If you read my last post about Mr. White you already know a little bit about how powerful a Reverse Mortgage can be. This post talks about how the loan works and who should consider using a Reverse Mortgage.
How the Reverse Mortgage Works
A Reverse Mortgage is a loan designed to help Seniors (anyone 62 or older) live in their homes for as long as they like without being required to make a mortgage payment. The borrower must use the home as their primary residence as the loan becomes due once the borrowers no longer use the home as their primary residence. If the borrower does not make a mortgage payment (most do not) the balance of the loan will increase each month. The loan is insured by HUD to make sure that the borrower, or their heirs will never owe more on the home than it is worth even if the balance of the loan exceeds the value of the home at the time the loan is due. If the borrower or their heirs still have equity in the home when the loan becomes due they have the option to sell or refinance to retain the available equity. There are no penalties for paying off the loan at any time. The borrower must have equity in their home to obtain a Reverse Mortgage. The maximum Loan to Value Ratio is based on the age of the youngest borrower. The Reverse Mortgage does not have any credit, income or employment requirements though which means that just about everyone who is 62 or older and has the required equity in their home will qualify for the Reverse Mortgage program.
What are the Guidelines?
- Youngest borrower must be at least 62 years old
- The home must have some equity, the requirement is based on the age of the youngest borrower
- The borrower must use the home as their primary residence and continue to live in the home while they have the loan
- The borrower must remain current on their property taxes and homeowner's insurance
Who are Reverse Mortgage Clients?
· Distressed Seniors: Unfortunately, many seniors are living paycheck to paycheck. Typically that means that they are living off of Social Security alone which is often not even enough to cover their utilities and bills. This can leave many homes in dire need of repairs. Other times we find that people have been able to keep up their home but as a result they have debt that they struggle to pay down. Many seniors I work with are at the point where they are defaulted on their mortgage and facing foreclosure. The Reverse Mortgage allows them to get the cash they need to fix up their homes and/or eliminate their mortgage payment. In some cases the client will actually make a mortgage payment that they can afford even if it does not cover all of the interest that accrues each month. This allows them to retain more equity in the home to leave for their heirs when they pass which is typically a major concern for a prospective Reverse Mortgage client.
· Senior who is declined a traditional mortgage: Many of our clients do not intend to take a Reverse Mortgage when they contact us. Often times they still want to pay off their home and are in search of a conventional mortgage. In the case that the client does not qualify for the conventional loan due to credit or income they can take a Reverse Mortgage as an alternative. In this case most clients opt for a fixed rate Reverse Mortgage and they make payments that they can afford. If credit is the only hurdle to obtaining a conventional mortgage the borrower will typically pay down their debt with the Reverse Mortgage proceeds, build up their credit then refinance back into a conventional loan that they can afford.
· Investment savvy Senior: Some of our clients use the Reverse Mortgage as an investment tool. This is a bit more complex and should be discussed with the client’s financial planner but there can be significant benefit. Some clients use the Reverse Mortgage equity and re-invest it in other areas. The thinking is that they are able to get a higher return on their investment than the interest that they are accumulating with the Reverse Mortgage and they are not required to make payments on that loan. The goal is to enhance cash flow in retirement. There are a number of other financial strategies that involve Reverse Mortgage, if you would like more information please let me know and we can discuss this further.
Due to the incredible flexibility of the Reverse Mortgage it is important that each person who takes this type of loan does so with a plan for the future. Make sure that your Reverse Mortgage Specialist understands what your plan is for the future and that the Reverse Mortgage fits within that plan.
Please feel free to comment or ask questions below. Your feedback is appreciated.