A reverse mortgage is a loan available to seniors aged 62 or older, per HUD, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves, they can be out of the home for up to 364 consecutive days.
In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term the mortgage has been paid in full and the property is released from the lender and becomes fully and solely owned by the homeowner. In a reverse mortgage, the home owner makes no payments aside from property taxes, and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month. If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home. In certain countries (including the United States), however, a reverse mortgage must be the only mortgage on the property. Most lenders put a lien of close to 300% of the amount funded in the transaction, so very rarely do they allow a “refi” type event to “capture” more equity. It is generally a one time event. The lender will require the loan satisfied and paid in full before they will offer a loan somewhere else. You will have to be in good standing with HUD as well.
To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age. The home owner must qualify for the ability to “afford the home”, to cover taxes, insurance, utilities, water, gas, etc. For most reverse mortgages, the money can be used for any purpose; however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds. A pending bankruptcy which has not been finalized may, however, slow the process. Some types of dwellings do not qualify, while others (like mobile homes) have special requirements (such as being on an approved permanent foundation and built after 1976) in order to be approved. Before borrowing, applicants must seek third party financial counseling from a source which is approved by the Department of Housing and Urban Development (HUD). The counseling is a both safeguard for the borrower and his/her family, to make sure the borrower completely understands what a reverse mortgage is and how one is obtained and so the home owner is alerted to the possibility of fraud. The current lending limit (the maximum the home can be appraised for, no matter how much it is worth) is $625,500. This was increased in 2009, after being raised from $200,000 to $417,000 in 2008. The maximum an originator can charge for a loan origination fee on a reverse mortgage is $6,000.