To qualify for a reverse mortgage, the primary homeowner must be at least 62 years old. However, if you are younger than 62, you might still be eligible if you meet other specific criteria, such as:
There are three main types of reverse mortgages:
Proprietary Reverse Mortgages: These are private loans not supported by government entities. They are often suitable for homeowners with high-valued homes, as they can provide larger loan advances compared to other types of reverse mortgages.
Single-Purpose Mortgages: These are less common and typically offered by non-profit organizations or a few state and local government agencies. Borrowers can use the funds for only one specific purpose, as defined by the lender.
Home Equity Conversion Mortgages (HECMs): These are the most popular reverse mortgages, insured by the U.S. Department of Housing and Urban Development (HUD). While HECMs often come with higher upfront costs, the funds can be used for any purpose. Borrowers are required to undergo counseling with a HUD-approved counselor before closing on the loan to help them fully understand how the reverse mortgage works.
There are several ways to receive proceeds from a reverse mortgage:
Lump Sum: Receive the entire loan amount at once when the loan closes. This option comes with a fixed interest rate, unlike other methods which have adjustable rates.
Equal Monthly Payments (Annuity): The lender makes steady monthly payments to the borrower as long as at least one borrower lives in the home as their principal residence. This is also referred to as a tenure plan.
Term Payments: The lender provides equal monthly payments for a set period chosen by the borrower, such as 10 years.
Line of Credit: Money is available for the homeowner to borrow as needed, with interest paid only on the amount actually borrowed from the line of credit.
Equal Monthly Payments Plus a Line of Credit: The lender gives steady monthly payments as long as at least one borrower occupies the home as a principal residence. If the borrower needs additional funds, they can access the line of credit.
Term Payments Plus a Line of Credit: The lender provides equal monthly payments for a set period, such as 10 years. If the borrower requires more funds during or after that period, they can access the line of credit.
A reverse mortgage offers several benefits:
If you think a reverse mortgage is the right choice for you, the application process is similar to that of a traditional home equity loan. After meeting the eligibility criteria, it’s important to compare different offers to find the best deal.
The California lender will review your financial situation, which includes checking your credit history, any outstanding mortgages, and ensuring that your property is free of active liens. You’ll also need to show that you can cover ongoing housing costs and arrange for a property appraisal to determine its value and how much you can borrow.
Once you close on the loan, you have a right of rescission, meaning you can cancel the mortgage without penalty. To exercise this right, you must notify your lender in writing within three business days after closing. Be sure to keep copies of any correspondence and send your cancellation letter via certified mail with a return receipt. Afterward, the lender has 20 days to refund any fees you’ve paid for the reverse mortgage.
The amount of funds available through a reverse mortgage is primarily based on the age of the youngest spouse and the appraised value of the home. Typically, the loan-to-value (LTV) ratio for a reverse mortgage is 40-70% of the appraised value, depending on your age.
The reverse mortgage becomes due when:
Your heirs/estate typically have up to six months to refinance the home if they wish to keep it or up to 12 months to sell the property.
Yes. Although reverse mortgages don’t require monthly payments, borrowers can make voluntary partial or full payments. There is no penalty for paying down or paying off the loan early. However, if the loan is fixed-rate, any funds you submit for prepayment cannot be re-borrowed during the life of the loan, and the revolving credit feature does not apply.
You can raise your credit score by paying your bills on time, reducing your credit balances, and avoiding frequent applications for new credit.
Reverse mortgages can provide essential funds for seniors whose wealth is primarily tied up in their home’s value. However, they may not be suitable for everyone. A reverse mortgage isn’t ideal if you cannot cover the costs associated with maintaining the home, even without a monthly mortgage payment. Additionally, if you pass away or the home is no longer your primary residence for more than 12 months, the loan will become due, and the home must either be sold or refinanced to repay the loan.
Even when issued by reputable lenders, reverse mortgages are complex products. California borrowers should thoroughly educate themselves to make the best choice for utilizing their home equity.
