A reverse mortgage is similar to a traditional mortgage and allows homeowners to borrow money using their home as collateral or security for the loan. When you take out a reverse mortgage loan, the title to your home will remain in your name, just like with a traditional loan. However, borrows won’t make monthly mortgage payments with a reverse mortgage loan. It is only repaid when you no longer live in the home.
Reverse Mortgage & Scams
Reverse mortgage loans enable the homeowner to stop making mortgage payments and resume them once they have moved out of their home. However, interests and fees will be added to your loan balance every month, so you will notice your balance continuously increase. Homeowners will also be required to pay both homeowners insurance and property taxes with a reverse mortgage loan. You will be allowed to use the property as your principal residence, but you must keep your home in great condition.
You must remember that if you are considering taking out a reverse mortgage loan it is not considered “free money.” This is because fees and interest are both added to your loan balance every month. This means that the equity in your home will decrease as the balance of your loan increases.
You must also be on alert for scams that are related to reverse mortgages, so you don’t fall victim.
There are many scams including:
- Contractor scams- You should be aware of contractors who may contact you about applying for a reverse mortgage loan to cover repair expenses for your home. It is possible that these are scams. Avoid getting pressured into applying for a reverse mortgage loan.
- Scams against veterans- If you are a veteran, you should know that The Department of Veterans Affairs does not offer any reverse mortgage loans. You may run into many mortgage ads that offer false promises targeting veterans with special deals. These deals may only get you approved with confirmed VA status, or they may offer a no-payment reverse mortgage loan offer to attract older veterans.
Cancelling a Reverse Mortgage
You typically have three business days to cancel a reverse mortgage loan. Cancellation of the loan will close any deal no matter the reason without any penalty towards you. You have a right to rescission. However, you must contact the lender in writing by certified mail only. You should ask for a return receipt so that you have proof in writing of when you sent the letter and when it was received by the lender.
Be sure to hang on to all copies regarding communication between you and your lender. Following your cancellation, the lender has up to 20 days to return any money you put toward the financing of the reverse mortgage loan. If you feel that there is a reason to cancel your loan following the three-day period, you should reach out to an attorney to see if you have a right to cancel.
Reverse Mortgage Eligibility
The homeowner must be at least 62 years of age that mortgaged the home in order to be eligible for a reverse mortgage loan. Borrows are only allowed to borrow money against their primary residence and must either own their property outright, or have at least 50% equity with at least one primary lien.
Borrowers are not allowed to have a second lien on their home or a second mortgage. Additionally, if the borrower doesn’t own their home outright, they will have to pay off any balance on their existing mortgage using the funds they received from their reverse mortgage loan.
There are also only certain eligible properties that may qualify for a reverse mortgage loan including:
- Single-family homes
- Multi-unit homes
- Manufactured homes that were built after June 1976
- Townhomes or condos
If you happen to get approved for a reverse mortgage, you should know that there are no limits on the amount you can borrow. Such limits and restrictions will be set by lenders individually.
However, you should know that when applying for a government-backed reverse mortgage program, you will not be allowed to borrow more than the appraised value of your home or the FHA maximum claim amount which is $765,000.
You will only be able to borrow up to a portion of the value of your home. Half of your home’s value will be used for collateral on loan expenses and used in the event the value of your home declines. Additionally, any set borrowing limits can be adjusted depending on your age and credit.
Most reverse mortgage loans are considered government-insured loans. These loans come with rules that traditional mortgages do not have since they are insured by the government. This includes the underwriting process, criteria for eligibility, funding options, and restrictions.
The different types of reverse mortgage loans include:
- Single-purpose revere mortgage-
- Home equity conversion mortgage
- Proprietary reverse mortgage
Pros & Cons of Reverse Mortgages
- Provides you with cash to cover medical expenses later in life
- Costs can be rolled into the balance
- Competitive interest rates
- No need to repay the loan out of your own pocket
- Must own your property outright or have at least half of the equity to qualify
- Must avoid scams
- Must obtain insurance
- Must be repaid for heirs to inherit your property