Reverse mortgages have jumped in popularity in today’s market as more eligible borrowers learn about the unique benefits.
If you’re 62 or older and interested in leveraging your home equity to eliminate your mortgage payments, a reverse mortgage may be right for you.
What's in this article?
Let’s take a look at the steps you need to take to prepare for the reverse mortgage application process, from initial research to receiving your funds.
Step 1: Determine whether you qualify for a reverse mortgage
The first step in the reverse mortgage application process is understanding whether you qualify.
Reverse mortgages are available only to certain borrowers who meet specific lending requirements.
The most common type of reverse mortgage, the Home Equity Conversion Mortgage (HECM), is backed by the U.S. Department of Housing and Urban Development (HUD).
To qualify for a HECM, you must meet the following criteria:
- Aged 62 or older
- Home is your primary residence
- Home is a single-family residence (or if you live in a two-to-four-unit home you live in one unit and rent out the others)
- More than 50% equity in the home
- Borrower is financially able to continue paying property taxes, homeowners insurance premiums, and maintenance costs
A reverse mortgage withdraws equity from your home, while a traditional “forward” mortgage puts equity into the home.
Those who are eligible for a reverse mortgage have been putting money into their home for many years.
A reverse mortgage eliminates the need to continue making mortgage payments for as long as the homeowner remains in the home.
Ready To Take Your Next Step?
Step 2: Find a reverse mortgage lender
If you believe you qualify for a reverse mortgage, the next step is to find an experienced lender who can successfully guide you through the process.
Your lender can explain the following:
- What information you will need to provide
- The associated costs and fees
- What happens if you move someday
- Options for receiving your funds
Your lender can also help you complete an initial application, which will supply them with the necessary details to provide personalized information about your borrowing scenario.
Your initial application will include personal identification details, documentation to prove that you own your home and proof of your income and assets.
The main factors that influence the amount of funding you’ll receive include:
- The amount of equity in your home
- Your age
- Your interest rate
Generally, the more equity you have in your home and the older you are, the more funding you are eligible to receive.
Step 3: Complete counseling
To move forward with an HECM, borrowers must complete a HUD-approved counseling session.
The purpose is to provide transparent information about the costs, benefits and drawbacks involved in a reverse mortgage, as well as to offer guidance on how to receive your funds.
The session costs around $125 and lasts up to an hour. Participants also have the option to complete the counseling over the phone.
Step 4: Get an appraisal
Once you have completed counseling and your initial application, your lender can order an appraisal to confirm that the property meets the HUD’s standards for safety, security and structural soundness.
The appraiser will consider the following:
- Size and condition of the home
- Home location
- Comparable home-sale prices in the area
- Local housing market trends
The appraisal will also take into account any upgrades or improvements you have made to the property.
Step 5: Lender completes underwriting
After the appraisal is complete and your lender receives the report, they can move on to underwriting the loan.
Underwriting a reverse mortgage involves a thorough evaluation of the borrower’s eligibility and the property’s suitability for the loan, including confirmation of the borrower’s age and finances, in addition to the condition of the property.
If any issues come up during underwriting, the lender will contact the borrower to work through them or to request additional documentation.
When all the information has been verified, the lender will signal that the borrower is cleared to close.
Step 6: Close on your loan and receive your funds
When your reverse mortgage loan application has been fully approved, you will schedule a date to close with a closing agent.
At closing, the final paperwork is signed, and you’ll decide how you would like to receive your funds.
Options for receiving the funds include:
- Line of credit
- Monthly payments
- Lump sum
After a three-day right of rescission period, you’ll start receiving your funds!
How do you repay a reverse mortgage?
Reverse mortgages don’t require borrowers to make a monthly payment as long as they live in the home.
A reverse mortgage becomes due only under the following homeowner circumstances:
- They move out of the home
- They pass away
- They stop paying insurance or property taxes
- They stop maintaining the home
- They sell the property
HECMs are popular because they protect both the borrower and their heirs.
For example, if the borrower passes away and the HECM balance is larger than the home’s value, the heirs are not responsible for paying the difference.
Instead, they can opt to give the home back to the lender.
Otherwise, heirs have three main options following the homeowner’s death:
- Sell the home
- Pay off the loan
- Refinance the loan
Reverse mortgages aren’t for everyone; but for the right borrower, they can be a welcome source of additional income for seniors.
Apply for a reverse mortgage today with Compass Mortgage
If you believe a reverse mortgage is right for you, apply today with the loan experts at Compass Mortgage.
Our team promises to be your partner and advocate throughout every step of the reverse loan process.
We look forward to working with you!