Throwing Home Financing into Reverse
- Rachel Scott
- Home Loans
As a home-owning Baby Boomer, you may be living with a sizable amount of home equity. In fact, individuals over the age of 55 account for 25 percent of the U.S. population but control about 66 percent of single-family home equity, according to a recent survey conducted by Freddie Mac. That means your home could be doing more than just sheltering you in retirement—it could potentially help support you.
Typically, accessing home equity has meant refinancing, taking out a home equity line of credit using conventional loan products, or selling and then downsizing to buy a home outright. These are still viable options, but once you reach the age of 62, they are no longer your only options.
Reversing the Monthly Mortgage Payment
At age 62, you gain access to reverse financing options. Most of these loans are insured by the Federal Housing Administration (FHA) under the Home Equity Conversion Mortgage (HECM) program.
The way a reverse mortgage works is that instead of making monthly payments on your home loan or line of credit from your income, you are not required to make monthly mortgage payments – only taxes, insurance, upkeep on the property, and HOA if applicable. The loan is repaid from the proceeds of the sale when you leave your home. At that point, any excess money over what you owe and the selling price goes to you or your heirs, and the rest is retained by the mortgage holder. The expenses and interest on the loan are included in the calculations that determine how much you’re able to borrow against your home’s current value and what you or your estate receives when the home is sold.
The Reverse Purchase
The proceeds from a reverse mortgage can be paid to you in a lump sum that you can then use as you want. For instance, the proceeds can be used to repair or remodel your home or fund an emergency health care fund. The money can also be accessed as monthly payments to supplement your retirement income. Another option is to borrow in the form of a line of credit that you only draw against as needed to pay for large or unexpected expenses. Possibly the most interesting use of reverse financing is the ability to make a reverse purchase.
The reverse purchase lets you buy a new principal residence without requiring a principal and interest mortgage payment.
Since it requires less of an upfront investment than an all-cash purchase and doesn’t require monthly mortgage payments—just a down payment—it can help preserve your savings for other purchases or investments and improve your monthly cash flow.
An Easier Qualification
The nature of the transaction leads to a different type of approval process. Since the lender is looking at the sale of the home for repayment, not your income, there are:
- No income requirements beyond being able to maintain the property and pay any property taxes on it
- No FICO qualification
- No debt-to-income ratio requirements
- No equity sharing with the lender
As long as you have, and retain, ownership of the property, you are likely to qualify.
A Planning Tool
Given that reverse mortgages are retirement products, you will want to talk to a financial professional to fully understand if using one fits in with your long-term financial and estate plans. In fact, part of the process for these loans includes some additional counseling to make sure the arrangement is right for you.
Whether you ultimately see yourself moving closer to family in retirement, support services or to a warmer climate, a reverse purchase may be able to move you much closer to the retirement lifestyle you aspire to while providing greater financial security.