Reverse mortgages have become more and more popular as the baby boomer generation ages into retirement. Unlike a traditional mortgage, a reverse mortgage uses your home as collateral against a loan that you can use to supplement your income. However, instead of receiving the proceeds of the loan in one lump sum and making regular monthly installment payments back to the lender, the lender keeps the bulk of the loan proceeds and disperses them to you in monthly allotments. This allows you to use the equity in your home as a way to pay your regular monthly expenses now that your income has become more limited.
Who Qualifies for a Reverse Mortgage?
Now, before you decide that getting a monthly check in the mail is much better than sending one out, it’s important to note that reverse mortgages are a special type of loan program that is designed to target a specific portion of the population. In order to qualify for a reverse mortgage:
- Applicants must be at least 62 years old.
- Applicants can only apply for a reverse mortgage on their primary residence
- Whoever is listed on the deed must be listed on the loan application
- All applicants must meet all of the eligibility requirements before a reverse mortgage will be granted.
- The home must be free of liens, loans or other encumbrances or those items must be low enough to be paid in full with the reverse mortgage loan.
As with any other loan, lenders have internal guidelines that let them determine whether or not you are qualified for a reverse mortgage. The good news is that the qualifying guidelines are pretty low, especially compared to what it takes to get a traditional mortgage in today’s post-recession financial landscape. The main focus is on the value of your home and how much you owe on it.
What Is and Isn't Included in Coverage?
Because a reverse mortgage is a loan, there are a few things that you need to know.
- A reverse mortgage will not include your taxes or homeowners insurance premiums. Unlike traditional mortgages where a portion of your payment goes to make these payments in escrow, you will still need to maintain these items on your home, and make regular payments. You can use the monthly check you get from your lender to pay them, however. If you fail to maintain your property taxes and/or homeowners insurance, your loan will default.
- You will need to be prepared to pay the costs associated with the loan. Reverse mortgages have a variety of associated costs, just like conventional mortgages, and will require the payment of closing costs before the proceeds can be dispersed. These include origination fees, title fees, and so on, just like a traditional mortgage. These fees and costs, commonly known as closing costs, are generally rolled up into the loan and are deducted from the proceeds before they are dispersed to you. However, in order to ensure that you are getting the best deal, you need to know what these fees are and how they will be impacting your monthly check.
All lenders charge fees associated with reverse mortgages and the amounts of these fees are different from lender to lender, making it very important to shop your loan before deciding on a loan provider.