What is a Reverse Mortgage?

A reverse mortgage is a type of mortgage loan that is engineered for individuals with considerable equity, typically senior homeowners aged 62 and older, and that is secured with residential property, with the lender making periodic payments to the borrower in return for periodic transfers of property equity. In such an arrangement, the borrower makes no monthly mortgage payments and retains rights over the unencumbered portion of the home equity.

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How Does a Reverse Mortgage Work?

Reverse mortgages are typically engineered to allow borrowers to use the equity they have accrued in their homes at any point of time, and defer payment of the loan until they die, sell the property, or change accommodations. However, obtaining a reverse mortgage on a property does not exempt the borrower from routine obligations such as paying property taxes, home insurance and maintaining the home in accordance with the guidelines set by the Federal Housing Administration (FHA). Borrowers typically use reverse mortgage loans to fund substantial expenditures such as property renovations and medical bills or to pay for daily living expenses. Homeowners may also use reverse mortgages to offset existing mortgages on their properties. The value of a reverse mortgage loan is determined by three factors:

1. The age of the youngest borrower.
2. Current rates of interest.
3. The property's appraised value, sale price or the maximum lending limit, whichever is the least.

Home equity conversion mortgage (HECM) requirements often restrict the availability of funds to the borrower for the first 12 months after the settlement of the loan. Borrowers may also be required to set aside additional funds from loan proceeds towards payment of property taxes and home insurance. The borrower (or his heirs) is usually allowed a period of six months to repay the loan, starting from the day the last surviving homeowner dies or evacuates the property. After the passage of the six months, the estate is usually obliged to sell the property to repay the balance of the loan, and remit any balance equity back to the heirs. However, in the event that the property sells for less than the payoff amount of the reverse mortgage loan, the borrower or his estate will not be held liable for any additional mortgage debt in excess of the value of the property.

Eligibility Criteria for Reverse Mortgage

FHA regulations mandate the following eligibility criteria for a borrower of a reverse mortgage loan:

• The youngest borrower on the title has to be at least 62 years old.
• Borrowers will need to satisfy the financial eligibility criteria as put forth by the United States Department of Housing and Urban Development (HUD).
• The borrower must use the proceeds from the reverse mortgage loan to pay off any existing mortgages on the property.

Types of Properties Eligible for Reverse Mortgages

The following types of properties are eligible for reverse mortgages, provided they meet FHA minimum property standards:

1. Approved single-family homes.
2. Owner-occupied dwellings consisting of two to four units, e.g. townhouses.
3. Approved condominiums.
4. Manufactured homes.

Reverse Mortgages and Inheritance

The following options are available to the heirs or estate of the borrower when the reverse mortgage loan becomes due:

1. The heirs/estate can repay the reverse mortgage loan and retain ownership of the home.
2. They can offer the home for sale in the market, the proceeds of which will go towards repayment of the loan. In case the property fetches more than the loan balance, the heirs/estate will duly receive the remaining home equity. If, however, the home fetches less than the loan balance, the heirs/estate is not obligated to pay more than the sale value of the home.

It is important to note here that reverse mortgage loans are non-recourse, that is the issuer of such a loan cannot lay claim to any other asset(s) of the borrower or his heirs/estate as compensation for any unpaid portions of the loan amount. 

Receiving Reverse Mortgage Loan Funds 

There are several options in which borrowers can choose to receive funds from reverse mortgage loans:

1. Line of Credit (LOC): This option allows the borrower to withdraw funds as needed up to a stated maximum limit.
2. Lump Sum: This option allows borrowers of fixed-rate loans to receive the entire amount of the loan amount at closing.
3. Tenure: This option offers the borrower fixed monthly payments for the total duration of the loan.
4. Term: This option offers the borrower monthly payments for a fixed term, i.e. a specified number of years.