Question: I feel like I see TV commercials and hear radio ads daily for reverse mortgages. How do I know if my father is a good candidate for one?
Answer: Before answering your question, let me give you a brief primer on reverse mortgages.
A reverse mortgage is a loan secured by the equity in your property. It allows you to borrow against the value of your house if you are 62 or older and have significant home equity. You can receive cash as a lump sum, monthly payments or a line of credit. Unlike a traditional mortgage, which is used to purchase a home, you’ll not make monthly payments to the lender. Instead, when you die, sell the home, or leave the house permanently, the entire debt becomes due for payment.
You can use reverse mortgages in various ways. You can use it to settle credit card debt, consolidate payday loans, renovate your home, etc. It’s up to you.
Now, coming back to your main question: Your father must meet the criteria to qualify for a reverse mortgage. The two most essential considerations are your father’s age and the amount of equity he has in his property.
What is your father’s age?
Reverse mortgages are intended to help elderly homeowners who don’t have other ways to fund their retirement by allowing them to tap into the equity they’ve built up in their property. As a result, to apply for a reverse mortgage, your father must be at least 62 years old. If your dad wants to include your mom as a co-borrower, she must be at least 62 as well.
Your father should also have a substantial amount of equity in his home—usually at least 50%. Furthermore, he should live in the house before and after taking out the reverse mortgage. The house must also be built on or after June 15, 1976.
Credit score and income
There are no income or credit score restrictions for reverse mortgages. This is one of the ways reverse mortgages differ from a home equity loan or a home equity line of credit (HELOC). HELOCs allow homeowners to borrow money against their home’s value. Home equity loans and HELOCs, unlike reverse mortgages, require borrowers to make payments, and they must have a good credit score to qualify. On the other hand, they may have fewer costs and be a less expensive option than a reverse mortgage.
According to the U.S. Department of Housing and Urban Development (HUD), all prospective reverse mortgage borrowers must attend a HUD-approved counseling session. This $125 counseling session should last at least 90 minutes and explore the benefits and drawbacks of a reverse mortgage in light of his specific financial and personal situation.
The counselor will go through how a reverse mortgage could affect your dad’s Medicaid and Supplemental Security Income (SSI) eligibility and how he can receive your reverse mortgage income.
Setting up a reverse mortgage comes with a price tag. Borrowers must pay an origination charge and an upfront mortgage insurance premium. The loan frequently covers these expenses, so your dad may not need any money to get a reverse mortgage. It’s crucial to remember that reverse mortgages include substantial upfront charges, regardless of whether your dad pays them out of his wallet or the equity he owns.
While property taxes and homeowner’s insurance are not strictly required to obtain a reverse mortgage, your dad will be responsible for them once he receives the loan. If your dad misses these payments or stops living in the house for more than a year – even if he’s in a long-term care facility for medical reasons – he’ll have to repay the debt, which is usually done by selling the property.