If you’re age 62 or older, you can receive money from your mortgage company by borrowing against the value of your home through a reverse mortgage. The payments you receive along with accrued interest and other charges increase the loan’s balance and decrease your equity in the property.
Most reverse mortgages are insured by the Federal Housing Administration (FHA), as part of its Home Equity Conversion Mortgage (HECM) program. As long as you live in the home as your primary residence, maintain the home, and pay homeowner’s insurance, property taxes, and homeowner’s (sometimes referred to as “HOA” fees) and/or condo association dues (if applicable), the loan does not have to be repaid.
If the property is sold or the last surviving borrower no longer occupies the property or passes away, the loan becomes due and payable. Usually, the home is sold to repay the loan and, if FHA-insured, FHA pays for amounts not fully covered by the sale proceeds.
Although you are provided with mandatory counseling prior to obtaining a reverse mortgage, it’s helpful to review your obligations.
Regardless of whether or not your reverse mortgage proceeds still are available, you are required to:
Pay property-related expenses on time. Property-related expenses include real estate (property) taxes; utilities; homeowner’s insurance (also referred to as “hazard” insurance); homeowner’s association (HOA) fees, and flood insurance premiums (if applicable).
Maintain the property’s condition at the same level it was kept at the time the reverse mortgage loan was obtained.
Live in the property as your primary residence and certify occupancy on an annual basis.
If you fail to meet any of the above requirements, your reverse mortgage will be in default, which could result in foreclosure.
In addition, there are other conditions unique to reverse mortgages:
A reverse mortgage will not automatically transfer to the surviving spouse if he or she is not listed as a borrower on the loan. If the borrower passes away or ceases to occupy the home (such as living in an assisted-living facility) and the surviving spouse is not listed as a borrower on the loan, the loan becomes immediately due. The surviving spouse will have to satisfy the debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property to retain the property or face foreclosure.
With forward mortgages, taxes and insurance are typically escrowed and are part of your monthly payment. But with a reverse mortgage you don’t make a monthly payment, so you must have other arrangements to pay your taxes and insurance for as long as you live in the home. Even if you opted to have money set aside for these expenses when the loan was originated, such arrangements typically only last for a short period of time. After that, you must pay these expenses, so it’s important to make sure you’ve set enough money aside to pay them.