What's In This Article?
A reverse mortgage provides senior homeowners of at least 62 years a loan product that can be used to access cash from their home equity. In the recent past, prior to October 15, 2019, few condo owners qualified for this type of mortgage. Fortunately, reverse mortgage guidelines have become more liberal since 2019, making it possible for many condo owners to obtain a reverse mortgage.
Benefits of a Reverse Mortgage
The benefits of a reverse mortgage are worth reviewing for senior condo owners who need an infusion of cash to pay for emergencies or any other expense necessary for living a more fulfilling life. Specifically, retirees find that this type of financial loan offers a viable solution for home repairs, medical bills, vacations, family educational expenses, and other cash outlays as deemed necessary or desirable.
As a loan that does not have to be repaid until the house is sold or the owner passes away, this option is appealing to many older homeowners who need some financial relief. Since most seniors are living on a fixed income, a reverse mortgage product is a welcome option for addressing monthly cash shortfalls or unexpected expenses.
Costs Associated with Reverse Mortgages
Like any loan, there are costs associated with a reverse mortgage. The good news for many cash-strapped borrowers is that the costs required to do the loan can be financed. Essentially, if the costs are financed, then they are paid from the loan proceeds. The main impact to the borrower who finances the loan costs is that the loan amount available to be borrowed is reduced by those expenses.
A reverse mortgage includes the charge of an origination fee just like other home loans. This charge compensates the lender for processing the loan. There are limits placed on how much a lender can charge for an origination fee. On the first $200,000 of the home’s value, lenders are allowed to charge $2500 or 2%, depending on which is greater. An additional 1% can be charged for any amount over the first $200,000 of the home’s value. The maximum amount that can be charged legally on any reverse mortgage loan is $6,000.
Mortgage Insurance Premium (MIP)
At the time of closing, borrowers will pay an upfront MIP charge of 2%. Additionally, there will be an annual charge equal to 0.5% of the outstanding balance left on the mortgage.
Miscellaneous Closing Expenses
In addition to an origination fee, other charges associated with the closing process are surveys, inspections, an appraisal, recording fees, mortgage taxes, title search, credit checks, and insurance. While this list of closing expenses is representative of the type of costs a borrower can expect, it is not necessarily all-inclusive. Expenses can vary by loan.
A servicing fee is charged to compensate lenders or their associates for sending out account statements, disbursing proceeds, and verifying that required real estate taxes and hazard insurance premiums are paid by the borrower. This fee is limited to a maximum charge of $30 monthly for an adjustable interest rate mortgage that adjusts annually or on fixed-rate loans. The servicing fee limit for an adjustable-rate loan that adjusts monthly is higher and can go as high as $35 per month.
Borrower Eligibility Requirements
Both the borrower and property must qualify for a reverse mortgage loan. This type of loan is similar to other loans requiring proof that the borrower meets certain criteria to qualify.
Below is a list of requirements for the borrower.
1. Borrower must be at least 62 years of age.
2. The borrower must have no remaining debt on the property balance or have substantial equity as determined by the lender to be sufficient for a reverse mortgage loan.
3. The borrower must have adequate financial resources to pay ongoing property taxes, Homeowner’s Association fees, and insurance as required over the life of the loan.
4. There should be no federal debt delinquencies in the borrower’s name.
5. The borrower must commit to occupying the property as their primary residence for the life of the loan.
6. Borrower must attend a session with a HUD-approved counselor to discuss reverse mortgages.
Property Eligibility Requirements
As mentioned above, the property must also be reviewed and approved based on strict guidelines for reverse mortgage eligibility. Below are the minimal requirements for eligible condominium properties.
1. The condominium property must have a minimum of 2 units and be used primarily for residential purposes.
2. A minimum of 50% of the total units must be occupied by owners.
3. Commercial usage is limited to a total of not more than 35% of the total floor square footage of the property.
4. No individual investor may own more than 10% of the total number of units.
5. The number of units behind more than 60 days on their mortgage payments may not exceed 15%.
6. A minimum of 10% of the condominium’s budget must be allocated to an established savings account.
7. The condominium agreement must allow the leasing of units.
8. The number of FHA-insured units is limited to a maximum of 50%.
Is a Condo Reverse Mortgage Right for You?
Obtaining a reverse mortgage is a big decision and should be carefully evaluated before moving forward. While many people benefit from this loan product, it doesn’t make sense for everyone. That’s why it is so crucial to meet with a HUD-approved counselor to discuss your options. Knowing the answers to some important questions will help you and your counselor decide if a reverse mortgage is right for you.
A few questions that borrowers need to answer before moving forward are:
Will the loan proceeds likely sustain you for the remainder of the time you live in the house?
The reason this question is important is because reverse mortgages require borrowers to stay current on necessary repairs, taxes, insurance, and homeowner fees to avoid default. Careful budgeting and planning are necessary to ensure that the borrower has the necessary funds to stay current on upcoming bills.
Can you guarantee that you will remain in the home as your primary residence?
This basic requirement for fulfilling the requirements of a reverse mortgage loan may sound like a no-brainer, but you must consider the possibility that circumstances might change.
The aging process is not always predictable. There is always a risk that you will require long-term care and be required to move out of your home. It is important that you understand how that will impact your reverse mortgage so you can weigh the risk versus the benefit of the loan so that you can make an informed decision.
Will the amount of the loan proceeds allow you to put money aside for necessary repairs or HOA assessments in the future?
Money management is key for success with this type of loan. Planning for future home maintenance issues is critical for complying with the terms of your reverse mortgage requirements.
How will the death of either spouse impact the other spouse in terms of the loan obligations?
It is important that borrowers understand exactly how the death of a spouse will impact a reverse mortgage loan and the surviving spouse. Depending on the terms of the loan, there are cases where the surviving spouse will be forced to move out of the home to fulfill the terms of the mortgage.
What are other options for obtaining equity loans?
Knowing all of your options is always advisable. While reverse mortgages offer some unique benefits, there are also some downsides for certain borrowers that must be considered. A careful examination of loan choices is likely to yield the best results that will suit individual needs.