Let’s start with what is the same. A reverse mortgage is still a mortgage. A mortgage is what gives your lender the right to take your property in foreclosure if you don’t pay back a loan in accordance with your promissory note. The promissory note creates the debt. The mortgage connects the debt to your property. That part is the same with a reverse mortgage. You sign a promissory note, which creates a debt. Then you sign a mortgage, which ties the debt to your property.
Next we’ll look at the differences that make reverse mortgages such a powerful financial tool.
Your credit score doesn’t matter. It doesn’t matter how good or bad your credit score is. The primary factor is your age. The youngest person on the deed to your house must be at least 62 years old. If that’s true, you are eligible. The only other tests for eligibility are whether or not you are delinquent on any kind of Federal government debt (income tax, for example) and whether or not you can afford to pay your real estate taxes and other home-related expenses.
Most property types qualify. If you live in a one to four family house, your property qualifies. Most condominiums and certain “manufactured” homes will qualify too, but co-op apartments and mixed-use buildings will not. Those restrictions come from the Federal government (HUD and FHA), not from the banks.
No payments during your lifetime. Now here is the fun part: you don’t have to pay the money back as long as you live in your house. Typically the money is paid back by your estate after your passing.
Flexibility. Reverse mortgages are very flexible. You can use the money for anything whatsoever. (You do have to pay off any existing mortgage as part of your closing, however). You can take the money in an up-front sump sum, or in the form of monthly payments from the bank to you. You can even take a reverse mortgage as a line of credit, just like a conventional home-equity line of credit (HELOC). Unlike a HELOC, however, any money you take does not have to be paid back until you are no longer in the home.
Most people want to know up front how much of their home equity they can tap through a reverse mortgage. The answer depends on your age (the higher the age, the higher the percentage of home value you can get), on the value of your property, and on what current interest rates are doing. The government has set a maximum reverse mortgage amount of $625,000 as of this writing. There are many reverse mortgage calculators online that will tell you how much you can qualify for. You plug in your age, home value and address, and the amount will be calculated for you. One that I like can be found at www.bitly.com/MorCalc.
Despite all the advantages for senior homeowners, reverse mortgages are not the right financial tool for all situations. For that reason, the government requires you to speak to a HUD-certified counselor before you proceed. As always, get independent legal advice before signing any papers that affect your money or your property.