Americans are not optimistic about retirement. Most Gen Xers nearing retirement age have less than $100,000 saved, which is far from the $550,000 experts recommend. As the cost of living rises, retirees should seek out ways to supplement their retirement income.
A reverse mortgage program is one such income option for homeowners approaching retirement. They allow homeowners to convert the equity they’ve built on their home into cash without selling the home. Lenders distribute loan proceeds in cash to the homeowner, and the loan only needs to be repaid when the property is sold.
There are a few types of reverse mortgage programs, but one of the most popular is the Home Equity Conversion Mortgage (HECM). Here are eight things retirees need to know about the HECM process.
Home equity conversion mortgages are insured by the Federal Housing Association, making them popular among borrowers and lenders. If a mortgage is government insured, it means the government will cover any payment amount if the borrower is unable to pay in full.
Government-insured mortgages offer extra security that appeals to mortgage lenders. Government insurance also protects the borrower against the housing market’s volatility.
The minimum age for applying for a HECM loan is 62. While this is younger than the age of eligibility for some other retirement benefits, it puts HECMs out of reach for younger Gen Xers or older Millennials trying to retire early.
This helps the program achieve its purpose of providing additional income to senior homeowners and retirees. At 62, many will have enough equity built on their homes to reap the full benefits of this program without having to sell and move during retirement.
Age requirements aside, your home itself needs to meet a few requirements before you qualify for a HECM.
The first major requirement is equity. Most lenders require you to have a certain amount of equity built on your home, typically around 50%. With so few people owning their homes outright in this inflated housing market, you can be eligible for a HECM with or without a mortgage.
The home needs to be the primary residence of the borrower to qualify for a HECM. The borrower also must be able to pay property taxes and any fees associated with the HECM.
Unlike many private mortgages, HECMs are non-recourse loans. This means that you as the borrower or your heirs will never be responsible for paying a mortgage that exceeds the value of the home. Instead, the FHA will pay the difference to your lender.
Say for example you took out a HECM on your home but decided to move into a retirement community. If the sale price isn’t enough to cover the leftover balance on the loan, the FHA will pay your lender.
Acquiring a HECM, like any type of refinancing, can quickly become expensive. One of the major downsides of a HECM is the fees that add up throughout the application process and the potential accrued interest on the loan.
Interest on your mortgage can quickly build up if you’re not using your equity disbursement to make minimum payments. Your lender may also require you to pay closing costs as you would for any other mortgage. Tack on the fees from the required counseling sessions and application preparation and you’re looking at a sizable mortgage bill.
Speaking of fees, the FHA requires all HECM applicants to attend reverse mortgage counseling before they even apply for their reverse mortgage. This is part of the government’s way of ensuring that loan applicants understand how reverse mortgages work before starting the approval process.
. Applicants also have to pay for this counseling session themselves, which can cost upwards of $90. The fee and counseling include some required reading and can take place in person or over the phone. The mandatory counseling doesn’t guarantee you’ll be approved, though
A HECM provides the most options for the disbursement of funds from the lender. Other types of reverse mortgage programs, like home equity loans, are often exclusively paid out in a lump sum. HECM borrowers have three main options for disbursement of funds, which are:
These distribution options are helpful for retirees who might need more flexibility over their finances. You can use monthly payments to supplement retirement income or take the lump sum for a larger project. Borrowers can also reinvest the funds into home maintenance or upgrades.
The federal government requires lenders to evaluate a potential borrower’s finances to ensure they are financially prepared for the costs of a HECM. The lending bank will conduct the assessment and examine the borrowers:
This might seem excessive, but this type of financial assessment assures the government that you as a homeowner will be able to cover the variety of expenses that come with homeownership. A lack of financial preparedness could mean financial trouble for you or your heirs down the line. Lenders also have the option to withhold some of the equity distributions to help cover costs like property taxes and homeowners insurance.
The rising cost of living has made homeownership and retirement more expensive. Government-insured Home Equity Conversion Mortgages offer a way for senior homeowners to access the equity on their homes without having to move or sell.
These mortgages come with some specific eligibility requirements for homes, and borrowers must complete mandatory counseling and financial assessments before qualifying. Once qualified, borrowers will be able to choose how they receive and spend their equity disbursements. The requirements mean that borrowers benefit from the increased security of government-insured loans.