Get the real answers about reverse mortgage requirements and the common misconceptions most people have
More and more mature Americans are looking into reverse mortgages these days. For homeowners ages 62 and up, a reverse mortgage can be an excellent way to receive extra cash flow to help cover expenses or improve one’s quality of life. Over the years we have found that it’s easy for people to get confused about reverse mortgages.
- The lending institution actually owns the house in a reverse mortgage arrangement. This is not true. Borrowers still maintain ownership of the home under a reverse mortgage, just like with a conventional mortgage. But instead of the homeowner paying off the mortgage with monthly payments, he or she receives money periodically based on the equity that has been put into the home over many years. Because there is no change in title possession, homeowners must still pay property taxes, keep up with repairs, and maintain proper insurance on their home.
- Under a reverse mortgage, a homeowner will lose his or her home. Exactly the opposite is true. If homeowners remain compliant with the terms of the reverse mortgage (such as not renting the home out or living elsewhere for over six months in a given year), then they can remain in the home for as long as they live or until they leave or sell it.
- Homeowners can’t qualify for a reverse mortgage if they don’t meet certain income requirements. There are nominal income requirements for a reverse mortgage. Individuals must also meet the age requirement and have enough equity in the home in order to qualify. Whether a homeowner gets Social Security benefits, receives a pension or 401(k) distributions, profits from investments, or has no money coming in at all, the status of the person’s reverse mortgage application will not be affected.
- A reverse mortgage may affect seniors’ Social Security or Medicare benefits. In most cases, these entitlement programs will not be affected by funds received as a part of a reverse mortgage. However, the payment might affect the status of a person’s Medicaid eligibility if the individual gets more than $2,000 ($3,000 for a couple) in a calendar month and does not spend it by the end of that month. Reverse mortgage money may also influence a senior’s status under some Federal Supplemental Security Income or state entitlement programs.
- A conventional mortgage must be entirely paid off in order for a homeowner to qualify for a reverse mortgage. Homeowners 62 and over can still obtain a reverse mortgage even if they owe some money on their original mortgage. However, any funds received from a reverse mortgage must first be used to repay the conventional mortgage. For example, if a homeowner qualifies for $100,000 under a reverse mortgage but still has $25,000 remaining on the home’s original mortgage, he or she will receive just $75,000 in payments.
- Under a reverse mortgage, the homeowner faces numerous restrictions on how he or she can spend the money. Funds received from a reverse mortgage can be used for anything. A homeowner can spend the money on medical bills, prescription drugs, home repairs, a new vehicle or a luxury item. The money can be allocated toward repayment of credit card debt, other loans or anything that the homeowner desires. And a person can set aside reverse mortgage funding for the purpose of future long-term care, additional investing or even a college fund for his or her grandchildren.
- A homeowner could be stuck with a huge bill at the end of a reverse mortgage if the value of the home depreciates. A reverse mortgage is known as a “non-recourse” loan, which means that the lender cannot demand a larger amount than the value of the home at the time of disposition. In other words, if the market value of the home falls below the amount of debt owed on it (a conventional mortgage would be called “upside down” under these conditions), or if the occupant outlives the life of reverse mortgage, then he or she is only required pay back an amount equal to the value of the home. This is actually one of the main advantages of a reverse mortgage.