When you’re retired, you still need an income source to cover your expenses. Many people invest in a retirement plan for this purpose, but not everyone can cover their cost of living with Social Security and 401k withdrawals. A reverse mortgage gives qualifying homeowners an additional way to cover living expenses when they want to step away from their careers. Understanding the rules of reverse mortgages can help you understand if you qualify and if it is the right option to fund your retirement.
What is a Reverse Mortgage?
A reverse mortgage occurs when you receive monthly payments from your home. Instead of paying a mortgage, the bank sends you money payments or a lump sum based on your agreement. Banks draw from your home’s equity to provide these monthly payments, which only makes it viable for homeowners with a lot of equity in their properties. Most people use reverse mortgages upon retirement. They can use a reverse mortgage to afford living expenses instead of having to sell the home and move into another neighborhood.
Most Important Reverse Mortgage Rules
Reverse mortgages have several rules and best practices. Knowing these fundamental rules will help you assess if a reverse mortgage is a good idea for your finances.
Age Requirement
You must be 62 years or older to qualify for a reverse mortgage, demonstrating the strategy’s usefulness for people looking at retirement. Until then, you will have to pay into your home and build equity each month. This equity position will help when you have the option to take out a reverse mortgage.
Home Ownership
The reverse mortgage strategy is specifically for a homeowner’s primary residence. Your home can only qualify for reverse mortgages if you live in it for most of the year. You can also get a reverse mortgage for a quadplex if you have lived in one of the units for at least a year and use it as your primary residence. You can generate cash flow from other rental properties with tenants but not with reverse mortgages.
Amount of Equity
If you don’t have much equity in your home, reverse mortgages are not for you. Homeowners need at least 50% equity in their homes, but it is better to have full ownership of your home. Each reverse mortgage payment reduces your equity. If you do not have as much equity when you start taking out reverse mortgages, you will soon end up with no equity left. If you do not have too much equity in your home and fear you will burn through it quickly, you may want to consider another funding source or continue with your career for a few more years.
Financial Assessment
Borrowers have to meet with an approved reverse mortgage counselor and discuss the loan. This consultation will help the borrower understand the loan, its risks, and if it is the right choice for them. The borrower must also assess if they can cover homeowners insurance and property taxes. These expenses will not go away. Falling behind on these costs can put you in a tight spot, and you could potentially lose your home.
Rules for Non-borrowing Spouse
The HUD has several rules for non-borrowing spouses that you should keep in mind. While the non-borrowing spouse does not have to be 62 years old, this individual has extra layers of complexity. An eligible non-borrowing spouse can defer the loan if the borrowing spouse dies and they live together in the primary residence. The eligible non-borrowing spouse can get listed on the title, but they must obtain the title after the borrowing spouse’s death. A spouse could not qualify for the reverse mortgage if you got married after taking out a reverse mortgage. The loan becomes due and payable if the borrower dies and the spouse is ineligible for the reverse mortgage. Couples who got married after one of them took out a reverse mortgage can solve this issue by refinancing the reverse mortgage. Then, the new spouse would become eligible.
Rules on Borrower Obligations
Borrowers have to meet certain conditions to qualify for a reverse mortgage and not worry about the loan suddenly becoming due. If you get a reverse mortgage, you will have to follow these rules.
Paying Off Other Mortgages
You can only take out one reverse mortgage for your primary residence. Homeowners cannot take out multiple reverse mortgages even if they own multiple homes. Even if you spend six months in your primary residence and the remaining six months in a secondary home, you can only use a reverse mortgage for your primary residence. You must continue making the mortgage payments on your other properties.
Payments of Home Insurance, Property Taxes, and Home Maintenance
Reverse mortgage borrowers have to keep up with home insurance and property tax payments. Falling behind can result in the reverse mortgage loan becoming due right away. It’s an avoidable issue, especially since you are getting funds each month from your reverse mortgage. However, this issue could present itself in a more meaningful way if you took out a lump sum of your reverse mortgage and used most of your funds already.
You must also reasonably maintain your home to continue taking out reverse mortgages. Lenders can send inspectors to take a look at your property and make recommendations. If the inspector recommends a repair, you must begin repairs within 60 days of receiving a request from your lender.
Complying with Loan Terms
Reverse mortgage borrowers must abide by loan terms. Falling behind on other financial obligations can put your reserve mortgage at risk. Some people take out reverse mortgages to consolidate their debt and get a lower interest rate.
Beneficial Reverse Mortgage Loan Rules
Reverse mortgages have several rules designed to protect lenders, but some of those rules help borrowers. These beneficial reverse mortgage rules put you in a better position.
Non-payment of Loan After Maturity
After you use up your reverse mortgage, you don’t have to pay it back. Instead, the bank waits for the borrower’s death to ask for repayment, which can come from your heirs selling your home. However, you still have to fulfill the requirements of a reverse mortgage not to have to repay the loan during your lifetime.
Loan Value Surpasses Home Value
A loan’s value can surpass the home’s value due to interest rates and other factors. While this can seem troubling for your heirs, mortgage insurance covers the gap. Reverse mortgage loans have mortgage insurance payments, and this scenario is part of what mortgage insurance covers. Heirs must pay up to 95% of the home’s appraised value upon the sale, and mortgage insurance will put up the remaining funds.
Other Government Rules and Regulations
The government has additional rules and regulations for reverse mortgages. Every loan has mortgage insurance, and your home must be an eligible property type to obtain a reverse mortgage. Manufactured homes that comply with FHA standards, single-family primary residences, 2-4 unit properties where you reside in one of the units, and HUD-approved condo units count as eligible property types. Here are some additional rules to keep in mind:
- You are not required to acquire additional loans from a lender. You can if you want, but the lender cannot force you.
- Financial institutions must monitor a potential borrower’s income and expenses.
- Borrowers can cancel their reverse mortgage loan up to three days after the closing. Lenders cannot charge interest during this time.
- The counseling session mentioned earlier is required before you can get a reverse mortgage.
- You can only access up to 60% of the loan’s principal during the first year. The remaining funds become accessible after the first year, but you can use them at your own pace.
Planning to Get a Reverse Mortgage?
A reverse mortgage provides retirees with an additional income stream. Homeowners commit multiple decades to accumulate home equity, and their properties appreciate over time. Their equity positions give them the opportunity to cover living expenses. In addition, you won’t have to pay the loan over your lifetime as long as you abide by the rules and regulations.
If a reverse mortgage is a good move for you or someone close to you, consider contacting Top Flite Financial, a full-service mortgage lender and a leading originator of these Home Equity Conversion Mortgages (HECM) backed by the federal government. They are a reputable lender, accredited by the Better Business Bureau (BBB) with an A+ rating. Complete this online form to request a free consultation with a Top Flite reverse mortgage expert.
