Do you really understand the FHA Reverse Mortgage?

I hear it all the time...Oh those reverse mortgages are not for me! I do not want to lose my home. Or I hear this a lot from children: "I do not want to lose my inheritance" or "I do not want to inherit debt from my parents". These are all common misconceptions about the FHA Reverse Mortgage.

Did you know that an FHA Reverse Mortgage is simply a loan? It is a lien against the home that is insured by the government. The bank does not trade you a loan for your home.. they lend you an amount called a "Principal Limit" against the value of your home based on the FHA lending limits in that particular zipcode. The amount of the "Principal Limit" or loan is based on the age of the client. To put it in simple terms the older a person is (over the age of 62) the larger loan amount they will get from HUD. So a person that is 62 years old will get a smaller loan amount or have a lower LTV (Loan to Value) than a person who is 80 years old.

What happens if the FHA Reverse mortgage grows to an amount greater then the value of the house? FHA Reverse Mortgage are non-recourse loans. This means the lender is legally prevented from seeking any deficiency judgement against the borrower regardless what happens to the value of the property. Here is an example: Let's say it comes time to sell the home and the value is $300,000 but the loan amount is $325,000. The heirs sell the home for market value and FHA pays the difference/shortage to the lender.

What happens if the home is worth far more than the FHA Reverse mortgage? Remember this is simply a loan with the underlying collateral being the home. So, when it comes time to sell the home any equity left over after paying off the loan will go to the heirs. Here is an example:  The home is valued at $300,000 and the FHA Reverse Mortgage has a balance of $150,000. The remaining funds after real estate fees etc.. would go to the estate or heirs.

The key to understanding today's FHA Reverse Mortgage is that it is simply a loan for people over the age of 62. The loan is based on age, zipcode and lending limits. It is NOT based on credit or income and there are never any mortgage payments to be made by the borrower to the lender.

It does require a homeowner to have at least 20% equity in the home or in the case of a purchase loan using the FHA Reverse Mortgage at least 20% down payment. It is not for everyone. And not every person who is eligible will need a reverse mortgage. And equally important, not everyone that is eligible will qualify for an FHA Reverse Mortgage.

This is the first blog in a series of blogs about this fantastic product the government offers people over the age of 62. If you have any questions please call me at 800-314-5626 ext. 111 or directly at 949-278-9244. You can also email me at noahb4@gmail.com.

Press on,

Noah S. Burford