Many reverse mortgages are insured by the Government Housing Administration (FHA), a federal agency. FHA reverse mortgage loans operate as follows.
- The most popular kind of reverse mortgage, also known as a home equity conversion mortgage, is insured by the Federal Housing Administration (FHA) (HECM).
- Only lenders that have been authorized by the FHA may issue HECMs.
- If the criteria are met, borrowers may receive a part of their home equity as a lump amount, regular installments, or a line of credit.
- Proprietary reverse mortgages and single-purpose reverse mortgages are further varieties.
What Is an FHA Reverse Mortgage Loan?
A sort of reverse mortgage known as a home equity conversion mortgage is insured by the FHA, a division of the U.S. Department of Housing and Urban Development (HUD) (HECM).In the event that the borrower fails on the loan, the insurance protects the lender.
The most popular reverse mortgages available today are HECMs. They enable homeowners, like other reverse mortgages, to access the equity that has grown in their houses over time without having to sell the property. The homeowner has the option of receiving the funds as a single payment, a series of regular installments, or a line of credit.
Unlike traditional mortgages, there are no payments due until the homeowner sells the house, vacates the property, or passes away. Instead, the debt grows over time, and the loan is paid back either when the house is ultimately sold or by the homeowner’s heirs if they desire to retain it.
Who Is Eligible for an FHA Reverse Mortgage Loan?
For the homeowner to be eligible for a HECM covered by the FHA, they must:
- Be at least age 62
- whose house is paid off, or at least substantially paid off
- occupy the house as their main abode full-time.
- not owe any back taxes to the government
- Possess sufficient funds to pay future property taxes, homeowners insurance payments, and any other necessary expenses.
In order to decide if a HECM is the best option for them, the homeowner must also take part in an information session with a counselor who has been authorized by HUD.
What Types of Homes Are Eligible for FHA Reverse Mortgage Loans?
Additionally, the applicant’s residence must adhere to specific FHA guidelines. It must specifically be:
- a single-family residence or a house with two to four units, one of which must be inhabited by the borrower.
- a condominium project with HUD approval
- a specific condominium that complies with FHA standards
- a mobile home that satisfies FHA standards
The house also has to adhere to HUD property standards and flood regulations. The lender’s appraiser, who must have HUD approval, will assess whether the house satisfies those standards or needs repairs or other modifications during the home assessment procedure for the loan.
Lenders of reverse mortgages often want a minimum of 50% equity in the property.
Types of FHA Reverse Mortgage Loans
Fixed-rate or variable-rate loans are also options for HECMs. A fixed-rate loan requires the borrower to accept the funds in one single amount.
A variable-rate HECM may provide monthly payments, a line of credit that the homeowner may use as needed, or a mix of the two as income.
Where to Get an FHA Reverse Mortgage Loan
The FHA does not really issue HECMs, but it does insure them. Instead, banks and credit unions that have been authorized by the FHA are the ones that issue them. Borrowers may utilize a search engine on HUD’s website to locate authorized lenders nearby.
FHA Reverse Mortgage Loan Costs
HECMs may include a large list of closing charges and additional fees, much like other mortgage types. These may consist of:
premiums for mortgage insurance. A first-time, one-time charge for the FHA insurance that is equivalent to 2% of the total loan amount is required from the borrower. The premium is then 0.5% of the outstanding loan total every year after that. Those premiums will increase along with the sum of the reverse mortgage since it rises annually.
initiation charge. The lender will receive this payment upon closing. It will be $2,500 or 2% of the first $200,000 of the home’s worth plus 1% of the amount beyond $200,000, whichever is larger. HECM origination costs are restricted at $6,000 by law.
service charges. Depending on the kind of HECM, the loan servicer may charge $30 or $35 per month for handling loan disbursements, account statements, and other continuing responsibilities related to the mortgage.
additional closing expenses In addition, the borrower could be required to pay costs for things like an appraisal, inspection, title search, and recording.
Considering that many of these costs might differ from lender to lender, consumers should look around.
Alternatives to FHA Reverse Mortgage Loans
There are several types of reverse mortgages than HECMs. Some lenders provide reverse mortgages that are exclusive to them. Although these loans are not guaranteed by the government, they may have lending restrictions beyond the $970,800 HECM cap set by the FHA at the moment.
The single-purpose reverse mortgage is yet another kind. State, municipal, and some charity groups provide these loans to homeowners with low and moderate incomes. The money must be utilized for the precise purpose specified in their name, such as house repairs or paying property taxes.
How Much Can You Borrow With a Reverse Mortgage?
Your age, the market worth of your property, and the prevailing interest rates will all have an impact on how much you may borrow via a reverse mortgage. The maximum loan amount for reverse mortgages that are guaranteed by the government is $970,800, however some lenders provide greater loans.
Does the U.S. Department of Veterans Affairs (VA) Offer Reverse Mortgages?
What Happens If You Inherit a Home With a Reverse Mortgage?
Depending on your connection to the borrower. Non-spouses who receive an inheritance must pay off the reverse mortgage, either by selling the property or, if they choose to retain it, with their own money. They must pay the lender the entire loan debt or, in the event that is less, 95% of the home’s assessed worth in order to accomplish this. In the latter scenario, the lender gets compensated for the shortfall by Federal Housing Administration (FHA) insurance.
Although the regulations are complex and vary depending on whether the spouses were co-borrowers on the loan or non-borrowing spouses, couples may often stay in the house for the remainder of their life. The loan servicer and/or a housing counselor approved by the U.S. Department of Housing and Urban Development (HUD) should be contacted as soon as possible after the borrower’s passing to find out what actions need to be taken and what the deadlines are for anyone, spouse or otherwise, who inherits a home with a reverse mortgage.
The Bottom Line
The most popular kind of reverse mortgages are FHA loans, often known as home equity conversion mortgages (HECMs). The government insures HECMs to safeguard lenders in the event that a borrower fails on the mortgage. The borrower must fulfill a number of conditions in order to be eligible for a HECM, including meeting with a housing consultant to determine if a reverse mortgage is the right choice for them.
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