Reverse Mortgages Designed To Help Older Homeowners
When a homeowner turns 62 years of age, they may want to learn what is a reversed mortgage. It is a special type of loan. It enables homeowners in this age bracket to convert a portion of their home’s equity into cash. The homeowner does not have to repay the loan until their home is no longer their principal residence, or they fail to meet their mortgage obligations. It was designed as a way to grant retirees with limited income access to the value of their home. There are no restrictions on how cash received from a reverse mortgage can be used.
In order for a person to qualify for a reverse mortgage, a homeowner must have their home be their primary residence. Second homes and investment properties won’t qualify for a reverse mortgage. The borrower must also be at least 62 years old. Currently, a spouse who is younger than 62 at the time of the origination of the reverse mortgage will qualify if their spouse passed away and was of qualifying age. This will enable the surviving spouse to remain living in the home.
There are now guidelines in place requiring individuals who apply for a reverse mortgage to have a financial assessment. The financial assessment is to determine if the borrower has the willingness and financial ability to remain current with home insurance and property taxes. A lender will want to know about a borrower’s residual income after covering monthly expenses. A homeowner must also be current on their installment debt payments and more. There are no escrow accounts involved with a homeowner getting a reverse mortgage. Property taxes and insurance remain the responsibility of the homeowner in most cases.
When a homeowner receives a reverse mortgage, there are two ongoing costs they will be required to pay. Annual homeowners insurance will be required. This does not need to be paid out of pocket. It is something that may be permitted to accrue over time and be added onto the loan balance. Some lenders require payment of a servicing fee and others do not. Some lenders charge a servicing fee to cover the cost of servicing the reverse mortgage. This fee may also be permitted to accrue over time and be added onto the loan balance.
Life Expectancy Set Aside (LESA)
If a homeowner does not meet the financial requirements for residual income or credit, the lender may require a LESA be put in place before the loan is approved. This is a financial tool that keeps a portion of the funds associated with the reverse mortgage benefit. It is used to pay the insurance and property taxes during the homeowner’s remaining life. The purpose of LESA is to make certain there is no default on the property because of nonpayment of homeowner’s insurance and property taxes.
There are different ways a homeowner can receive funds from a reverse mortgage. They could receive equal monthly payments as long as their home remains their primary residence. Equal monthly payments for a fixed period of time is an option. It’s also possible to receive payment as a line of credit. Some homeowner’s get their reverse mortgage payment as a combination of monthly payments and a line of credit. Its also possible to have a combination of line of credit and monthly payments for a fixed period of time determined by the lender.