal is ordered through an approved appraisal management company which then independently makes the appraisal assignment with a local appraiser. The appraisal management company acts as a firewall between the loan originator and the appraiser to ensure that the appraised value is not influenced or biased in any way by the originator.
The appraisal is the one closing cost charge that is generally paid in cash, often before the loan is made rather than from the loan proceeds. In addition to placing a value on the home, an appraiser must also make sure there are no major structural defects, such as a bad foundation, leaky roof, or termite damage. Federal regulations mandate that your home be structurally sound and comply with all home safety and local building codes in order for the reverse mortgage to be made. If the appraiser uncovers property defects, repairs may be required prior to the loan closing.
Once the repairs are completed, the same appraiser is paid for a second visit to make sure the repairs have been completed. Appraisers generally charge $150 dollars for the follow-up inspection.
Title Insurance / Title policy Endorsements – Title insurance protects the lender (lender’s policy) against any loss arising from disputes over ownership of a property. Title insurance rates are set by the office of the Texas Insurance Commissioner and vary by size of the loan, though in general, the larger the loan amount, the higher the cost of the title insurance.
Credit Report – Verifies any federal tax liens, judgments, other government insured loans, etc. relating to the borrower. If there is a non-borrowing spouse, a separate credit report will be required. Cost: $35 - $55
Flood Certification – Determines whether the property is located in a federally designated flood hazard area. Cost: $18 - $25
MERS – Registers loan on Mortgage Electronic Registration System which tracks the servicing rights and ownership of mortgage loans electronically. Cost: $12 - $15
Counseling Certificate– HUD approved counseling is required for each borrower prior to obtaining a FHA case number to begin processing the reverse mortgage loan request. Counseling is typically done over the phone. Cost: $125-$150
Escrow (aka Settlement or Closing) – Generally includes a title search and various other required closing services. Cost: $650 to $750 depending on location.
Document Preparation – Charge for preparation of final closing documents, including the mortgage note, deed of trust and other recordable items. Cost: $225 - $265
HOA Transfer – Some homeowner associations charge a fee each time a property owner in the subdivision sells or refinances the property. This is done as a source of revenue for the homeowner association to assist with the cost of maintaining the subdivision. Cost: $0 - $250
Notary Closing Agent – After the reverse mortgage loan has been fully approved, the title company will schedule a closing agent to meet with the borrower (typically at their home) to sign the final loan documents. Cost: $150 - $200
Texas Title Insurance Guarantee Fund – Texas title agents are required to collect a policy guarantee fee for each owner’s or lenders policy issued. The amount of the fee is set by TTIGA’s Board of Directors. Cost: $3
Recording– Charge for recording the mortgage lien with the County Recorder’s Office. Cost: $150 - $300, depending on the county and number of pages to be recorded
Courier – Cost of any overnight mailing of documents between the lender and the title company or loan investor. Cost: $25 - $75
Pest Inspection– Determines whether the home is infested with any wood-destroying insects such as termites. Cost: $150 - $200
Survey – Determines the official boundaries of the property and is used to review for encroachments, easements, etc. If the borrower has an existing survey and no changes have been made to the property since the date of the survey, a new survey can usually be avoided. Cost: $475+, depending on size of property
(Note: Cost estimates can change over time. For most current costs, consult a lender. Also, some states may have local fees that are not included here.)
Q: Does my home qualify?
A: Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976), condominiums, and townhouses. Co-ops do not qualify. Condominiums must be HUD approved. Manufactured and Mobile homes must be built on a set foundation and certain other requirements must be met.
Q: Are there any special requirements to get a reverse mortgage?
A: As long as you own a home that is your primary residence, are at least 62, and have enough equity in your home, you may be eligible for a reverse mortgage.
Q: What if I have an existing mortgage?
A: You can qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so the proceeds from a reverse mortgage must first be used to pay off any existing indebtedness. All remaining proceeds will go to you. The payoff of your current mortgage will give extra cash flow each month because your mortgage payment* will be eliminated.
Social Security and Medicare
Q: Will I lose my government assistance if I get a reverse mortgage?
A: A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid or Supplemental Security Income (SSI), any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain count as an asset and could impact eligibility. To be safe, you should contact the local Area Agency on Aging or a Medicaid expert.
Deciding against a Reverse Mortgage
Q: Under what circumstances should I not consider a reverse mortgage?
A: 1) You have enrolled in a tax deferral program because you cannot afford to pay the annual property taxes; 2) Your home is located in a flood hazard zone but you can’t afford the annual flood insurance premium; 3) A situation with a child requires that you leave them your house to live after you die that is free of any payment obligation*; 4) You intend to sell the house shortly and don’t want to incur the closing costs of a reverse mortgage just prior to the sale.
Q: What are My Income Options?
A: You can choose to receive the money from a reverse mortgage 1) all at once as a lump sum; 2) fixed monthly payments either for a set term or for as long as you live in the home; 3) as a line of credit, or a combination of these.
Amount of Proceeds
Q: How Much Money Can I Get?
A: The amount of funds you are eligible to receive depends on your age (or the age of the youngest spouse in the case of couples), the appraised home value, interest rates, and the lending limit in your area. In general, the older you are and the more valuable your home (and the less you owe on your home), the more money you can get.
Q: Why did I receive less money at closing than on the original estimate I was given?
A: The most common reason that less money is available at closing than the original estimate is a lower appraised value however the following items may also cause a reduction in the net loan proceeds:
Use of Proceeds
Q: How can I use the proceeds from a reverse mortgage?
A: The proceeds from a reverse mortgage can be used for anything, whether it’s to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, pay for insurance and property taxes, or prevent foreclosure.
Q: How does the interest work on a reverse mortgage?
A: With a reverse mortgage, you are charged interest only on the proceeds that you receive. Both fixed and variable interest rates are available. Rates are tied to the London Interbank Offered Rate (LIBOR) index, plus a margin that typically adds 1.75% – 3% to the index rate. Interest is not paid out of your available loan proceeds or in monthly installments, but instead compounds over the life of the loan until repayment occurs.
Q: My understanding is that the unused balance in the Line of Credit has a growth feature. Does that mean I'm earning interest?
A: No, you're not earning interest like you do with a savings account. After your loan closing, the principal limit increases each month at a rate equal to 1/12th of the annual interest rate in effect at that time plus 1/12th of the annual mortgage insurance premium rate (.5% per year). This growth should be considered a further extension of credit rather than an accrual of interest.
Mortgage Insurance Premiums
Q: Why is there a Mortgage Insurance Premium with my HECM reverse mortgage?
A: Under the HECM program, borrowers are charged an initial mortgage insurance premium (IMIP) which is equal to a 2% of your home value or the maximum claim amount of $765,600, (whichever is less), plus an annual premium of .5% thereafter on the loan balance. 1/12th of the annual mortgage insurance premium is added to the loan balance each month the loan is outstanding.
The MIP guarantees that if the company managing your account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the mortgage insurance guarantees that you will never owe more than the value of your home when the HECM must be repaid.
The mortgage insurance premium is considered by the FHA to be a “fully earned premium” at the time of the loan closing and these mortgage insurance premiums are non-refundable.
Q: I elected to receive monthly income payments. When will those monthly payments commence?
A: Your first monthly payments are to be sent to you the first business day of the month following your loan funding date.
For example, if your loan closed at the end of May and your loan funded in June, then your first monthly payment will be issued the first business day of July.
Q: Can I change the type of payment plan I elected at closing?
A: If you have a Home Equity Conversion Mortgage (HECM), and your loan documents allow for a payment plan change, then yes you can change your payment plan. This means that you can change from monthly payments to a Line of Credit, or vice versa. There is usually a fee associated with changing your payment plan.
Q: What if my loan servicer does not send my requested funds in a timely manner?
A: Your loan servicer is required to send your requested Line of Credit funds within five (5) business days of receiving your request for funds. If you have scheduled monthly payments, then these funds are to be disbursed by the first business day of each month. If your servicer does not disburse your funds within these timeframes, then your loan servicer is to pay you a fine equal to 10% of the payment that is due to you, plus interest on that sum for each additional day the disbursement is delayed. This fine shall not exceed $500 for each instance of late disbursement. This fine may not be added to your loan balance.
Q: Can I make a partial prepayment to my reverse mortgage account?
A: An FHA insured reverse mortgage will permit a partial prepayment to your reverse mortgage account without penalty.
Q: How are my partial prepayments applied to my loan balance?
A: Your payments are applied in the following order: first to that part of your loan balance representing mortgage insurance premiums, secondly to that part of your loan balance representing servicing fees (if any), thirdly to that part of your loan balance representing interest charges, and finally to that part of your loan balance representing principal advances.
Interest charges and your income taxes
Q: Can I deduct the interest charges for income tax purposes?
A: Since personal tax returns are cash based rather than accrual based, Interest charges can only be deducted once those interest charges have been paid. As long as you have not made any payments to your reverse mortgage, you would be precluded from deducting those interest charges for income tax purposes. If you have made partial prepayments, then you must be assured that your prepayments have been applied to your interest charges.
Q: What is a Repair Rider?
A: In select cases, there may be a requirement that certain repairs to your property be completed so that your property meets the required lending standards. If completing such repairs was a condition of your loan closing, then you were to have signed a “Repair Rider” to your loan agreement. This Rider is your agreement to complete the required repairs within the time frame detailed in that Repair Rider. The Repair Rider is considered to be additional terms to your loan agreement.
Q: What is a “Repair Set Aside”?
A: The “Repair Set Aside” is the portion of your available funds which are to be used solely for the completion of your required repairs. This “set aside” is not part of your loan balance until which time the funds are actually disbursed.
Q: Will inspections be required to verify the required repairs have been completed?
A: Yes. Your loan servicer will arrange to have the repair work inspected so as to verify the required repairs have been completed. It may be possible to arrange interim inspections so that partial repair completion payments can be made by your loan servicer.
Q: Should I receive a statement of account from my loan servicer?
A: Yes. Your loan servicer must issue to you a statement of account after each line of credit activity. Your loan servicer must also issue to you a statement advising you of any impending interest rate change that may impact your reverse mortgage. Additionally, your loan servicer is required to provide to you an annual statement of account by January 31 which details all of your previous year's reverse mortgage account activity. The annual statement must summarize all advances of principal, all Mortgage Insurance Premiums accrued, all interest charges, and all property charges paid in the prior year.
Q: Why do I receive “Occupancy Certificates”?
A: All reverse mortgages require you to periodically certify that you continue to reside in the mortgaged property as your primary residence. You must truthfully attest to your occupancy status on this Occupancy Certificate by signing the certificate and returning this Occupancy Certificate to your loan servicer. Failure to complete this Occupancy Certificate in a timely manner may cause an interruption in your reverse mortgage payments and may eventually lead to a default in the terms of your loan agreement.
Q: Do I have to pay my property taxes?
A: Yes, it is your responsibility to ensure that your property taxes are paid in a timely manner. Failure to keep your property taxes current is considered a DEFAULT in the terms of your Loan Agreement and may be grounds for calling your loan due and payable.
Q: What is a “Life Expectancy Set Aside” (LESA)?
A: LESA is an amount of money withheld from the maximum loan amount for the future payment of property taxes and insurance. The calculation is based on your life expectancy, the expected rate of interest on the date of loan closing and 120% of your annual property tax and insurance charges. The amount withheld does not become a part of your loan balance until funds are disbursed for payment.
Q: May I participate in a tax exemption program?
A: Yes, tax exemption programs are permitted under the reverse mortgage program.
Q: Am I required to maintain Hazard Insurance on my mortgaged property?
A: Yes. The minimum requirement for hazard insurance on your property is equal to the land value subtracted from the total appraised value. You must provide your loan servicer with a copy of your Hazard Insurance policy and ensure that the policy is renewed upon expiration. Failure to maintain adequate Hazard Insurance on your property is considered a DEFAULT in the terms of your Loan Agreement and may be grounds for calling your loan due and payable.
Q: Do I have to carry Flood Insurance in addition to my Hazard Insurance?
A: If your property is in an area that has been identified by FEMA as having special flood hazards, then you must maintain Flood Insurance in compliance with the Flood Disaster Act of 1973. If you are required to maintain Flood Insurance, then you must provide your loan servicer with evidence of this coverage and ensure that this policy is renewed upon expiration.
Q: I was not required to have Flood Insurance when my loan closed, but I am now notified that I must get Flood Insurance. Why is this?
A: FEMA will periodically update their Flood Maps and alter the risk of flood associated with your geographic area. If FEMA determines that your geographic area represents a risk of flood, then you must purchase flood insurance to be in compliance with the terms of your Loan Agreement. Conversely, if you were considered to be in a flood zone at the time of your loan closing, but FEMA updated your geographic area to be a non-risk zone, then you may cancel your Flood Insurance once your loan servicer has been formally notified of the change to your geographic area.
Q: Why have I received a notice that my loan is being assigned to HUD?
A: Under the Home Equity Conversion Mortgage (HECM) plan, your loan servicer may assign your loan to HUD when your outstanding loan balance reaches 98% of your maximum claim amount. HUD will continue to administer your HECM reverse mortgage. HUD will continue to issue your disbursements and will track your Property Taxes, Hazard and Flood Insurance and Occupancy.
Q: What happens if I file for Bankruptcy while I have a reverse mortgage?
A: Filing for Bankruptcy is NOT a default in the terms of the Home Equity Conversion Mortgage (HECM) Program. Under the HECM program, you cannot access any additional reverse mortgage funds unless that request for funds is approved by the court or the trustee monitoring the bankruptcy proceedings.
Q: What is a maturity event?
A: A maturity event is any event which may cause your reverse mortgage to be called due and payable. Once a loan has reached a maturity event, then no additional funds may be advanced from the reverse mortgage. Such maturity events include:
1. All borrowers have passed away.
2. All borrowers have sold or conveyed title of the property to a third party.
3. The property is no longer the principal residence of at least one borrower for reasons other than death.
4. The borrower does not maintain the property as principal residence for a period exceeding 12 months because of physical or mental illness.
5. Borrower fails to pay property taxes and/or insurance and all attempts to rectify the situation have been exhausted.
6. The property is in disrepair and the borrower has refused or is unable to repair the property.
Q: Can I pay off my reverse mortgage before a maturity event is reached?
A: Yes. You can pay your reverse mortgage in full at any time during the term of your reverse mortgage.
Q: How long will my estate have to pay off the reverse mortgage once it has been called due and payable?
A: The reverse mortgage is to be paid in full once it has been called due and payable. You and/or your estate must work closely with your loan servicer to ensure your reverse mortgage is paid in full in a timely manner. If arrangements to pay the reverse mortgage are not made with your loan servicer, then your loan servicer may proceed with foreclosure between 30 days and six months from when your loan has been called due and payable. Servicers will often grant up to two 90 day extensions beyond 6 months if you or your estate are actively working to either refinance your property or sell your property to satisfy your reverse mortgage. It is not typical however, to forestall the start of a foreclosure process beyond one year after the maturity event.
Q: What does “non-recourse loan” mean?
A: FHA insured reverse mortgage loans are considered “non-recourse loans." This means that you can never owe more than the value of your home at the time you or your heirs sell your home to repay your reverse mortgage. Additionally, the Home Equity Conversion Mortgage ("HECM") debt may be satisfied by paying the lesser of the mortgage balance or 95% of the current appraised value of the home.
As with any financial transaction, there are specific rules and obligations attached to reverse mortgages. Some of them are unique to this particular financial product. You may be accustomed to such items being buried in fine print. With reverse mortgages, both loan officers and counselors will explain these specifics to you as part of the loan process.
Among the rules and obligations you need to be aware of are:
Everyone listed on the deed of a home owned by someone seeking a reverse mortgage no longer must be over 62 years old;
If your husband or wife, for instance, is under 62, their name will not be on the loan document, however the proceeds available will be based on the youngest spouse’s age and either spouse can continue to live in and retain the property as their primary residence until they die or sell the home, regardless of which spouse dies first. This is a great safeguard that has recently been added by HUD however there are some specific requirements that apply. They are as follows:
In order for the Deferral Period to apply to a Non-Borrowing Spouse, the Non-Borrowing Spouse must:
1. Have been the spouse of a HECM mortgagor at the time of loan closing and have remained the spouse of such HECM mortgagor for the duration of the HECM mortgagor’s lifetime;
2. Have been properly disclosed to the mortgagee at origination and specifically named as a Non-Borrowing Spouse in the HECM documents;
3. Have occupied, and continue to occupy, the property securing the HECM as the Principal Residence of the Non-Borrowing Spouse.
4. Within ninety (90) days from the death of the last surviving HECM mortgagor, establish legal ownership or other ongoing legal right to remain in the property securing the HECM;
5. After the death of the last surviving mortgagor, ensure all other obligations of the HECM mortgagor(s) contained in the loan documents continue to be satisfied; and
6. After the death of the last surviving mortgagor, ensure that the HECM does not become eligible to be called due and payable for any other reason.
If a home with a reverse mortgage is not sold before the death of the last surviving spouse/borrower, ownership of the house will transfer to the heirs or estate but the reverse mortgage loan must be paid off. The heirs can choose to keep the house or sell it. To pay off the loan balance, your heirs may use all available options which may include selling the house, paying off with life insurance proceeds or cash reserves, obtaining their own loan, etc. If the house is sold and cash is left over from the sale of the home after the reverse mortgage is paid, it belongs to the heirs. If there is more owed than the value of the home, the heirs can deed the house to HUD or the designated lender, pay off the balance at 95% of the appraised value or sell the house to a 3rd party for market value and the FHA mortgage insurance will pay for the deficiency balance.
A reverse mortgage must be the only lien on a property. This means, in order to obtain a reverse mortgage, all proceeds must first be used to pay off mortgage balances or other liens on the property;
A reverse mortgage holder is responsible for staying current on their real estate taxes and homeowner’s insurance. If you go into arrears, you take the risk of being forced into default;
A reverse mortgage holder is responsible for maintenance of the home;
The home must be your primary residence, which means you must live there more than 183 days a year;
You are only permitted to live out of your home for a total of twelve consecutive months. This means, if you find yourself in, say, an extended care situation, or on an extended out-of-town work situation, you must approach your lender and discuss;
Loan originators are not permitted to require that you purchase other financial products (i.e., annuities, long term care insurance) as a condition for getting a reverse mortgage.
After you feel confident that you understand what a reverse mortgage is and you have discussed the various options available with a loan officer, the following steps are required to obtain a reverse mortgage loan.
How do I apply?
Simply contact the mortgage company that you are prepared to proceed with. They will work with you through the following steps.
What is involved?
1. Application disclosures – The mortgage company will ask you how you want the money from the reverse mortgage. The options include a lump sum, line of credit, fixed monthly payment or some combination of these. They will provide you with the initial loan application disclosures to sign along with a list of items that will be needed during the processing and underwriting stages of the loan. These documents will include items such as driver’s license, social security card, homeowner’s insurance, mortgage statement, utility bill, bank statement, property survey, tax returns and verification of income sources.
2. Counseling – Counseling from a HUD approved counseling agency is required for all HECMs. A counseling session can take place either face-to-face or by telephone. Counselors have been trained to deliver the required information either way. After the counseling session, the counselor will mail you 3 copies of the counseling certificate. One for your records, one to sign and provide to your mortgage company and one to sign and return to the counseling agency.
Loan originators are not permitted to direct you to a specific counselor or counseling agency. Instead, they are required by HUD to provide a list of counselors, including local agencies and national intermediaries who are selected by HUD to provide counseling by telephone across the country.
Prior to being counseled, you will receive an information packet from either the counseling agency, or the lender, depending on who you contact first. This information packet will include the following materials:
3. Loan processing & underwriting – The lender orders and obtains the FHA case number that will be tied to your property. An appraisal is ordered through an independent appraisal management company. It is paid for by the homeowner. This determines the market value of the home. However, the final value is not established until the Loan Underwriter employed by the lender reviews the appraisal and approves it.
After receiving all pertinent information from the homeowner and obtaining other required items, the loan package is submitted to the Loan Underwriter for final approval. It generally takes anywhere from 1-5 days to underwrite a loan. Underwriting involves verifying all information and making sure the loan complies with all laws and regulations.
A conditional approval is provided with a final home value and any repairs or additional inspections required, as well as anything else the lender may need in order to issue a final approval, so the loan can close.
4. Closing – After the final underwriting approval is obtained, a closing (signing) of the reverse mortgage is scheduled with a title agent. The lender should confirm the payment plan the borrower wishes to receive (i.e. lump sum, line of credit, fixed monthly payment) Closing documents and final figures are prepared. Closing costs are normally financed as part of the loan, but the homeowner is allowed to pay any costs in cash if they choose. The closing typically occurs at the borrower’s residence where a notary agent from the title company will ask you to sign the final loan documents.
A reverse mortgage must be the only lien on a property. This means that proceeds from the reverse mortgage must first be used to pay off any existing mortgage(s) or other obligations for which a lien has been placed on the property. Additionally, all property taxes past due or for which a tax bill has been generated for in the current year must be paid prior to or at closing out of the loan proceeds. Your closing agent will pay off all existing liens, verify taxes are paid and make sure that you have a current homeowner’s insurance policy.
Proceeds from a reverse mortgage are not considered income for income tax payments. Social Security and Medicare benefits are not affected by a reverse mortgage. However, Medicaid or Supplemental Security Income (SSI) benefits can be affected by the proceeds from a reverse mortgage so you may want to discuss this with your local Area Agency on Aging or a Medicaid expert. You may also refer back to page 17 of this guide for more information on this topic.
5. Disbursement of funds – The homeowner has three business days after signing the loan documents to cancel the loan. (These three days are known as the "Rescission period"). The only exception to a homeowner's right to rescind is on a HECM for Purchase reverse mortgage. There is no rescission option on a purchase money mortgage.
Upon expiration of this period, the loan funds are disbursed. The homeowner accesses the funds in the form of the payment option selected. Any existing debt on the home is paid off and a new reverse mortgage lien is placed on the home.
If you select fixed payments, your loan Servicer will disburse them on the first business day of each month. As a borrower, you have the right to change your payment plan at any time. You simply request a new Payment Plan Agreement form from your Servicer. A change may include a small administrative fee of no more than $20. Once the agreement is executed, the new payment plan will go into effect the first business day of the next month.
How long does it take?
Most closings can occur within 30-45 days from the date of application, however clearing heirship issues on title, completing repairs to the home, delays in completing the counseling or arranging an inspection date and time with the appraiser are a few of the items that may cause delays.
Established in 1998, our family owned, Houston area based reverse mortgage company is located in Willis, TX, just north of The Woodlands and Conroe. We maintain an A+ exemplary rating by the Better Business Bureau (BBB) and are proud members of the National Reverse Mortgage Lenders Association. As a NRMLA member, we abide by a Code of Ethics & Professional Responsibility in which we pledge to serve you with integrity. Your best interests are our primary consideration.
Our years of experience in the mortgage business in Texas have provided us the opportunity to educate and assist many homeowners through the years. We strive to exceed your expectations in educating and offering you the very best terms as well as providing an efficient and true no hassle experience and timely close. Our goal remains simple - to offer the very best terms accompanied by extraordinary customer service.
Because of our belief that all people have the right to receive quick and honest answers to all questions, we commit to you that we will never pressure you to make a decision that is not right for you. We will never try to sell you another loan product to make more money and we will listen to you and your concerns and goals to help you identify the best course of action. You may contact us by email at firstname.lastname@example.org or call us locally at 936-228-7590 or toll free 800-711-8139.
Residential Mortgage Loan Originator, NMLS# 247453
Montgomery Mortgage, Inc. – NMLS# 266068
11230 FM 830, Willis, TX 77318
Local: 936-228-7590 Toll Free 800-711-8139
Visit us at www.montgomerymortgage.com
Email us at email@example.com
This material is not from HUD or FHA and has not been approved by HUD or any government agency.