Definition of reverse Mortgage
Reverse Mortgage is simply a kind of loan. It is available to persons who are above the age of sixty two and are homeowners. A portion of the equity in their home is converted to cash.
The concept of Reverse Mortgage was developed to help people who are above a certain age and have retired from their jobs. Retired persons have a very limited source of income. Therefore, some loan facility can help them pay for unexpected expenses for some emergencies like healthcare, medicine etc. How the reverse mortgage earnings can be used does not have any form of restriction.
Why is it called ‘Reverse mortgage’?
The repayment of the reverse mortgage is very convenient for senior citizens. The borrower does not have to pay his debt unless the house against which the loan has been procured is not vacated or sold. However, the property taxes, condominium fees (in case applicable) and the homeowner’s insurance should be up to date.
The loan provided is called reverse mortgage for a reason. In a traditional mortgage, the borrower repays the loan procured in instalments as per agreement between both parties. However, in this case, the lender is the one that pays the borrower against the equity of the house. This is why the loan is called reverse mortgage.
Eligibility for Reverse Mortgage in USA
According to surveys, the reason for applying for a reverse mortgage for 48% of the applicants was to overcome financial difficulties. 81% of the applicants, as revealed by the same survey, wanted to retain their property till death.
To be eligible for Reverse Mortgage in USA, the following criteria have to be fulfilled:
- The borrower has to be atleast 62 years old and has to occupy the property (against which the reverse mortgage will be availed) as the primary residence.
- Any other mortgage on the house should be low enough to be paid using the procured loan or the reverse mortgage
- For reverse mortgage procurement in USA, FHA eligibility standards are followed. Property types that are eligible are: 1-4 family dwellings, PUD, FHA permitted condominiums. Manufactured houses are also eligible as per FHA guidelines.
- All loan applicants have to undergo a standard counselling course before procuring the reverse mortgage. Even though this process has been criticized over the years by groups like the Consumer Financial Protection Bureau, it is for the safety and awareness of the lender.
FHA assigns a case number to applicants when they apply for reverse mortgage. The lenders can then use the case number to identify them. A detailed financial assessment of the applicant takes place after the assigning of the case number. Unpaid property taxes and late payment of debts are looked upon very negatively by lenders.
Size of Loan
Principal limit is defined as the maximum amount of loan that an applicant can procure under a HECM reverse mortgage, which is a reverse mortgage that is guaranteed by the federal government. The principal limit is based on several factors like the expected average interest rate and the age of the youngest applicant. The greatest amount that can be claimed by the applicant is the minimum of the maximum amount insured by HUD and the evaluated value of the concerned property. The principal limit is found out by calculating the product of the principal limit factor and the claim amount. The applicant’s age and the expected average rate of interest are the factors influencing the principal limit factor. Loan tables are available that show the various principal limits for different factors involved as discussed above.
Criticisms faced by the concept of Reverse Mortgage
Any concepts developed in the past have faced criticism from various groups. The concept of reverse mortgage is no different. It was conceived to help people who have retired, have limited income and are in some sort of financial emergency. However Reverse Mortgage does have some shortcomings which are discussed as follows:
- High interest rates on reverse mortgages have always been criticized. The interest rates for a reverse mortgage compounds over time. This implies that the interest rates accumulate to very high levels over the life time of the loan. There are, however, laws that state that a borrower can never apply for a loan greater than the value of the property against which it is being procured and the debt cannot be passed on to the legal heirs after the death of the borrower.
- Most of the elderly borrowers do not have a clear understanding of reverse mortgage according to surveys. This leads to a situation where lenders take unfair advantages.
Having said this, surveys also reveal that most elderly Americans are happy with reverse mortgages and are satisfied with the positive effects of reverse mortgage on their lives.