How Does a Reverse Mortgage Differ From a Home Equity Loan?
Home equity loans are loans which utilize the equity in a home as a form of collateral. They are essentially second mortgages that must be paid back alongside the first if it is still outstanding. Reverse mortgages are also loans based on a home's equity, however, they are insured by the federal government and do not have to be paid back until the homeowner moves or passes away.
Reverse mortgages are only available to homeowners over the age of 62. These loans enable the conversion of home equity into cash, usually for the sake of supplemental retirement income. Unlike traditional mortgages, this loan increases in value over time.
While reverse mortgages for veterans are managed by the United States Department of Veterans’ Affairs, normal reverse mortgages or Home Equity Conversion Mortgages (HECMs) are insured by the Federal Housing Administration (FHA). What's more, the government requires potential HECM borrowers to attend counseling at agencies individually approved by approved United States Department of Housing and Urban Development in order to help them fully understand the process and navigate the bureaucracy.
What Are the Requirements for a Reverse Mortgage?
In addition to the minimum age requirement of 62, as well as the attendance to a HECM counseling session, the FHA has put in place several qualifying factors for those seeking reverse mortgages. First and foremost, the home whose equity is being disbursed must be the primary residence of the applicant(s). If multiple borrowers are listed, then they must be legally married. If unmarried, then the other spouse must be listed as an ineligible resident.
In regards to the property itself, it must meet all FHA-mandated property laws and flood standards. Furthermore, it is expected that the homeowner continue to pay all relevant costs during the reverse mortgage disbursement. These costs may include property taxes, homeowner’s insurance, and fees associated with maintenance.
The requirements for a reverse mortgage also have something to do with the borrower in question. Is he or she up-to-date on any federal debts? Is the property owned outright, or has the borrower nearly finished paying off the mortgage? These are inquiries that will be examined at the beginning of the application process. Moreover, lending agencies will also appraise a borrower’s proof of income, including paychecks and bank records, as well as pension, 401(k), social security, and other retirement-centric statements.
What Happens If the Loan Application Is Approved?
While it varies by lender, it will usually take approximately 30 days from application to the closure of the mortgage agreement. Under normal HECM requirements, the borrower can expect a borrowing limit of $636,150. That said, the value that can actually be used will be typically capped at 60% of the presented limit. The exact number is calculated based on the borrower’s age, the appraised value of the property, and the set interest rate.
Once the specifics of the loan are presented, and if they’re amenable, then the borrower will need to select his or her preferred method of disbursement. Since the premise of reverse mortgages revolve around turning equity into cash, this can be a point of deliberation. In this regard, options will vary based on whether the reverse mortgage in question is fixed- or adjustable-rate.
In the event of a fixed-rate reverse mortgage, there is only one payment option — lump sum. Upon loan closure, the borrower will receive a one-time payment encompassing the entirety of the agreed-upon amount. Rather than a supplemental source of income, this type of disbursement is excellent for urgent financial matters, including debt and emergency medical fees.
There are more payment options in the case of an adjustable-rate reverse mortgage. Possibilities include disbursement as a line of credit, meaning that the borrower can extract a variable amount at unspecified intervals. Other choices involve term and tenure payments. Term payments indicate the borrower’s desire for payments of fixed amounts for a fixed interval of time. Tenure payments, on the other hand, allow for set payment amounts for until such time as the borrower no longer maintains residence within the property. Furthermore, both term and tenure disbursement options can modified to include associated lines of credit.