Reverse Mortgage 101--

1. What is a reverse mortgage?
A reverse mortgage is a home loan unique in that it allows homeowners to convert a portion of the equity in his or her home into cash. Equity is built in a home though mortgage payments and you as a homeowner have the ability to tap into that equity and start receiving payments for what the home is worth.
This kind of loan is different from a traditional home equity loan or a second mortgage because you are not required to make any payments unless you move into a new home. In the event of your death, the home will be sold in order to pay off the balance of the loan. The remaining amount will be passed on to your heirs.
2. Qualifications for a HUD reverse mortgage?
To be eligible for a HUD reverse mortgage, the Federal Housing Administration (FHA) requires that the borrower be at least 62 years old and a homeowner. You must own your home or have a low mortgage balance which can be paid off with the proceeds of the reverse mortgage loan at the closing (the moment which you sign the legal documents). The home being used for the reverse mortgage must also be your primary residence. Before qualifying or obtaining the loan, you are required to meet with an HUD-approved counselor who will guide you through the application steps, answer any questions you may have, and discuss any of your concerns. (You can contact the Housing Counseling Clearinghouse on 1-800-569-4287 to obtain the name and telephone number of a HUD-approved counseling agency and a list of FHA approved lenders within your area).
3. Can I apply even if I didn’t buy my present house with FHA mortgage insurance?
Yes. Even if you did not buy the home with an FHA-insured mortgage, your new HUD reverse mortgage will act as a new FHA-insured mortgage loan.
4. What types of homes are eligible?
Your home must be a single family dwelling or a two-to-four unit property. Generally townhouses, detached homes, and condominiums are eligible however, condominiums must be FHA-approved. It is possible for individual condominiums units to qualify under the Spot Loan program. Mobile homes and cooperatives are not eligible for a reverse mortgage.
5. What’s the difference between a reverse mortgage and a bank home equity loan?
Generally a home equity loan, a second mortgage, or a home equity line of credit have strict eligibility requirements in regard to your income or credit level. Also, unlike reverse mortgage loans, with other traditional loans you are still required to make monthly mortgage payments. A reverse mortgage is available to you regardless of your current income and instead of making monthly payments, you are the one receiving payment.
With a reverse mortgage the amount you can borrow depends on your age, the current interest rate, and the appraised value of your home. In most cases, the loan amount will be the lesser of the said factors. Thus, the older you are, the lower the interest rate, and the more valuable your home, the higher the loan amount will be. As stated previously, with traditional loans you are still required to make monthly payments, but with a reverse mortgage the loan is not due as long as the house is your principal residence. Also, with a reverse mortgage you cannot be forced to foreclose or forced to vacate your home because of a missed mortgage payment. However, this does not mean that you are no longer required to pay real estate taxes and other payments like utilities or maintenance.
6. Can the lender take my home away if I outlive the loan?
Absolutely not. As long as you or one of the borrowers live in the home (keeping taxes and insurance current) you do not need to repay the loan. Furthermore, you will never owe more than your home’s value and cannot outlive the loan.
7. Will I still have an estate that I can leave to my heirs?
In the event of your death or in the event that you no longer use the home as your primary residence, your estate will be used to repay the cash amount which you received from the reverse mortgage up to that point, plus interest and other fees. If the equity in your home is worth more than the amount you owe to your lender, the remaining balance belongs to your heirs. No other assets are affected by a reverse mortgage loan; boats, cars, or valuable possessions cannot be taken from you to be used as repayment. The debt you incur will not under any circumstance be passed on to your heirs.
8. How much money can I get from my home?
Again, the amount available for you to borrow depends on your age (the older the better), the current interest rate (the lower the better), and the appraised value of your home (the higher the better).
9. Should I use an estate planning service to find a reverse mortgage?
It is not recommended that you use an estate planning service, or any service which asks for a “small percentage” of the loan in return a referral to a lender. HUD provides information on approved housing counseling agencies and will refer you to a list of approved lenders for free.
Call 1-800-569-4287, toll-free, for the name and location of a HUD-approved housing counseling agency near you.
10. How do I receive my payments?
Five options of payments you can choose from:
• Tenure - as long as at least one of the borrowers uses the home as his/her primary residence, you can receive equal monthly payments for the duration of your life.
• Term - equal monthly payments for a fixed period of months selected (ex: you may rather receive a large dispersement each month over 5 years instead of smaller dispersement over a period of 10-15 years).
• Line of Credit - the amount and time of disbursement is up to you; you may take the amount you please whenever you wish up until the line of credit is exhausted.
• Modified Tenure - combination of line of credit with monthly payments for as long as the borrower remains in the home.
• Modified Term - combination of line of credit with monthly payments for a fixed period of months selected by the borrower.
Source: http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm