Everything You Need to Know About Reverse Mortgages
What is a Reverse Mortgage?
A reverse mortgage allows a homeowner to borrow against the equity in their principal residence. This type of loan is secured by a deed of trust on the property. Furthermore, this loan is available to homeowners that are at least 62 years old. For some, this loan is an attractive option as it easily converts home equity into cash without incurring any personal liability. Because the loan does not put the liability on the homeowner, many people use this loan to pay for home improvements, medical expenses, or to give money to their children or grandchildren. No matter what you are considering using this loan for, there are a few things to know about reverse mortgages before creating this loan.
How is the Loan Dispersed to the Borrower?
The money paid to the homeowner under a reverse mortgage can be paid in a number of ways. The homeowner usually chooses to receive a monthly cash advance. Homeowners, however, often have the option to receive a lump sum cash payment or open a “credit line” account, which allows the homeowner to decide the time and amount of money dispersed to them. There is no best way to collect your money from a reverse mortgage. Instead, you should base your decision on your individual situation and needs. For example, if you have a large number of medical bills that you need to pay, you should receive a lump sum payment from your reverse mortgage. However, if you are simply looking to enhance your quality of life, a monthly case advance or credit line will work best.
How Does One Qualify for a Reverse Mortgage?
To qualify for a reverse mortgage, the homeowners must be at least 62 years old, own a home, and live in the home as their primary residence. Unlike traditional loans, an applicant’s credit score and income do not affect their ability to apply for a reverse mortgage. The reason for this is because the borrower does not make monthly payments to the lender. This type of loan is defined as a non-recourse loan because the individuals taking out the loan have no personal liability on the amount due.
What if there is a Mortgage or Other Outstanding Lien on My Home?
Generally, homeowners may still take out a reverse mortgage if there is a mortgage or outstanding lien on their home. However, they still must have enough equity in their property to qualify for a loan after such liens are accounted for. In this situation, the reverse mortgage will pay off any outstanding liens against the property before any funds are dispersed to the homeowners. The amount paid to clear the property of any previous liens will be considered part of the principal of the non-recourse loan. Thus, wrapping the balance of your existing mortgage into the balance of your reverse mortgages.
How Does The Estate Pay Back a Reverse Mortgage?
Once the borrower passes, their estate is typically given four options to pay back the reverse mortgage.
Under the first option, the estate can elect to pay off the reverse mortgage with the proceeds from the estate. The estate cannot choose this option unless the corpus of the estate, after accounting for various administrative fees and the decedent’s estate planning portfolio, is big enough to pay off the loan.
The second option allows the estate to refinance out the reverse mortgage with a conventional loan. This will, in effect, pay off the reverse mortgage. However, the estate is left with the burden of fixing the terms of the conventional loan.
Under the third option, the estate can elect to sell the property. In this situation, the reverse mortgage will be satisfied from the proceeds of the sale. Finally, the balance of the equity, if any, will be paid to the estate.
The final option the estate has it to issue a deed in lieu of foreclosure to the lender. This keeps the lender from initiating a foreclosure proceeding against the property and will satisfy the loan.
Typically, the lender will make a request of the estate shortly after the borrower has passed. They will give the estate 30 days to select which of these options it wishes to choose. If you do not choose an option, the property faces foreclosure.
How Much Money Can One Get from a Reverse Mortgage
A reverse mortgage will typically not equal the full value of your home. The amount of the loan that you will qualify for is based on the lowest selling margins in your areas.
For example, if your home is worth $500,000 in today’s market, the value limit the lender places on the property may reduce your home’s value for the purpose of computing the reverse mortgage to $420,870. This figure may result in a loan principal limit, depending on the current interest rates, of $300,922. Therefore, $300,922 may be the maximum amount that a reverse mortgage lender is going to give you on a $500,000 house. On top of this, reverse mortgages are very expensive to set up. The reverse mortgage lender is going to subtract all of the lender’s fees upfront. If this figure is $20,000, you will be left with $280,922 as your net principal limit on a $500,000 house. The problems do not end there. When the reverse mortgage company records their deed of trust on your property, they are going to record it for $420,870.
Another problem with reverse mortgages stems from the triggering conditions for when the loan becomes due. A reverse mortgage becomes due when the homeowners stop using the home as their principal residence. What if the homeowners require constant care in their old age. If so, what if they need to move to a nursing home or assisted care facility? This may trigger repayment of the reverse mortgage. As such, the homeowners may be forced to watch their children handle this difficult issue while they are alive.
Contact our DC Law Office for More Information
For more information on everything you need to know about reverse mortgages, please contact Antonoplos & Associates at 202-803-5676. You can also directly schedule a consultation with one of our attorneys.