Reverse mortgage facts and home equity conversion mortgage definition

What is a reverse mortgage?

So far, you have read about how important good credit and your income-to-debt ratios are to obtain a favorable mortgage. Now you can forget it. For a reverse mortgage, none of that matters. What is important is that you are 62 years old or older and that your home is free and clear of any other loans and mortgages, or at least has a lot of equity. A reverse mortgage is a completely different type of loan. If properly used, it can be the best thing to happen to many seniors since Social Security.

How does a reverse mortgage work?

Instead of obtaining a loan and paying it back through payments that begin a month after you borrow the money, you do not pay it back until you stop living in your home. You can see the obvious advantage for a retired person who needs money and would find it difficult to make payments. Since you do not make payments, your ability to repay the loan is irrelevant. That is why credit and income are not considered in order to qualify. Another reason they are not considered is that the reverse mortgage is a nonrecourse mortgage. You are not personally responsible for repayment.

When it comes time to repay the loan, the lender can look only to the property. If you have borrowed more than the property is worth because you have lived longer than the average person, it is not a problem. Your estate does not have to make up the shortfall. The beneficiaries of your estate will not get less of your other assets because they have to repay your reverse mortgage. This is especially helpful for those who have substantial assets.

What is a home equity conversion mortgage?

The home equity conversion mortgage (HECM) is the most popular reverse mortgage. The guidelines allowing lenders to make this loan are offered by the Department of Housing and Urban Development. (It is FHA-insured.) It requires the borrowers to:

be 62 years of age or older;
own the property;
occupy the property as the primary residence; and,
participate in a consumer information session given by an approved HECM counselor.

These requirements need little explanation. Although the test for a primary residence is somewhat subjective, the general rule is that it is the property you live in most of the time and consider your home. It is not your vacation home or a piece of investment property that you rent out to someone else.

Although the theory for all reverse mortgages is basically the same, there are enormous differences in the types of reverse mortgages and from whom you borrow.

The main reason counseling is required is the notion, right or wrong, that seniors require more protection than other adults. An 18-yearold can get a loan without special counseling, but a 62-year-old has to be counseled. Having said that, counseling is a benefit that should be available to (even required for) an 18-year-old. The other reason seniors get counseling is that there is an organization that watches out for them. There is no such organization for the 18-year-old. The American Association of Retired Persons (AARP), in cooperation with HUD, has a list of approved counselors. The counselor will explain to the borrower the different types of reverse mortgages, and which, if any, will help the borrower best achieve his or her objectives.

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