What is the minimum credit score required to qualify for a reverse mortgage?

One of the most surprising aspects of a reverse mortgage is that your credit history is generally irrelevant. People with bad credit or even no credit can qualify for a reverse mortgage just as easy as someone with perfect credit, with no difference in interest rates.

While you're probably waiting for a catch, there is none. That's because a reverse mortgage is actually a loan being made against an existing asset with a measurable value. The asset, not your credit history, is offered up as proof that the loan can be repaid. In a worst-case scenario, the home can be sold by the lender if there is a failure to repay.

Giving another layer of protection to your lender, which further removes any need by you to appear credit worthy, is the fact that the maximum initial loan amount is usually set at approximately 50% of your home's value. It's on this amount that the bank's monthly payout to you is calculated. This helps to ensure that most homes will have more than enough home equity left to payoff the loan if it needs to be sold.

That's not to say that having a reverse mortgage won't affect your credit. It's considered a loan like any other on your credit report and will likely put some downward pressure on your credit score. This in turn may affect your ability to get additional loans from other sources in the future.

Are reverse mortgages safe?

If you're like most Americans, you know countless people with a traditional mortgage, but no one with a reverse mortgage. In fact, the only time most of us hear anything about people with reverse mortgages is when someone gets taken to the cleaners by a less than reputable lender. That of course, leaves many older homeowners wary of using a reverse mortgage, even if such a loan would bring substantially greater financial freedom.

Truthfully, when it comes to the safety of a reverse mortgage, most people's fears are overblown. In reality, most reverse mortgages in the United States are backed by the Federal Housing Administration, which places stringent rules on lenders and ample protections on the borrower. If anything, the only true risk associated with a reverse mortgage is that the lender will have to pay out too much money and won't be able to make a profit for themselves. In fact, the FHA sponsoring of reverse mortgages is actually to protect lenders from losing money because they are forced to pay out too much to a borrower over the course of the loan.

But, just because a FHA loan from one of the top reverse mortgage lenders carries no real risk, doesn't mean that it is always the best choice. Using a reverse mortgage requires you to think through a variety of emotional and cost factors such as how long you'll live in the home, what your heirs will do when you die, and whether or not a reverse mortgage will affect certain government benefits you receive. Not surprisingly, the Federal Housing Administration makes all borrowers using its program complete a counseling session to make sure they fully understand these various facets.

What types of properties qualify for a reverse mortgage?

There are fairly strict rules about the types of properties that someone can borrow against with a reverse mortgage. Of course, the most basic rule for all reverse mortgages is that the person applying for the mortgage must be the owner and have little or no existing debt on the home. Additionally, most reverse mortgages require the property to be the primary residence of the borrower.

In addition to these basic requirements, the Federal Housing Administration generally limits the type of properties to the following: single-family homes, town homes, and condominiums (if FHA approved). Any property being considered for a reverse mortgage will also be required to have a valid appraisal and be current on all property taxes before the loan is issued.

Multiple-unit homes such as a duplex may also be eligible for a reverse mortgage as long as the borrower lives in one of the units. Such properties may have no more than four units to remain eligible for a FHA reverse mortgage.

Additionally, mobile homes are also eligible subject to certain requirements such as having a minimum square footage of 400 square feet, being classified as real estate for tax purposes, and having never been installed at a previous location.

Where can I find the best reverse mortgage rates?

In short, the best way to shop for reverse mortgage rates is always to talk directly to potential lenders. Since interest rates can change quickly, no borrower should rely solely on the internet to determine where to find the best deal. With that said, it's important to understand that reverse mortgage rates operate a little differently than most people are used to with the traditional mortgage market.

Thhe first thing to understand when it comes to the overall market for reverse mortgage rates is that there are very few lenders compared to the traditional mortgage market. This means that "deals" on rates don't really exist like they do with other lending products. In fact, reverse mortgage rates are usually based on a simple formula that adds a lender's profit margin to a base interest rate (currently the 10-Year Treasury Note rate) to arrive at a borrower's overall interest rate. The typical profit margin added to the loan is usually around 2% industry-wide, meaning all lenders essentially offer the same reverse mortgage rate.

Second, the department of Housing and Urban Development (HUD) sets a "floor" on how low this rate can drop. This prevents a borrower from receiving a payment that would quickly put the lender at risk of being owed more than a home is potentially worth.
This interest rate floor can create a unique situation when interest rates are unusually low, causing the total of the 10-Year Treasury Note rate and the lender's profit margin to actually be below the HUD-mandated base rate. Such an environment leaves all lenders no choice but to offer the HUD-mandated minimum interest rate, effectively removing any ability to find a "best" reverse mortgage rate.

Are there different monthly payment options for a reverse mortgage?

While non-FHA lenders may offer other options, there are four primary payment options available under the Home Equity Conversion Mortgage (HECM) program. It's important to fully understand each of these options before making a decision, since the largest monthly payments may also have time limits attached to them.

A tenure payment is the most classic of the payment options and the one most people think of when they talk about reverse mortgages. Under a tenure payment program, the owners of the home receive an equal monthly payment for as long as they live in the house. Of all the reverse mortgage payment options, this one usually results in the lowest monthly payment to the borrower.

Term payments offer a slightly larger monthly payment that terminates after a certain number of months. This payment plan is ideal for seniors who need a monthly income stream for a short period of time until another income stream, such as Social Security or an employer pension plan kick in.

Modified tenure payments provide a monthly income stream for as long as the owner lives in the house. But, this payment plan also provides access to a lump sum of cash up front that can be used to pay off other bills, take a vacation, etc. Often times, a modified plan is used to help pay the reverse mortgage closing costs when the borrower doesn't have any other money available.

Modified term payments also provide the borrower with some upfront cash, but only continue for a specified amount of years. Due to the finite number of months, modified term payment plans pay more each month than modified tenure plans.

What is a HECM?

HECM is the official abbreviation for the most popular type of reverse mortgage program in the country, the Home Equity Conversion Mortgage. The standard HECM is backed by the Federal Housing Administration, but offered through participating lending institutions.

In a HECM reverse mortgage, the borrower receives a monthly check based on the value of their home, their age, and the loan options they've selected. Though this monthly check is often referred to as "monthly income," it would be more accurate to view it as a small loan made each month against the value of one's home. There are no restrictions on how this money may be spent, making reverse mortgages an important consideration for cash-strapped seniors.

While an HECM reverse mortgage can be obtained without having to show any credit worthiness at all, they are subject to limitations on the borrower's age, the amount of the loan, and the type of property used as collateral. They are also subject to sizeable upfront fees and closing costs, making them a poor choice for individuals who do not plan to stay in their home for at least five years.

In addition to HECM reverse mortgages, there are a number of other, less popular reverse mortgage programs available through other sources. While some of these are offered through state-run organizations, others are offered by second-tier lenders who should be investigated thoroughly before using.

Is there such a thing as a "jumbo" reverse mortgage?

Since this essentially limits homeowners with very expensive homes from accessing equity above these limits, many seniors have begun asking about the possibility of a "jumbo reverse mortgage." Like their traditional forward mortgage counterpart, a jumbo reverse mortgage is one that exceeds the limits for the most popular government programs and is funded by alternative programs or by the banks themselves.

Thankfully, more and more banks have begun offering jumbo reverse mortgages, some with maximum loan amounts in the multi-million dollar range. Though these loans can prove costly for borrowers who only use them for a short period of time, they are a boon to cash-strapped seniors whose home has appreciated tremendously. As with all reverse mortgages, the use of a jumbo reverse mortgage allows the borrower to create a stream of monthly payments that they can use to supplement their spending needs, including paying down their other existing mortgage obligations.

Since a jumbo reverse mortgage does not fall under the same lending guidelines as the more common HECM loan from the FHA, it's crucial to make sure you understand all the fine print behind your loan. Additionally, all reverse mortgage borrowers, especially those utilizing a jumbo reverse mortgage, should check with an attorney or tax expert on the estate tax implications of using a reverse mortgage.

What is the maximum loan amount for a reverse mortgage?

Reverse mortgages are surprisingly less complicated than most people imagine, except perhaps when it comes to calculating the maximum loan amount available to a borrower. Unlike traditional mortgages, whose limits might only be affected by geographical location and down payment, the maximum reverse mortgage amount is calculated on a combination of numerous intertwined factors.

First, reverse mortgages are subject to an overall maximum that is set by the Federal Housing Administration (FHA) if the reverse mortgage is backed by their agency. Since 90% of all reverse mortgages are FHA-insured, most loans will be subject to this cap. The current maximum reverse mortgage amount set by the FHA is $417,000, adjusted for location.

The FHA reverse mortgage maximum is just the beginning however. From this point, the lender begins figuring in a few other key factors. Specifically, the reverse mortgage maximum amount is adjusted for the age of the borrower, whether or not there is more than one borrower (such as a couple), and finally by whether or not there is any existing loans or lines of credit against the house.

Given all these adjustments, most reverse mortgages maximums fall somewhere between 25-50% of a home's available equity. Of course, once the maximum reverse mortgage loan amount in determined, the borrower then has to choose between multiple payment options. Ultimately, to get the best idea of the size of a reverse mortgage monthly payout, it's best to use one of the online reverse mortgage calculators available through most lenders' sites.

What is the minimum age requirement for a reverse mortgage?

In theory, there doesn't need to be a minimum age requirement for a lender to issue a reverse mortgage. However, from a practical point of view, the minimum age for virtually every legitimate reverse mortgage product is going to be 62 years old.

First of all, since a reverse mortgage lender must continue to pay out on a traditional reverse mortgage for as long as the borrower lives in the house, they're going to prefer as old of a borrower as possible. If they issue a reverse mortgage to too young of a person, there's a good chance the lender will lose money on the deal by having to pay out for an extraordinarily long period of time. Naturally, life expectancy estimates play a huge part in determining what the minimum age and maximum payment for a reverse mortgage will be.

Second, 90% of all new reverse mortgages are backed by the Federal Housing Administration (FHA) to protect the lender against a home selling for less than is owed. The FHA, in their effort to find a median age that benefits both consumers and lenders, has set their minimum cutoff at age 62. This means that virtually every reverse mortgage lender out there requires a borrower to be at least 62 years old.

If you find a reverse mortgage lender that offers you a loan at anything less than age 62, especially if you are substantially younger, you'll want to take a real close look at the fine print. Chances are, such a lender is either taking a huge risk, or forcing you to take one.

What is reverse mortgage counseling?

Somewhere between the notion that a reverse mortgages is risky enough to require counseling and the idea of having to sit through some type of workshop, many potential seniors automatically look to other options. Thankfully, reverse mortgage counseling is actually a quick and easy process that indicates the extent to which the FHA has gone to minimize risk for borrowers.

Reverse mortgage counseling is not meant to talk a borrower out of a mortgage or warn them of hidden risks, but rather to simply educate them about something that most people have no working knowledge of. In fact, reverse mortgage counseling is far more like browsing the owner's manual for a new car than anything else.

While not every borrower is required to receive reverse mortgage counseling, any borrower using the FHA's Home Equity Conversion Mortgage (HECM) is. Since this mortgage program accounts for 90% of all reverse mortgages made, there's a good chance you'll be required to complete reverse mortgage counseling if you are considering one of these loans.

Reverse mortgage counseling is offered through FHA-approved providers and generally runs about one hour in length. The entire counseling session usually costs somewhere between $50 - $100 and can be completed online, over the phone, or in person. To help you find a list of non-profit reverse mortgage counselors in your area, you can use HUD's interactive directory.

What is a reverse mortgage insurance premium?

With traditional forward mortgages, this mortgage insurance protects the lender against a loss on a foreclosed property that's sold for less than the In general, mortgage insurance protects a lender against a loss from a "loan gone bad." outstanding balance, usually stemming from a buyer's inability to pay.

On a reverse mortgage however, the mortgage insurance is meant primarily to protect the lender in case the buyer lives long enough that the monthly payouts they've received exceed the value of the home when eventually sold. Thus, the "mortgage insurance premium" on a reverse mortgage is the cost of a specialized insurance policy to protect reverse mortgage lenders against paying out too much.

Currently, reverse mortgage borrowers are required to pay an upfront premium equal to 2% of the maximum loan amount, due at closing. Additionally, borrowers are required to pay a monthly premium of .50% (one half of one percent) of the outstanding balance, which grows over time.

Unlike traditional PMI on forward mortgages, the reverse mortgage premium is unavoidable and will remain in place as long as the borrower uses the reverse mortgage. This can represents a significant cost compared to the loan payout received and needs to be evaluated carefully before borrowing.

What is a reverse mortgage servicing fee?

A reverse mortgage servicing fee is monthly fee charged to reverse mortgage borrowers to cover the administrative costs of serving your account. This fee would typically cover lender costs including monthly statements, required tax notices, maintaining records, etc.
Most servicing fees normally range between $30-35 per month, limited by a government imposed maximum amount.

It's easy for borrowers to overlook the significance of this cost when choosing between reverse mortgage lenders, due to its relatively small size and the fact that it can be added to your balance instead of paid out of pocket. However, these $300 - $350 in annual fees can quickly add up to thousands of dollars that are eventually subtracted from the sale proceeds of your home.

Most reverse mortgage lenders and programs are required to fully disclose these fees up front and before closing. Be sure to ask for an estimate of this amount in advance so you can shop around and find the best reverse mortgage lender to suit your needs.

Can I change my reverse mortgage payment plan?

From time to time, a reverse mortgage borrower may decide that they need to change the size of their monthly payment or may even need access to a larger amount of cash in a one-time installment. Thankfully, most reverse mortgage plans allow a borrower to change their payout option for a minimal fee and with minimal restrictions.

The most important requirement in changing your reverse mortgage payout option is that you have sufficient equity left in your home to meet the new obligation. In other words, if your home has no equity left in it, you won't be able to shift to a payment plan that pays you more than you're currently receiving.

Second, even if your home does have equity, changes in your payment will be limited by how close to your maximum loan amount you currently are. But, if a borrower has both substantial equity and substantial room to go before they hit their maximum mortgage amount, they'd be able to increase their payment significantly or take out a larger lump sum.

Under most reverse mortgage programs, the lender may charge a reasonable fee to adjust a borrower's payment plan. The current limit on this fee for all FHA-backed reverse mortgages is $20.

Is there rules against using reverse mortgage proceeds to purchase long-term care insurance or annuities?

As far as borrowers are concerned, there are no limitations on how the funds from a reverse mortgage may be used. A borrower may use their monthly payments to purchase insurance, invest for retirement, pay off other debts, or for general living and leisure expenses.

There are rules however, about the type of financial products a lender or their associates may recommend to you in conjunction with a reverse mortgage secured through their company. Specifically, a reverse mortgage lender may not require you to purchase or receive compensation for the sale of insurance products such as long-term care policies or annuities, with the proceeds of a loan made through their company.

Generally, it's advisable for seniors considering the purchase of these products with reverse mortgage proceeds to seek quotes from unrelated companies as well as second opinions from their trusted advisors (accountant, attorney, financial planner, etc.)

Will my social security, medicare, or other retirement benefits be affected by a reverse mortgage?

A natural concern for many retirees, especially those on very tight budgets, is whether a reverse mortgage will affect the monthly benefits they receive from various government and employer sponsored plans. Particularly, will the receipt of a reverse mortgage payout cause their payments from other programs to be disqualified or even discontinued?

The good news for most seniors is that reverse mortgages have no effect on the core government and retirement programs that most individuals rely on during their retirement years. Both basic Social Security and Medicare are "entitlement" programs, which means you're eligible to receive them based solely on your history of paying into those systems. The same is true for virtually every employer sponsored pension plan out there.

But, two programs designed to aid very low-income individuals could be affected by borrowing money through a reverse a mortgage. The Medicaid (or Medical) program and the Supplemental Social Security program, which are designed to provide health care and income to low-income and disabled seniors, both contain provisions that may be triggered by a reverse mortgage payment. If you participate in either of these programs, it's crucial that you contact your local benefits office to determine the exact consequences of a taking out a reverse mortgage.

Can a reverse mortgage lender ever take my home away from me?

Under any legitimate reverse mortgage, your lender cannot simply seize your house and sell it, simply because you owe more than the home is actually worth. That's one of the things that makes a reverse mortgage attractive to individuals who need the cash flow a reverse mortgage can provide, especially if they have little interest in leaving the home to their heirs after their death.

Even after your death, a legitimate reverse mortgage lender does not simply seize your home and sell it. Rather, they give your heirs the option of paying off any existing balance outright, or refinancing it and assuming the payments.

However, your lender can seize your home if you fail to stay current on your property tax and homeowner's insurance bills. While that may sound like a harsh step to take, it's an important way for the lender to protect their interest in the home, which is the collateral for the large amounts of money you're borrowing.

Many lenders, to help ensure borrowers stay current on their obligations, require an "escrow account" to be set up. These accounts set aside a portion of your future property taxes and insurance premiums each month out of each new reverse mortgage payment.

What is TALC and what does it have to do with reverse mortgages?

One of the primary drawbacks to using a reverse mortgage is that the costs (relative to the benefit received) may be higher than many people realize. This is especially true when a home is sold or refinanced within just a few years of a reverse mortgage being issued. This higher cost doesn't mean that a reverse mortgage shouldn't be used, but rather that seniors need to understand the full extent of potential costs prior to making a decision to borrow. That's where the Total Annual Loan Cost calculation, or TALC, comes in handy.

The TALC calculation is meant to help the borrower understand the potential costs associated with a reverse mortgage, expressed as a percentage, across a variety of potential scenarios. Not only does this help the borrower make an educated decision about whether or not a reverse mortgage is right for them, but it also helps them to compare different reverse mortgages against one another.

Under the current law, the TALC is required to compute the annual costs based on the reverse mortgage being held for two years, for the borrower's life expectancy, and for a time period that equals 40% beyond the borrower's life expectancy. Further, the TALC calculation incorporates the effects on a borrower's cost of their home appreciating at 0%, 4%, and 8% annual rate. Ultimately, the lower the TALC percentage, the better the deal it represents to the borrower.

Can I deduct the interest on my reverse mortgage?

As with all tax questions pertaining to your unique situation, you should always be sure to consult your tax advisor. In general though, reverse mortgage interest is deductible, but not necessarily in the way that most taxpayers are used to.

Typically, with a standard mortgage, a portion of the payment you make each month is designated as interest and is therefore deductible on your tax return. A reverse mortgage however, actually pays you, with the interest on the borrowed amount being added to your outstanding balance each month.

Since your loan balance (including this interest) is not paid off until the home is eventually sold or refinanced, the IRS has ruled that it's also not deductible until that time. In other words, the IRS requires you to deduct all the interest added to your loan in the year you actually terminate the loan. This deduction may further limited by the Home Equity Deduction rules, which place limits on how much home equity debt used for personal expenses can be deducted.

Borrowers in high income tax brackets, or those needing the deduction on each year's tax return, will want to closely evaluate using a home equity line of credit (HELOC) over a reverse mortgage.

What is the difference between a HUD reverse mortgage and a FHA reverse mortgage?

There's a lot of unnecessary confusion surrounding the two most frequently used reverse mortgage abbreviations, HUD and FHA. In reality, a HUD reverse mortgage and a FHA reverse mortgage are simply the same thing, with different people preferring different terminology. The origin of the two terms arises from the fact that the Federal Housing Administration (FHA) is actually a department within the U.S. Department of Housing and Urban Development (HUD).

The Home Equity Conversion Mortgage (HECM) program, which accounts for roughly 90% of all new reverse mortgages issued, is an FHA administered program. Thus, when people mention a FHA reverse mortgage, they're talking about this program. But because the FHA is an organization within the U.S. Department of Housing and Urban Development (HUD), this effectively means that all FHA reverse mortgages are ultimately backed by HUD. Naturally, these FHA reverse mortgages have picked up the label of "HUD reverse mortgages" by some consumers and lenders.

Ensuring that confusion between these two identical terms continues for the foreseeable future is the fact that both terms, HUD and FHA, appear at different places throughout the reverse mortgage paperwork process.

Why is a reverse mortgage a "non-recourse" loan?

Many potential borrowers are intimidated by the term "non-recourse loan," fearing that it means they'd have limited options in the event something goes wrong. With reverse mortgages however, the lack of recourse actually puts the lender at risk, not the borrower. In fact, it's this non-recourse feature of the loan that makes a reverse mortgage an exceptionally good deal for the rare person who lives far beyond their life expectancy.

In a non-recourse loan, the only asset that may be seized to pay off the loan is the asset the loan itself backs, hence the lack of "recourse" for the lender. In the case of a non-recourse reverse mortgage, this would mean that the only asset that could be seized by the bank to payoff the mortgage is the house itself, even if the borrower has been paid out hundreds of thousands of dollars more than the home is worth.

It's important to note however, that while a non-recourse loan may protect the borrower's other assets if they walk away from the loan, it does not protect their credit score. A non-recourse loan foreclosure can be just as damaging as recourse loan foreclosure, though the sale of a home after an owner's death is not considered a foreclosure in this sense for credit purposes.