Most adults have heard of reverse mortgages, but many are unsure of what these loans mean and how they work.
What Is a Reverse Mortgage?
In a nutshell, these loans are outstanding loans intended for people over the age of 62 to have access to equity in their homes. This type of loan is especially desirable to people who want, or need, to supplement their pension funds.
How Does A Reverse Mortgage Purchase Loan Work?
A reverse mortgage purchase loan works by first using part of the home equity to repay an existing residential mortgage - that is, if it still has a mortgage.
The homeowner is not required to pay the loan monthly for the reverse mortgage, as the loan balance falls due until the final borrower leaves the house, passes away, failure to pays taxes or insurance, or neglects house maintenance.
Although they are not required to make month-to-month payments, doing so could decrease the regular monthly interest or prevent it from accruing entirely. If they decide not to make a month-to-month payment on the loan, interest for that month will get added to the total loan balance.
After paying off the existing mortgage, the reverse mortgage purchase loan lender will pay any proceeds that are left from the new loan. The homeowner gets to choose how to receive the funds.
Types of reverse mortgage purchase loans:
- Home Equity Conversion Mortgages (HECMs)
- HECMs are insured by the federal government and make up more than 90% of all reverse mortgages purchase loans.
- Eligible residences include properties with one to four units, as well as approved manufactured homes, apartments, and co-ops.
- Proprietary loans: Private institutions fund proprietary loans
- Single-purpose loans: Non-profit and other organizations fund single-purpose loans.
- As the name suggests, single-purpose loans must be used for a specific purpose, which the provider typically dictates. Currently, loans that are subject to proprietary or single-purpose loans are rarely given to borrowers.
Who Is Eligible For A Reverse Mortgage Purchase Loan?
To be eligible for a reverse mortgage purchase loan, the homeowner must meet at least the following criteria:
- Must be 62 years of age or older.
- Must have adequate equity in the home – about 50%, but the amount required varies depending on the lender.
- Must participate in a counseling session from a Department of Housing and Urban Development-approved counselor.
- Must go through a financial assessment.
In addition to these requirements, the house also needs to qualify for the loan. Here are some basic requirements:
- The house must be the primary residence.
- The house must be in good condition and comply with FHA standards.
- The house cannot be a manufactured home.
- If the house is a condo, it must be on the list of condos approved by the HUD/FHA. If it is not, the homeowner may still be eligible for a proprietary reverse mortgage loan.
To get a more accurate estimate that puts into consideration lifestyle and financial goals, consider the assistance of a reverse mortgage specialist. The Mortgage Loan Specialist is responsible for carrying out the day-to-day operational tasks related to residential, construction, and commercial mortgage loans following the bank's policies, procedures, and related laws, rules, and regulations.
Older people who have considered the possibility of a reverse mortgage now have a new advantage; the purchase of a second home.
A caveat loan is funding that one can secure against a property’s equity value.
It is also known as an unregistered second mortgage or an equitable mortgage.
Mortgage financing is another long-term funding option.
Funds can be used for any purpose however the most popular is to purchase property.
Both of these loan types use the property as security.
