Reverse Mortgage FAQs
Adjustable rates are based on either the 1-month LIBOR index or the 1-year LIBOR index.
The LIBOR index is a published rate (Wall Street Journal) that is not controlled by the lender.
Yes, there are two types of caps. There is an annual cap, which means that the rate can never go up by more than 2% in any one year.
And there are lifetime caps: 5% over the start rate for the annual adjustable type and 10% over the start rate for the monthly adjustable reverse mortgage.
PL stand for Principal Limit and it is the maximum loan amount.
It is based on three factors:
- Property value (up to a point)
- Age of the youngest borrower (or their spouse even if that spouse isn’t on the loan)
- Expected interest rate.
Yes, up until 90 years old. For calculation purposes, the borrower’s age caps at 90.
What value is the reverse mortgage based upon? The home’s value (Maximum Claim Amount) is considered to be the lowest of the:
National Lending Limit, which is currently $625,500
Purchase price if the reverse mortgage is being used to buy a house
Consider three people, all the same age, all getting a reverse mortgage at the same time.
- One owns a house worth $625,500
- The second owns a house worth $800,000
- And the third owns a house worth $2 million
Would the homeowner with the $2 million dollar house get more proceeds from an FHA reverse mortgage than the other two?
No, a house worth more than $625,000 would be treated just like a house worth $625,500 in terms of how much money they can get from a reverse mortgage.
There are three main factors that affect how much money you can take out with a reverse mortgage.
That amount is called the Principal Limit and it is affected by the Max Claim Amount (home’s value), the age of the youngest borrower, co-borrower, or spouse of a borrower, and something called the Expected Rate.
The Department of Housing and Urban Development (HUD) has Principal Limit Factor Tables that were changed substantially in August, 2014. The best way to determine the amount is to use a reverse mortgage calculator; like the one provided on this website.
The amount of money a borrower can get from a reverse mortgage depends on several factors and one is age. But remember, it is the age of the youngest borrower, or their spouse – even if that spouse isn’t on the loan.
This is a change from the past. Also, the benefit of being older (in terms of getting more money) stops at 90.
Any one over 90 is treated the same as someone who is 90.
Remember, the home’s value is capped at $625,500, and the amount someone can get is also affected by the Expect Rate – the higher the expected rate, the less they can get.
If the Expected Rate is 5% or less, the range is 52.4% to 75%. If the Expected Rate is 7%, the range drops to 31.2% to 57.8%.
Most all loan fees are paid for with loan proceeds. The two typical exceptions are the appraisal and the counseling fee.
Mortgage insurance protects the borrower in case of lender default and it protects the lender in case of borrower default. If a lender goes out of business, FHA will ensure the proceeds available in a line of credit remain available and term or tenure payments continue monthly without interruption.
There are two components to mortgage insurance: an upfront premium and an on-going annual premium.
- Upfront mortgage insurance – is 0.5% when the initial disbursement is 60% or less than the Principal Limit. However, it is 2.5% when the initial disbursement is greater than 60% of the available Principal Limit. Upfront mortgage insurance is calculated on the Maximum Claim Amount (home’s value).
- Annual mortgage insurance – is 1.25% of the loan balance and it is charged over the life of the loan.
The Initial Disbursement Limit dictates how much the borrower can receive in the first year. It is a new disbursement rule that pertains to all payment options.
If Mandatory Obligations are greater than 50% of the Principal Limit, the borrower can still take an additional 10% during the first twelve months but the total disbursement cannot exceed the Principal Limit
The following items must be paid off before any money goes to the borrower:
Initial mortgage insurance premium (either 0.5% or 2.5%)
Required payoffs including existing liens, federal liens, delinquent federal debt, student loans
Property taxes due within 45 days, which are to be paid at closing
Hazard and/or flood insurance paid at closing
Repair Set-Asides for repairs performed after closing
Funds for home repairs completed as a condition of closing
Reasonable and customary loan fees
Customary fees for warranties, inspections, or engineer certifications
Repair Set-Asides are mandatory if the appraisal notes needed repairs in excess of $500.
If the appraiser estimates the cost to fix items, then two times (2x) that amount must be held back.
If a contractor estimates the repair costs, then only one and a half times (1.5x) must be held back.
All repairs must be completed in a manner approved by HUD.
The repairs can be completed after closing if they cost less than 15% of the Maximum Claim Amount (home value).
- If the repairs will cost between 15% and 30% of the MCA (Maximum Claim Amount), they must be completed before closing.
- If repairs will cost more than 30%, HUD must review the property.
However, an appraiser should never reject a property outright.
The first HUD/FHA-insured reverse mortgage (also known as a HECM – Home Equity Conversion Mortgage) was funded in 1989 in Kansas City, Missouri.
The first non-FHA reverse mortgage was funded in 1961 by a private company in Portland, Maine.
The common FHA-insured reverse mortgages include the HECM, the HECM to HECM refinance, and the HECM for purchase (sometimes known as H4P)
To refinance an existing reverse mortgage with a new reverse mortgage, the existing HECM must be in good standing, it must be at least 6 months old, and the new Principal Limit (maximum loan amount) must be five times (5x) the cost of the refinance.
When using a HECM to purchase a home, the home must meet the following requirements:
Must meet FHA requirements prior to loan application
Property must be complete; it cannot be under construction
Certificate of Occupancy date must precede the application date
If repairs were noted by the appraiser, they must be completed prior to closing
Borrowers must move into the property within 60 days of closing
Common reasons why reverse mortgages are used in purchase transactions include: downsizing to a smaller or easier to maintain home, moving into a 50+ community, purchasing a home closer to family, moving into a home with more modern amenities or that is easier to navigate (like a one-story house).
With a reverse mortgage, the lender is in first lien position and HUD is in second lien position. This is to protect the homeowner in case the lender defaults or goes out of business. FHA insurance will ensure that the homeowner gets all payments or benefits to which they’re entitled.
Qualification rules include:
- The youngest borrower must be 62 at the time of closing
- At least one borrower must live in the home, making it a primary residence
- The borrower must be the homeowner on title
- The borrower must be a US resident or permanent resident alien; and
- The borrower must live in the home more than half the year.
Yes, non-borrowing spouses (NBS) have certain rights and they affect how much a reverse mortgage can be. A non-borrowing spouse does not have to be 62 years old, but the younger they are, the less the borrower can get.
Yes, if they meet certain rules including:
The non-borrowing spouse (NBS) is identified at the time of application
They must be married at time of closing
They must live in the principal residence most of the year
They must have continued to live in the principal residence throughout the borrower’s lifetime
A non-borrowing spouse can reside in a healthcare facility so long as the borrowing spouse lives in the home while the non-borrowing spouse was away
They must remain married during the borrower’s lifetime
The non-borrowing spouse has 90 days after death to establish legal ownership or legal right to remain in the home.
No, the non-borrowing spouse will not have access to the line of credit and they will not continue to receive any regular monthly payments.
Yes, it must be a revocable trust, the borrower must be named as the beneficiary in the trust documents, and the beneficiary and trustee must sign the security instrument.
Yes, whether the person unable to make legal decisions is incompetent or incapacitated, their property can be eligible for a reverse mortgage. The conservator must sign the security instrument.
Yes, an Attorney-in-fact (the caretaker with authority to manage financial and healthcare decisions) can enter into a reverse mortgage on a borrower’s behalf. The Attorney-in-fact signs the security instrument and other loan documents.
Yes, if everyone with a legal interest signs the security instrument.
Yes, and there are a few other rules:
- The borrower must live in the home at least 51% of the year
- The borrower can only have one principal residence at a time
- At least one of the borrowers must live in the home – it is okay if a co-borrower is living in a health care facility; and
- If the borrower lives in a health care facility for more than one year, the loan is due.
The following home types are eligible for an FHA-insured reverse mortgage:
- Single family detached
- 2-4 unit condominium
- Manufactured home (that meets certain requirements)
- PUD (planned unit development) and
- Mixed use property so long as the commercial square footage is less than 25%.
The FHA reverse mortgage has changed considerably over time in an effort to increase the likelihood that the borrowers and the program are safe and sustainable.
No limitation on how proceeds are spent
All proceeds are tax free – because they are not deemed income by the IRS
Interest is tax deductible when the loan is paid off (not before)
No prepayment penalties if paid off before due
No monthly payments for principal or interest (unpaid interest is added to the loan balance)
Repayment is not required until last borrower no longer lives there as a primary residence
After loan balance is paid off, all remaining equity goes to the heirs; not the lender
Highly regulated to prevent fraud, over-charging, steering, or unethical lending practices
Independent counseling is required and the lender cannot steer borrower on whom to use
Non-recourse – if loan is more than value of home, the federal government pays the lender the difference, not the borrower
Three-day right of rescission to cancel loan if borrowers change their mind
Mandatory advance disclosures
Standard and capped interest rates
Limitation on fees
Loan can run until the borrower is 150 years old
People often use their reverse mortgage proceeds to:
Pay off an existing mortgage (thereby eliminating their mortgage payment)
Create a monthly income stream
Long-term care insurance
Establish a financial reserve
Improve quality of life
Help with educational expenses (grandkids)
Refinance an existing reverse mortgage
Purchase a smaller home
There are several payment options with a reverse mortgage:
Single lump sum; but afterward no additional funds are available
Tenure, which means equal fixed monthly payments
Term, which means fixed payments for a specified number of months selected by borrower
Line of Credit (LOC), which allows for the borrower to write checks as they need them
Modified Tenure or Term; a combination of Tenure or Term payments plus a line of credit
Yes, the amount available increases whether the borrower draws from the line or not. The rate of increase equals the current note rate (index + margin) plus 1.25 (annual mortgage insurance percentage).
It does not impact Social Security benefits or Medicare benefits but it may impact Medicaid and Supplemental Security Income (SSI).
The loan is due and payable when the home is no longer:
- The primary residence of at least one borrower for 6 consecutive months
- Or the property is sold
- Or the property falls into a state of disrepair
- Or property taxes or insurance are not paid in a timely manner
- Or when the last surviving borrower dies
- Or when the last eligible non-borrowing spouse stops living there.