Everyone who finances real estate knows how a “forward” mortgage works so it seems logical that a “reverse” mortgage is just the opposite. That’s somewhat true, but not entirely. A reverse mortgage is a different kind of financial critter, one which requires a little background to understand.
With a forward loan you apply for a mortgage and must qualify on the basis of your credit, income, down payment and other factors. If you get the loan, you then make monthly payments until the loan is paid off. Most mortgages today have a 30-year term and are self-amortizing — that is, they are fully repaid at the end of the loan term.
Reverse Mortgage Qualifications
With a reverse mortgage the key is the equity in your home. Basically, your equity is the value of the home less any debts. So, to get a reverse mortgage you need equity and you need to be at least age 62.
But wait? What if you’ve just been laid off? No problem. Income is not considered when applying for a reverse mortgage.
Huh? How can that be?
A reverse mortgage is an asset-based loan. If you have the assets then you can get the loan. This is possible because the lender is never giving you a mortgage equal to the full value of the house and because reverse mortgages are typically insured by the FHA.
What if — and here’s a neat example — you’re over age 62, you have a mortgage balance — and you’ve just lost your job? In such circumstances it might make sense to refinance with a reverse mortgage, pay off the current loan and then you’ll have your house but no monthly payment.
Reverse mortgages are not “free” money — you still have to pay taxes and insurance, for example — but they can be good for some property owners. More than 100,000 homeowners each year are now turning to FHA-insured reverse mortgages.
To see if a reverse mortgage is for you think about your personal preferences and your financial needs. You also have to think about wills, estates and taxes — and you should speak with family members and people you trust. Also, consult with an attorney who specializes in elder law who can provide legal advice.