Reverse mortgage is a type of home loan available only to homeowners who are 62 and older. This type of mortgage allows the homeowner to transform some part of their home equity into cash and use the amount for anything they need or want. Here's how this lending system works.
 How does a reverse mortgage work? The homeowner converts part of their home equity into cash when getting a reverse mortgage. They can use this amount for various purposes, like making home repairs or improvements, paying for in-home care, or lowering mortgage payments. The funds are provided in the form of a lump sum payment, and borrowers don't need to repay the lender with monthly installments. The loan is due only when they pass away or leave the house. The property is then sold, and the sale proceeds are used to repay the mortgage. Who can apply for a reverse mortgage? One must meet the following eligibility criteria to apply for a reverse mortgage:
  • Must be aged 62 or above
  • Must own the home (with no mortgage against it) or have a low mortgage balance
  • Must go through a financial assessment
  • Must have enough equity in their property, which is usually around 50% but can vary depending on the lender
  • Must get counseling from a HUD-approved reverse mortgage counseling agency to discuss their eligibility, the loan's financial implications, and other alternatives
What is required of the homeowner? There is a lot of debate about whether a reverse mortgage is the right kind of loan for seniors. The home must also meet certain criteria, and the owner must undertake a few responsibilities to get a reverse mortgage and ensure that the loan does not come due before they leave the house or pass away:
  • The homeowner must keep the home in good condition
  • They must live in the home for over 6 months of the year, showing it as their primary residence
  • The home cannot be a manufactured or mobile home
  • If it's a condo, it must be a HUD/FHA-approved property
What should be considered before applying for a reverse mortgage? While a reverse mortgage may seem like an easy way to get some cash, one should weigh the pros and cons of taking this financial decision. Pros of a reverse mortgage The pros include:
  • The ability to access one's home equity without having to sell the home or pay a monthly installment is the biggest benefit.
  • The borrower's name remains on the title as they are still the owner after getting the loan.
  • The credit score is what majorly influences loan approval, but there are no such requirements in this case. That said, a financial assessment includes reviewing the borrower's credit history.
  • The borrower is free to use this money in whatever way they would like. There are no prerequisites to how they can spend the money, unlike other loans that have specific purposes.
  • Even if the borrower passes away, their spouse, who is not listed on the mortgage, can continue to live in the house.
  • If a borrower passes away and their heirs wish to keep the home, they can purchase the property for 95% of its appraised value or the balance loan amount, whichever is lower.
  • The borrower is protected from declining home values since a reverse mortgage is a nonrecourse loan.
Cons of a reverse mortgage These loans come with the following disadvantages:
  • The loan given to the borrower is against the equity of their home, which means their equity reduces and the amount of debt increases.
  • While there is no obligatory monthly repayment system, not making any payments can cause the loan balance to increase over time due to the accumulation of interest.
  • These loans usually come with high closing costs and fees.
  • Borrowers should also consider that in case they wish to leave the property to their heirs, it would be difficult for the heirs to procure it without a cost.
  • The mortgage could come due if the borrower fails to uphold their responsibilities, like maintaining the home or paying their property taxes and homeowners insurance.