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Reverse Mortgages
What is a Reverse Mortgage?
A reverse mortgage is a loan that allows homeowners aged 62 or older to convert part of their home equity into cash.
This type of loan may be a good fit if you want to supplement retirement income while remaining in your home.
Reverse mortgages are typically insured by the federal government under the Home Equity Conversion Mortgage (HECM) program.
Instead of making monthly mortgage payments, repayment is deferred until the home is sold, the borrower moves out, or passes away.
Loan amounts are based on age, home value, and equity.
To apply, borrowers must complete counseling with an approved agency and meet eligibility requirements.
How to Qualify for a Reverse Mortgage
The primary homeowner must be age 62 or older to apply. However, if you are under 62, you may still be able to get a reverse mortgage if you meet other eligibility criteria. For example:
- You must own your Texas home outright or have a single primary lien you hope to borrow against.
- Any existing mortgage you have must be paid off using the proceeds from your reverse mortgage.
- You must live in the home as your primary residence.
- You must remain current on property taxes, homeowner’s insurance and other mandatory obligations, such as homeowners association dues.
- You must participate in a consumer information session led by a HUD-approved counselor.
- You must maintain your Texas property and keep it in good working condition.
- Your home must be a single-family home, a multi-unit property with up to four units, a manufactured home built after June 1976, a condominium, or a townhouse.
Types of Reverse Mortgages
- Proprietary reverse mortgages – these are private loans not backed by any government entity. Typically you can receive a larger loan advance from this type of reverse mortgage, especially those who have higher-valued homes.
- Single-purpose mortgages – not as common as the other two options, this type of reverse mortgage is usually offered by non-profit organizations and a few state and local government agencies. Texas Borrowers can only use the loan for one specific purpose.
- Home Equity Conversion Mortgages (HCEMs) – the most popular type of reverse mortgage and backed by the U. S. Department of Housing and Urban Development (HUD), these federally insured mortgages usually have higher upfront costs, but the funds can be used for any purpose. Before closing on a HECM, all borrowers will need to go through counseling from a HUD-approved counselor. The point is to help you understand how a reverse mortgage works from someone who won’t benefit from you taking out the loan.
Ways to Receive Proceeds from a Reverse Mortgage
- Lump sum – get all the proceeds at once when your loan closes. This is the only option that comes with a fixed interest rate. The other five have adjustable interest rates.
- Equal monthly payments (annuity) – for as long as at least one borrower lives in the home as a principal residence, the lender will make steady payments to the borrower. This is also known as a tenure plan.
- Term payments – the lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years.
- Line of credit – money is available for the homeowner to borrow as needed. The homeowner only pays interest on the amounts actually borrowed from the credit line.
- Equal monthly payments plus a line of credit – the lender provides steady monthly payments for as long as at least one borrower occupies the home as a principal residence. If the borrower needs more money at any point, they can access the line of credit.
- Term payments plus a line of credit – the lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years. If the borrower needs more money during or after that term, they can access the line of credit.
Benefits of a Reverse Mortgage
- The borrower does not need to make monthly payments toward their loan balance.
- Proceeds can be used for living expenses, debt repayment, healthcare expenses, and more.
- Funds can help borrowers enjoy their retirement.
- Non-borrowing spouses can stay in the home after the borrower dies.
- Borrowers facing foreclosure can use a reverse mortgage to pay off the existing mortgage, potentially stopping the foreclosure.
The Reverse Mortgage Process
If you believe a reverse mortgage is the solution for you, applying for one is similar to that of a traditional home equity loan. Once you meet the eligibility criteria, shop around to find the best deal.
The Texas lender will assess your financial situation including evaluating your credit history, any outstanding mortgage and ensuring your property qualifies (as in you don’t have any active property liens). You’ll also need to provide proof that you’re able to pay for ongoing housing costs, and order a property appraisal to determine its value and how much you can borrow.
Once you close on your loan, you have the right of rescission, or your right to cancel your mortgage without penalty. In order to do so, you need to notify your lender within three business days after closing in writing.
Make sure to keep all copies of any correspondence and send your letter via certified mail and ask for a return receipt so that you’ll know it got into the right hands. Afterwards, your Texas lender will have 20 days to return any fees you’ve paid for the reverse mortgage.