A reverse mortgage is a loan that allows a homeowner over 62 with significant equity in their home, to borrow money based on the value of their home and receive funds as a lump sum, fixed monthly payment, or line of credit.
Unlike a traditional mortgage used to buy a home, a reverse mortgage does not require the homeowner to make loan payments. Instead, the loan gets repaid in full once the homeowner has moved from the home or a maturity event has occurred.
If you’ve decided that a reverse mortgage is the right option for your situation and you’re all set to begin the application process, we have the information you need, including requirements to qualify, the application process, and other considerations.
The Requirements for a Reverse Mortgage
You’ve decided that you need the liquidity built into your home, so you want to look further into a reverse mortgage as an option.
- You are at least 62 years of age.
- You own a significant amount of equity in your home (generally, at least 60 percent).
- Taxes and insurance must be paid on time and currently paid in full (you may not have delinquent federal debt).
- The home you seek to apply a reverse mortgage to is your primary residence.
A Home Equity Conversion Mortgage (HECM)—the most popular of the three types of reverse mortgages—is a government-sponsored mortgage. If you seek an HECM, you will be required to attend a counseling session with a US Department of Housing and Urban Development (HUD) certified counselor to receive a comprehensive understanding of the loan and how it could affect your eligibility for Medicaid and Social Security income.
The Ideal Borrower
Meeting the basic requirements of a reverse mortgage doesn’t guarantee loan approval. In an ideal situation, you will have:
- Low loan-to-value ratio: Typically, a reverse mortgage can only tap into 40 percent of a home’s value, so a high mortgage balance won’t allow you to qualify. An ideal borrower has a small loan amount or owns the home outright.
- High equity: Rather than having 95 percent loan-to-value ratio, it’s better if you have 60 percent or under because equity can then be taken out.
Once you can confirm you can meet the requirements, let’s move on to what you can expect during the application process.
Applying for a Reverse Mortgage
The good news is that applying for a reverse mortgage is a fairly straightforward, simple process:
- It has about half the number of questions of a traditional mortgage application.
- It’s generally done over the phone and takes about five minutes.
- The application only asks for current income, debt, and repayment history.
- The application does not consider FICO scores.
During the application process, you will provide your lender with the following documents:
- Copy of Social Security award letter
- Most recent 1099 form
- Most recent insurance policy
- Social Security card
- Proof of identification
- Counseling certificate (applicable for HECM reverse mortgages)
- Current mortgage statement
Although not a requirement, it’s highly recommended to have an email address so that you can avoid mailing documents and instead go with e-documents and e-signatures.
Other Considerations Before Applying for a Reverse Mortgage
A reverse mortgage provides many benefits, including peace of mind and a better financial cushion. To hold up your end of the bargain, you are responsible for a few key items:
You will still be responsible for property taxes, homeowners insurance, and—if applicable—flood insurance and homeowners association (HOA) fees.
You should also expect to pay closing costs, including an origination fee, title/recording fees, and a mortgage insurance premium, which are usually taken out of the loan proceeds.
Typically, the only out-of-pocket costs are for the counseling certificate and the appraisal, averaging $200 and $500 respectively.
Keep Your Home in Good Condition
Once you move out of your home, you will need to pay back the loan. For most borrowers, they use the money gained from selling the home to pay, meaning the home needs to maintain a good condition to preserve its value.
Work with a Trustworthy Loan Officer from radius
Although applying for a reverse mortgage is relatively easy, it has plenty of elements that can be fairly challenging to grasp without the right advisor on your side.
By working with a Loan Officer from radius, you’ll receive guidance when applying for the mortgage, providing proper documentation, selecting the right mortgage for your situation, and so much more.
Want to learn more about reverse mortgages? Complete our questionnaire and connect with us.
* This guide is for educational purposes only and should not be construed as financial advice. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Not tax advice, consult a tax professional. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and insurance. The borrower must maintain the home. When the last borrower or eligible non-borrowing spouse passes away, sells the home, permanently moves out, or fails to comply with the loan terms, the loan becomes due and payable (and the property may become subject to foreclosure). Reverse mortgages are currently not available in NH and TN with radius financial group, inc.