Seniors considering buying a house with a reverse mortgage should be well-informed about the qualifications, process, benefits, and potential drawbacks. Here’s what you should know:
- Eligibility: You must be at least 62 years old to qualify for an FHA reverse mortgage for purchase. Depending on your state, there are proprietary reverse mortgages available for people as young as 55.
- Down Payment: The down payment requirement for a reverse mortgage for purchase typically ranges from 30% to 70% of the purchase price, depending on your age, the value of the home you are purchasing, and the current interest rate. The reverse mortgage covers the difference between the down payment and the purchase price with no monthly mortgage payments due on what’s borrowed.
- Loan Terms and Costs: It’s important to understand the interest rate, fees, and costs associated with a reverse mortgage for purchase. These fees include an origination fee, mortgage insurance premiums, closing costs, and possibly servicing fees. With a reverse mortgage, the interest will accrue over time and is added to the loan balance.
- Loan Repayment: One of the main benefits of a reverse mortgage is that borrowers are not required to make monthly mortgage payments. The loan becomes due when the last borrower leaves the home permanently, triggering a maturity event. This can happen due to moving, selling the home, or passing away. The loan is typically repaid from the sale of the property.
- Property Ownership and Responsibilities: You remain the owner of the home and are responsible for paying property taxes, homeowner’s insurance, and maintaining the property in good condition. Failure to meet these obligations could lead to default and potential foreclosure, as with most mortgages, traditional or otherwise.
- Counseling Requirement: Before proceeding with a reverse mortgage, seniors are required to undergo an independent counseling session. This counseling session is done over the phone or in person and helps to ensure that you were provided with all the required documentation showing the terms, costs, and implications of the loan. It is a federal requirement as a borrower protection. It normally takes less than an hour.
- Long-Term Planning: Consider your long-term plans before getting a reverse mortgage. If you plan to move or sell the home within a short time, a reverse mortgage might not be the best option due to the associated upfront costs.
- Alternative Options: Consider exploring alternative financing options, such as traditional mortgages, a cash purchase, or downsizing to a more affordable home (which can also be accomplished with a reverse mortgage for purchase). These options might better align with your financial goals and needs.
- Impact on Heirs: Be aware that if you have heirs, the reverse mortgage loan will need to be repaid from the proceeds of the home’s sale. This could affect the inheritance left to heirs. One benefit of the reverse mortgage is that it is a non-recourse loan so if the loan balance ever exceeds the home’s value, you or your heirs will never be responsible to pay the difference. This is one of the best features separating a reverse mortgage from a traditional mortgage. If you pass away with a traditional mortgage and the loan balance is greater than the value of the home, the entire loan balance is still due and could be collected from your estate, eating into any possible inheritance for your heirs.
- Professional Advice: Consult with your financial advisor, reverse mortgage specialist, and legal professional who can provide personalized guidance based on your individual financial situations and goals.
- Research and Education: Thoroughly research and get educated about reverse mortgages for purchase. By reading this blog, it shows you are on the right track!
Carefully weigh the pros and cons of buying a house with a reverse mortgage and consider how it fits into your overall financial and lifestyle plans. It’s important to make an informed decision that aligns with your individual circumstances and goals. If you desire to live your retirement in a new home with no monthly mortgage payments, a reverse mortgage sounds like a good fit!