A Guide On How To Qualify For A Reverse Mortgage

Florida is home to more seniors than any other state in the country, with nearly 20% of the population being people who are 65 or older. Unfortunately, after working hard for all their lives, many of these senior citizens find themselves in a difficult financial position after retirement. This could be because their social security income is inadequate to make ends meet, because they face steep medical bills, or because they need to pay for expensive nursing care.

In these circumstances, taking out a reverse mortgage loan is a possible solution. But there are several criteria that must be met to qualify, legal considerations you need to understand, and they are not a suitable solution for everyone. Our comprehensive guide to reverse mortgages in Florida is here to help you assess whether it might be the best solution for you.

What Is a Reverse Mortgage?

A reverse mortgage is a financial agreement where a homeowner relinquishes equity in their home in exchange for routine payments. “Equity” is simply the word used to describe the asset value of your home, so to access its equity while still living in it is a bit like being able to spend the money you’ve made on a sale while still using the item you’ve sold.

In contrast to a normal mortgage, instead of you paying the lender each month, the lender pays you until you sell the house or pass away (or if you have a spouse, until the last surviving of you passes away). The funds which you receive through the loan can be paid to you in a fixed amount each month, paid to you in a lump sum, or distributed as a line of credit. You can also choose to roll over your reverse mortgage credit into an account that allows you to draw on your home equity at will.

These types of loans are typically made to supplement retirement income and should not be a sole means of income for the applicant. Traditionally, these loans are backed by the Federal Housing Administration (FHA) and offer more consumer protections, making them popular in Florida.

Another characteristic of reverse mortgages is that the interest rates are typically lower and have fewer requirements than with a traditional mortgage. However, the closing costs are substantially higher than a standard mortgage.

The loan is repaid when you sell the house and transfer the proceeds to the lender, or when you pass away (your estate must sell the house within a certain period and transfer that portion of the proceeds which equates to the extent of the loan to the lender). Because of both the advantages and disadvantages involved, it is important that you seek the advice of a real estate attorney if you are considering applying for one.

Types of Reverse Mortgages: HECM vs. Proprietary

Home Equity Conversion Mortgage (HECM)

A Home Equity Conversion Mortgage (HECM) is the most common reverse mortgage. HECMs are insured by federal institutions, which makes them more accessible for people who are less well-off. It is the type of mortgage you will apply for if the equity you need or qualify for is below $679,650. The requirements to qualify for a HECM frequently change, so it is important to confirm these requirements with your attorney.

Because HECMs are backed by the FHA, they include some tremendous consumer protections. However, those protections come at a cost in the form of mortgage insurance premiums and other fees, which are detailed later in this guide.

Proprietary Reverse Mortgages

Proprietary reverse mortgages are generally used by people who qualify for and seek access to equity greater than $679,650. The lenders involved in this type of mortgage may be slightly more lenient on certain requirements. To qualify, the main criteria that you will need to meet are the age limit and the ownership/equity requirement. You will also need to demonstrate proof of residual funds for these mortgages, and they have significant upfront costs which you will need to be able to finance.

There are different types of reverse mortgages beyond these two categories, which you can discuss with a reputable broker or a real estate attorney. Keep in mind that discussing this type of mortgage with a reliable and experienced professional can help you make a more informed decision.

Eligibility Requirements for a Reverse Mortgage

In the same way that you need to meet certain eligibility criteria for a traditional mortgage, there is a list of factors that must be met for a reverse mortgage. Whether or not you can qualify for a reverse mortgage depends on several different factors and is best discussed with a mortgage lender and your attorney. Currently, the main requirements are as follows:

1. Age Requirement

You must be over the age of 62. These types of mortgages are only available to those 62 years or older.

2. Primary Residence

You must live in your home for most of the year. Otherwise, you cannot use its equity to qualify for this kind of reverse mortgage. This means that you cannot, for example, apply for a HECM on your vacation home or investment property. The mortgage holder must remain residing in the same property. To qualify, you cannot move in with an adult child at a different address, nor can you reside at an assisted living or nursing facility. You would need to pay back the mortgage immediately in this case.

3. Ownership or High Equity in Your Home

This is the requirement that homeowners tend to have the most difficulty meeting. You will not qualify for an HECM unless you own your home outright (i.e., you have paid off your mortgage) or you have a low remaining balance on your existing mortgage. Any existing mortgage will need to be paid off with the proceeds of the HECM, which will be done at the time of the closing and funding of your new HECM loan.

Because this loan type allows you to receive payouts from your home equity, lenders look for seniors whose home values are high enough to provide the maximum benefit.

4. Free of Federal Debt

You must be free of federal debt, such as outstanding federal income tax or outstanding student loans. Additionally, lenders who offer reverse mortgages also want clients who have no other outstanding debts.

5. Residual Funds for Property-Related Expenses

You must demonstrate that you have sufficient funds to pay for ongoing property charges, such as association fees, taxes, and home insurance. You must also have enough funds to cover maintenance and repair costs. This is why HECMs are only suitable as a form of supplemental income: generally, people use their income from other sources to demonstrate that they can cover these ongoing property costs.

6. Condition and Type of Property

Your home must be in a reasonable condition and must not need any major repair work for you to qualify. There can also be eligibility restrictions based on the type of property as well as its age. All approved properties must meet the standards set by the Federal Housing Administration (FHA).

7. HUD-Approved Counseling

It is a federal requirement that those applying for HECMs prove they have attended mortgage counseling at an approved counseling agency and received sound legal and financial advice about whether an HECM is suitable for them. Before you can access a reverse mortgage, you are required to undergo a form of counseling from an HUD-approved agency. This means that the organization has been approved by the U.S. Department of Housing and Urban Development (HUD). This is not only to ensure that the individuals understand the rights and responsibilities of a reverse mortgage but also the implications should things not work out as planned.

How Does a Reverse Mortgage Work?

With a reverse mortgage, instead of making monthly payments to a lender as you would with a traditional mortgage, the lender pays you. There is no repayment obligation until all of your home equity is gone or you no longer live in the property.

You can choose to receive the funds in several ways:

• Fixed monthly payments: The lender pays you a set amount each month for as long as you live in the home.
• Lump sum: You receive the full amount at once at closing.
• Line of credit: You draw on your home equity as needed, giving you flexibility to access funds when expenses arise.

You can also choose to roll over your reverse mortgage credit into an account that allows you to draw on your home equity at will. Most reverse mortgages allow homeowners access to the money any time. With this option, each month’s payment starts with whatever cash is left in your equity account. Then, the amount of the loan’s principal is reduced by the principal amount paid out on that month’s loan payment.

Advantages of a Reverse Mortgage

There are several meaningful benefits that make reverse mortgages appealing to Florida seniors who qualify:

Access Your Home Equity Without Selling

The biggest plus of a reverse mortgage is that you can get access to your home equity without selling your home. This loan type allows you to receive monthly income through the lender, so if you decide to downsize or relocate, you can move into another home without losing the money in your home equity account.

No Income Taxes on Funds Received

Another advantage of reverse mortgages is that there are no income taxes due on the money you receive. The loan itself is not generally considered as taxable income.

Interest-Free Payments

Unlike traditional mortgages, with reverse mortgages lenders pay out interest-free loans for as long as you live in the house. The interest rates on the loan itself are typically lower than with a traditional mortgage.

Disadvantages of a Reverse Mortgage

While reverse mortgages can provide needed financial relief, there are significant drawbacks you should carefully consider:

Risk of Losing Your Home

The biggest drawback of reverse mortgages is that you can lose your home if you don’t repay the loan. Because these loans are unsecured, the lender has no recourse if you don’t pay. However, the good news is that they cannot go after one of your other assets to recoup their loss.

Early Repayment Obligations

Another disadvantage of a reverse mortgage is that sometimes it needs to be repaid sooner than you think, for example, if you move out of your home to live in an assisted living facility. Unlike traditional loans, a reverse mortgage does not require monthly payments; rather, you pay back the loan all at once.

Higher Fees Than Traditional Mortgages

In Florida, there are more fees associated with reverse mortgages than typical home mortgages. While reverse mortgages backed by the FHA include some tremendous protections, those protections come at a cost. The closing costs are substantially higher than a standard mortgage, and you will need to be prepared for these expenses. The specific Florida fees are detailed in the section below.

Accumulating Interest and Fees

Interest and fees on a reverse mortgage are always accumulating and can add to the overall loan balance. Over time, this means the total amount owed can grow significantly, reducing the equity that remains in your home.

Legal Considerations for Reverse Mortgages

There are a number of legal considerations involved in obtaining a reverse mortgage. Borrowers are advised to check with their legal counsel because the rules can vary depending on the state you live in. Laws governing these practices are changing, so it is best to get all of your questions answered before you proceed.

Loan Repayment Triggers

A reverse mortgage loan must be repaid once any of the following occurs:

• The homeowner sells the home
• The homeowner moves out for over a 12-month period (including moving to an assisted living or nursing facility)
• The homeowner passes away (the estate must sell the house within a certain period and transfer the loan amount to the lender)

An important protection to be aware of: the repayment amount cannot exceed the value of the home. This means that even if the loan balance has grown beyond the home’s market value, neither you nor your heirs will owe more than the home is worth.

Maintenance and Insurance Obligations

It is your responsibility to ensure that the property is kept in good condition, including any regular preventative maintenance, repairs, or replacements to things around the property. You need to also ensure that the appropriate property taxes are paid each year and that your homeowners insurance remains current. Failure to maintain the property or keep up with these obligations could put your reverse mortgage in jeopardy.

Inheritance Impact

If you have family or an individual that could potentially inherit your home, this is an important consideration. Your beneficiary must repay the loan if they would like to keep the house. If they sell the property, they can keep any excess proceeds from the sale once the loan is repaid. This is a critical point to discuss with your estate planning attorney to ensure your wishes for your heirs are properly accounted for.

Tax Benefits and Implications

While the loan itself is not generally considered as taxable income, it may impact your eligibility for governmental assistance such as your supplemental security income (SSI). Before taking out a reverse mortgage, discuss the potential tax implications with your attorney or financial advisor to understand how it could affect your overall financial picture.

Florida-Specific Fees for Reverse Mortgages

If you are applying for a home equity conversion mortgage in Florida, you should be prepared for the following fees. Before you apply, talk to your lender about all the fees involved. This will help you determine whether or not you can afford a reverse mortgage loan in the first place.

1. Mortgage Insurance: 2% of your home’s value, paid up-front. This is required for FHA-backed HECMs and provides important consumer protections.
2. Counseling Fee: This can vary but averages at about $125 in Florida. This covers the mandatory HUD-approved counseling session required before you can proceed with the loan.
3. Origination Fee: $2,500 OR 2% of the first $200,000 of your home’s value and then 1% of any additional value, whichever amount is greater. This fee is capped at $6,000.
4. Home Appraisal Fee: In Florida, the average cost for an appraisal fee is $300 to $500. An appraisal is required to determine the current market value of your property.

Tips Before Applying for a Reverse Mortgage

Reverse mortgages require a lot of forethought before starting the process. Here are important considerations to keep in mind:

1. Have Additional Income Streams

While you may be retired, this type of mortgage can aid you in covering unforeseen costs throughout your retirement. It should not form the backbone of your retirement financial strategy. Supplement your retirement costs with your social security, stock investments, your 401K, and more. If your home allows for it, make use of additional space in your home by renting out rooms for additional rental income, or even consider a part-time job.

2. Remember: It Is Not Free Money

Reverse mortgages are just like any other loan, and you will need to repay it. Unlike more traditional loans where you can make monthly payments, a reverse mortgage loan will need to be paid in a single lump sum. This is generally repaid with the sale of the home, but it is a factor to keep in mind. Interest and fees accumulate over time, adding to the total loan balance.

3. Understand the Full Cost

Before you apply, talk to your lender about all the fees involved. Make sure you understand the mortgage insurance premiums, origination fees, counseling fees, and appraisal costs. Factor in the accumulating interest and fees that will add to your loan balance over time. This will help you determine whether or not you can truly afford a reverse mortgage loan.

4. Consider the Impact on Your Heirs

If you plan to leave your home to your children or other beneficiaries, understand that they will either need to repay the loan to keep the house or sell the property to satisfy the debt. Discuss these implications with your family and your estate planning attorney before making a decision.

5. Get Professional Counseling and Legal Advice

This is why it is a federal requirement to get counseling from a HUD-approved agency. Beyond the mandatory counseling, you should also consult with a real estate attorney who can help you understand all of the legal considerations and ensure that your interests are protected throughout the process. You do not want to fall victim to a scam, nor do you want to run into even more financial difficulties and possible foreclosure.

Seek the Advice of an Experienced Real Estate Attorney Today

Reverse mortgages are not for everyone, and they have several unique advantages and disadvantages which you need to consider before you decide to apply for one. There are advantages and disadvantages to weigh, legal considerations to understand, and Florida-specific fees to account for. Making an informed decision requires professional guidance.

Your real estate attorneys at Gary I. Handin, P.A. can help you understand the process as well as all of the legal considerations you should know before getting a reverse mortgage. For quality legal advice and an attorney who will ensure that your best interests are taken care of as you make this decision, contact the Law Offices of Gary I. Handin, P.A. today at 1-877-815-4560. We have years of experience assisting senior citizens with reverse mortgages in Coral Springs and throughout Florida, and we will be glad to assist you.