A reverse mortgage is a type of home loan that allows homeowners 62 years of age or older to convert some of the equity in their home into a stream of tax-free income. There are a number of options available when looking for a reverse mortgage. There are non-FHA options, typically known as proprietary reverse mortgages, and there are government insured FHA approved reverse mortgages called a Home Equity Conversion Mortgage (HECM)*.
Be cautious when considering any reverse mortgage that is not FHA insured, and beware of any service or counselor that charges a fee to help connect you to an approved borrower; these services are often scams that take advantage of seniors and seek to charge significant fees for providing a service that can be found elsewhere for little or no charge. Non-FHA mortgages may be absolutely legitimate, and may meet your needs better than an FHA-HECM (for instance if you need to access more equity than the FHA limits will permit), however reverse mortgages can be extremely complex arrangements, and the FHA guidelines provide a measure of oversight that should not be overlooked. As with any significant financial transaction, do your research, and seek the advice of a trusted financial professional.
Features of FHA Reverse Mortgages:
- You do not make monthly payments to the lender as you do with a traditional mortgage or home equity loan
- Remaining equity in your home DOES become an asset of your estate in the event of death
- Proceeds from a reverse mortgage can be taken as a lump sum, through a line of credit, or as payments over time (lifetime or fixed term).
- Proceeds from a reverse mortgage can be used for any purpose
Requirements of FHA Reverse Mortgages:
- Borrower must be age 62 or older
- Residence must be the borrowers primary residence
- Borrower must receive HUD approved counseling prior to loan origination
- Residence must be a single-family home, a 2 to 4-unit home where the borrower occupies one of those units, or a condominium or manufactured home that meets FHA requirements
- You must own your home or have a low mortgage balance that can be paid off by the proceeds of the reverse mortgage
- Residence must be properly maintained
- Hazard Insurance and Property taxes must be kept up to date by homeowner
- Repayment in full is due at the time of death of the borrower, in the event that the home is sold, or if the homeowner fails to adhere to the terms of the mortgage contract (for example failure to pay property taxes or hazard insurance premiums)
- Borrower fails to live in the residence for a twelve (12) consecutive months
The Federal Government provides more information on reverse mortgages and FHA approved lenders on their website:
* In Canada a similar type of vehicle to a reverse mortgage exists called a Canadian Home Income Plan (CHIP). Note that some rules and limitations of a CHIP vary from those of an HECM.