What Is a Reverse Mortgage Loan and How Does It Work?

What is a Reverse Mortgage Loan?

The reverse mortgage loan is a program that enables the borrower to convert part of their home equity into cash. This program is for American citizens 62 years old or older.

The reverse mortgage loan is called as such because instead of the borrower making monthly payments to a lender (like with a conventional mortgage) the lender makes monthly payments to the borrower.

The money the borrower receives provides relative financial freedom to seniors that they can use for home improvements, medical expenses and more.

This program was created as a way to aid retirees with inadequate income use the collected value of their homes to cover their living expenses like basic utilities, food, and medical bills. There are no restrictions as to how the proceeds from the mortgage shall be used by the borrower.

Requirements and Qualifications

Here are the basic requirements a borrower must meet to be able to qualify for a reverse mortgage.

• Age: All borrowers listed on title must be 62 years old or older.
• Residency: The property used as collateral must be the primary residence.
• Primary lien: The reverse mortgage must be the home’s primary lien. If there are any existing mortgage, it must be paid off using the money received from the reverse mortgage.
• Taxes and other Insurance: All real estate taxes, home insurance and other obligations must be current.
• Maintain the properties’ condition: the borrower must ensure that all maintenance and repairs are done on time.

Loan Payment

The borrower is not required to pay off the loan until such time when the last surviving borrower passes away, sells the home, or vacates the home as its primary residence.  It is only then that the loan has to be paid. 

As long as the home is used by the borrower as his primary residence, he is not required to make any monthly loan payments. However, he borrower must have all property taxes, home insurance and other obligations paid and current.

Types of Reverse Mortgage

• Home Equity Conversion Mortgage (HECM)

The FHA Home Equity Conversion Mortgage (HECM) is a reverse mortgage program offered by the Federal Housing Administration (FHA). The FHA joined the Department of Housing and Urban Development (HUD) Office of Housing in 1965.

As with FHA loans, it is a mortgage loan issued by a lender, but is insured by the FHA. This insurance protects both the borrower and the lender.

All borrowers getting HECM are required by the federal government to receive counseling from a third party.

• Proprietary Reverse Mortgage

This type of mortgage has insurance provided by the same company that offers the mortgage. These companies does not follow the same regulations as HECMs, however, as best practice, lenders that provide this type of mortgages imitate the same standards used by the HECM program, including mandatory third-party counseling.

Many banks and financial institutions offer this type of program.

Reverse mortgage rates vary among different states and lenders so it is recommended that you do your research and shop around. You can consult a reputable mortgage broker for assistance and to get the best plan that fits your profile.