If you’re considering getting a reverse mortgage, you’ve probably already heard of an FHA reverse mortgage. It’s the most common type of reverse mortgage there is, also known as Home Equity Conversion Mortgage or HECM.
But what exactly is an FHA reverse mortgage? How do you qualify for one? And what are its advantages over other reverse mortgage loans? In this article, we will answer all of these questions and more. On top of that, we will tell you how you can get started on your own reverse mortgage application, so make sure to read until the end!
What is an FHA Reverse Mortgage?
A reverse mortgage is a type of financial product that allows you to borrow against the value of your property. In other words, it allows you to gain access to the home equity you have built up so far. There are two main types of reverse mortgages: private reverse mortgages and FHA reverse mortgages.
Among all types of reverse mortgage loans, the FHA reverse mortgage is the most common. An FHA reverse mortgage, also known as a Home Equity Conversion Mortgage or HECM, is a type of loan that allows you to convert your home equity into income or a line of credit. It is a federally-backed loan established by the Federal Housing Administration (FHA) in 1989. President Ronald Reagan signed it into law as a component of the Housing and Community Development Act of 1987.
The primary purpose of FHA reverse mortgages is to provide an additional source of income to homeowners 62 and older, mainly to help alleviate seniors’ financial difficulties. Secondly, FHA reverse mortgages protect lenders in case a borrower defaults on the mortgage and, in turn, protects borrowers from lender failure. It is also relatively easier to obtain in comparison with other types of reverse mortgages and home equity loans, many of which require certain credit scores and debt-to-income ratios.
Who Can Qualify For an FHA Reverse Mortgage?
You must be at least 62 years old to qualify for any type of reverse mortgage. Furthermore, you must also own the mortgaged property outright or have at least 50% in home equity. The property in question should also be your primary residence; you cannot take out a reverse mortgage on vacation homes or rental units.
Apart from these primary requirements, a qualified HECM borrower:
- Must have completed a reverse mortgage counseling session with a reverse mortgage counselor approved by the Department of Housing and Urban Development (HUD).
- Must have a mortgage balance small enough to be paid off by HECM proceeds.
- Must not have delinquent federal loans or property taxes.
- Must pass a financial assessment test, which determines if a borrower will be able to comply with the loan obligations, e.g. paying property taxes and homeowner’s insurance, and keeping the property in good shape
What Are The Advantages of an FHA Reverse Mortgage?
A reverse mortgage can be a powerful financial tool in the right hands. If you’re considering getting a reverse mortgage on your home, you should know the ‘whys’ as well as you know the ‘hows’. That said, here are the biggest advantages of an FHA reverse mortgage, which should help you determine if you should get one:
An FHA reverse mortgage, unlike private reverse mortgages, is backed by the government. FHA insurance protects you from lender failure, e.g. when they fail to disburse the loan proceeds on time. With that in mind, you can rest assured that you will still receive your proceeds even if your lender goes out of business; other types of non-government-backed loans may not have that guarantee.
A lot of people believe that when you take out a reverse mortgage, you are selling off your home. However, this is only a myth. When you get a reverse mortgage, you retain full ownership of your property until the balance becomes due, i.e. when you die or move away permanently. As long as you continue to meet the ongoing obligations of the loan, you are the rightful owner of your home.
If you’re like many retirees, you may have limited income streams now that you are not part of the workforce. A reverse mortgage can give you the additional income you need without selling off your home.
You can receive your proceeds in a lump sum, through fixed monthly payments, or via a line of credit. But whichever method of payment you choose, the proceeds that you receive from a reverse mortgage can provide a significant boost to your income. Hence, you have more freedom to live the retirement lifestyle you want, and you can also use the proceeds to pay off other outstanding debts. Plus, the income from a reverse mortgage is completely tax-free.
No Repayment Penalty
If you are still paying off your original mortgage, you no longer have to make payments if you take out a reverse mortgage. You can, however, make voluntary repayments to reduce your balance.
Although repayment is optional, you can choose to make early payments without facing repayment fees or penalties.
Limited Financial Requirements
Unlike other types of reverse mortgage loans, FHA reverse mortgages do not have a lot of income and credit score requirements. Having said that, it is often easier to obtain an FHA reverse mortgage than a private reverse mortgage or even a home equity loan.
However, you will still need to pass a financial assessment test to ensure that you are financially capable to comply with loan obligations.
Loan Balance Will Never Be More Than Your Home Value
With an FHA reverse mortgage, you will never owe more than what your home is worth at the time the loan becomes due. And when you pass away, your children do not have to pay the difference if the loan balance is greater than the home’s value. If the opposite is true, the excess proceeds from the sale of the home can be part of your family’s inheritance.
What Are The Possible Disadvantages of an FHA Reverse Mortgage?
An FHA reverse mortgage is not suitable for everyone, just like with any other type of loan. Here are the possible disadvantages of an FHA reverse mortgage that you should know about:
One of the main requirements of an FHA reverse mortgage or HECM is that the mortgaged property should be your primary residence. This means that if you move away permanently, the loan balance becomes due. Hence, you must be confident that your current home will be your last home until you pass away.
But what if you want to move to a new house before you take out a reverse mortgage? You can do so by taking out a new forward mortgage. Or you can use an HECM for Purchase to buy a new property under a reverse mortgage. An HECM for Purchase or H4P is just like an HECM except you use the proceeds to buy an eligible property—without having to make mortgage payments afterward.
Can Reduce Your Children’s Inheritance
Your home is likely your biggest asset. Therefore, it is probably the biggest part of your heirs’ inheritance in terms of value. Taking out a reverse mortgage reduces your home equity, which can decrease the amount that your heirs will inherit when you pass away.
Nevertheless, your heirs can purchase the property again by paying off the loan balance or refinancing the loan if they wish to keep the home in the family.
The reverse mortgage process can be complicated and difficult to understand. There are many variables to consider and risks to assess carefully. That said, we’ve made it a point to provide as much information as we can to help borrowers understand the reverse mortgage process completely. Our reverse mortgage specialists are always willing to answer your questions and guide you accordingly.
How Much Can You Borrow?
The amount you can borrow with an HECM depends on the youngest borrower’s age, the interest rate, the disbursement type, and either the home’s appraised value or the FHA’s maximum claim amount ($970,800 as of January 1, 2022). Most borrowers’ homes do not exceed that amount. But if you need a loan with a higher value than that, consider getting a jumbo reverse mortgage.
Talk to us today to determine how much you can borrow under an FHA reverse mortgage.
When Will You Have to Repay The Loan?
The balance of any reverse mortgage only becomes due when you:
- Pass away
- Move away permanently
- Sell the home
- Fail to comply with loan obligations, e.g. paying homeowner’s insurance and property taxes, as well as keeping the home in good condition
Until then, repayment remains optional.
As you can see, an FHA reverse mortgage is the most common type of reverse mortgage for a reason. It being federally backed gives you the protection that you need against lender failure. Furthermore, it’s the only type of reverse mortgage loan that does not focus on your credit score or debt-to-income ratio.
A reverse mortgage can help you live the kind of life you want during retirement. Find out how you can achieve financial freedom by getting in touch with South River Mortgage specialists today.