A Reverse Mortgage provides a means for an individual or entity to take the equity out of their property. The lender provides the borrower either a line of credit or a monthly payment which is due at a later date. This type of loan was primarily designed for senior citizens who have a bunch of equity in their homestead but are running low on cash. In this instance, the borrower would get cash each month from the lender which would be repaid usually upon the death of the borrower. Factors such as the amount of equity in the home and life expectancy would be examined to determine the amount of the line of credit or monthly cash payment.
As specifically defined by the U.S. Government Department of Housing and Urban Development (HUD):
“A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.”
While (currently) a reverse mortgage does not legally have to meet certain requirements, 99.9% of lenders require that the borrower comply with requirements as created by the Federal Housing Authority (FHA). The most relevant requirements include:
- Be 62 years of age or older
- Occupy the property as your principal residence
- Have the property be a single family home (or approved condominium)
- Own the property outright (or have it significantly paid off)
The debt outstanding will not become due until a triggering event, including death of the borrower(s), sale of the property or change of primary residence status, occurs.
See the HUD site for additional details.
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