To qualify for a reverse mortgage, the borrower must be at least 62 years old and own a home with enough equity built up to pay off any outstanding balances. The borrower must be living in the home as a primary residence.
The actual dollar amount that a lender will loan is established by a number of factors. The borrower’s age at the time of closing, the assessed value of the house, and current interest rates all also factor into the loan amount.
HUD guidelines limit borrowers to using 60% of the available money (after closing costs & fees) in the first year. Beginning year two, the remaining funds become accessible. This maximum disbursement limit set by HUD allows for the GREATER of:
- 60% of the Principal Limit (amount of money available to borrower in all years of the loan) in the first twelve months of the loan from your closing date OR…
- The sum of Mandatory Obligations* (existing mortgage payoff, tax liens, closing costs, mortgage insurance premium) plus 10% of the Principal Limit. This total cannot exceed the total the Principal Limit at the time of loan closing.
Reverse mortgage payments can be received in one of five ways:
Tenure: equal monthly payments
Term: equal monthly payments for a fixed period of months as specified by the borrower(s)
Line of Credit: payments made in installments or at various times and in amounts dictated by the borrower(s)
Modified Tenure: monthly payments with a line of credit
Modified Term: monthly payments for a fixed period of months with a line of credit
Due to HUD rules, in the first year the Line of Credit or monthly Tenure Payments or monthly payments cannot exceed 60% of the Principal Limit. After the first year, the available Line of Credit or Tenure/Monthly payments will be increased when applicable.
Counseling is required with a third party HUD-approved counselor to make sure borrowers have received correct and complete information about reverse mortgages. Before the loan can close, the lender must be in receipt of the counseling certificate. Contact us for a list of reverse mortgage counselors.
Borrowers can typically expect to pay an origination fee to the broker/lender, a MIP (mortgage insurance premium) paid to HUD on the Home Equity Conversion Mortgage (HECM), an appraisal fee, a flood certification fee, a doc prep fee, title and settlement fees, and other standard closing costs. In some cases, monthly servicing fees could apply.
The upfront Mortgage Insurance Premiums (MIP) are either 2.5% or .5% depending on how much of the Principal Limit (amount the borrower can borrow) is used in the first year. If the borrower’s total mandatory obligation payoffs (existing mortgage payoff, tax liens, closing costs, upfront mortgage insurance premium) exceed 60% of the Principal Limit, the upfront MIP is calculated at 2.5% of the homes appraised value up to the national lending limit of $625,500. If the borrower’s total mandatory obligations and cash taken in the first year are 60% or less of the Principal Limit, then the upfront MIP charge is .5% of the homes appraised value or national lending limit (whichever is less).
Typically, the equity in your home is considered to be loan proceeds and not additional income. In most cases, the cash generated from a reverse mortgage is considered tax-free. (Borrowers should seek professional tax advice regarding reverse mortgage proceeds.)