Reverse Mortgages are government supported loans allowing a homeowner from age 62 onwards to borrow against their home equity. Home Equity is the difference between the remaining debt on the home loan or mortgage and the current value of the property.
A Reverse Mortgage is normally used by a homeowner wanting to remain in their existing home that they have owned for many years. This mortgage converts a proportion of the property’s equity to cash, be it converted into a monthly income or a lump sum.
Borrowers do not make any repayments on these mortgages. The principal debt and accumulated interest is paid off when the owner moves, sells the property or passes away. Therefore the debt cannot exceed the future proceeds from the eventual sale of the property. This ensures the safety of the borrower’s other assets. There is no need for qualification of this loan as the property is used as surety and not the borrowers liquidity, the borrower does not require an income to qualify for this mortgage.
These mortgage plans are also available for new home purchases, including newly constructed homes, however not many people are aware of its existence. Most people view this particular mortgage plan as only being available to people who want to remain in their existing homes. However it is also available to older homeowners wanting to relocate for various reasons; downsizing, frail care facilities and being closer to their children, but do not want to incur the enormous mortgage payments of a newly bought home.
This option is the HECM (Home Equity Conversion Mortgage) for Purchase program, this plan allows the purchase of an existing home, including one that is newly constructed.
The HECM for purchase has been legally available since 2008. It is overlooked and unused as many people are unaware of its existence. The debt cannot exceed the property’s eventual sale price. The advantage is that buyers do not need to qualify and they get to keep their other assets safe. This is a huge attraction for seniors wanting to move into a new home without taking on a new mortgage. This plan is made available to older homeowners to borrow more on the loan, than younger homeowners, as there is less time for the debt to grow exponentially.
This is a good option for people wanting to move and not downsize to a cheaper home or it is also an option to convert equity into cash.
Charges however can be very high on these mortgage plans and it is essential to read the fine print on the contracts before signing.
Purchasers using this plan must have the affordability to pay the difference between the settlement costs and sale price of the property and the maximum amount that can be drawn on the HECM.The lower of the sale price, the appraised value and FHA’s maximum loan amount determine the maximum draw amount.
This mortgage plan cannot be used to build a new home. However it is available for newly constructed homes.
The HECM for purchase program allows seniors the opportunity to purchase a new principal residence and obtain a reverse mortgage, at the same time, within a single transaction. This then also allows senior homeowners to move to new geographical areas and, should the need arise, homes that are equipped for their particular needs.
The purchaser must prove that the home is their legitimate principal residence. Lenders are required to ascertain that the borrower lives in the home.
At the time of initial application and inspection newly constructed properties must be completed by 100% to enable the loan process to start. The application is only valid once the Certificate of Occupancy or equivalent has been issued/ received.
Eligible Properties for this type of loan settlement are one-to-four unit properties where construction has been completed. The property is then habitable by local jurisdiction standards and the issuance of the Certificate of Occupancy and/or its equivalent.
Federal insurance is available for these properties as long as the purchaser ensures that the property meets FHA (Federal Housing Administration) minimum requirements. Property deficiencies threatening the health and safety of the homeowners family or jeopardising the soundness and security of the property must be fixed completely by the seller before closing the application.
Generally there are no restrictions on how the funds are used from these mortgage plans, unless they are single purpose reverse mortgages issued by non-profits and government agencies used for specifics such as taxes or home repairs.
In order to qualify for a Reverse Mortgage on your home it must be your primary residence, and all your property taxes and home insurances must be currently up to date. Any maintenance and/or repairs must be up to date on the property.
Lenders will still ensure that you have the affordability to pay expenses related to the property such as property taxes and maintenance.