By Sharon Frankenberg,
Attorney at Law
If the homeowners are both 62 or older and have sufficient equity in their home, they may be eligible to apply for a reverse mortgage loan. A reverse mortgage is very different from other types of mortgages. Unlike traditional mortgages where the loan must be repaid every month, no repayment is required in a reverse mortgage until certain events occur such as death of the borrower. They enable the homeowners to convert part of the equity in their home to cash for a variety of uses. Until recent changes were made, these loans had no credit history requirements or minimum income requirements.
There are three types of reverse mortgages. Single-purpose reverse mortgages are offered by some state and local government agencies and nonprofit organizations. These loans are not available everywhere and are usually the least expensive of the three types. The agency or organization making the loan usually limits what the loan proceeds may be used for. For example, the lender may require that the loan must be used to only to complete necessary home repairs or to pay delinquent property taxes.
There are also proprietary reverse mortgages which are private loans made by companies who do not have government insurance guaranteeing the loans. The costs on this type of reverse mortgages tend to be higher than with other types of reverse mortgages. The requirements to qualify for these loans may be more flexible and the loan amounts available may be higher than with other types of reverse mortgages. The loan documents will spell out the specifics of the particular loan and should be reviewed carefully since these loans are not all standardized.
The third type of reverse mortgage is the federally-insured reverse mortgage. These loans are known as Home Equity Conversion Mortgages (HECMs) and are backed by the U.S. Department of Housing and Urban Development (HUD). The home pledged as collateral for the loan must be a single-family dwelling or a two- to four-unit property that the borrower owns and occupies. The borrower is required to obtain counseling from a HUD-approved counseling agency. After obtaining the loan, the borrower must maintain the property in good repair, pay the real property taxes when due and not use the property for any illegal purpose. The HECM must be repaid when the last borrower dies; when all borrowers have conveyed their title to the property; when the property is no longer any borrower’s principal residence or when the property is not the principal residence of another borrower for a period of more than twelve consecutive months.
The cost of an HECM is more than with a conventional mortgage primarily due to the cost of required Federal Housing Administration mortgage insurance and the origination fee. Also beginning later this month, the FHA will require lenders to verify that homeowners have the ability to pay their taxes and insurance and that their credit history reflect a commitment to paying obligations. This may reduce the number of applicants who qualify to obtain reverse mortgages.
You can obtain additional information on reverse mortgages from the Federal Trade Commission website, the HUD website and the AARP website. You should consult an attorney for assistance and advice with your individual situation.
Sharon Frankenberg is an experienced attorney licensed in Tennessee since 1988. Her office number in Knoxville is (865)539-2100.