Texas Reverse Mortgage Education Center
Public Knowledge Base and Reverse Mortgage Education for Seniors
A reverse mortgage is similar to a regular forward mortgage in that a bank loans money to a borrower using the equity of the home as collateral. Unlike a 15 or 30 year forward mortgage the reverse mortgage is open ended and requires no monthly repayment by the borrower to the bank. The borrower is obligated to repay the bank the loan plus accumulated interest at the end of the mortgage. The end of the mortgage occurs upon death or sale of the property.
All borrowers must be at least 62 years old. For a reverse mortgage in Texas, if one person is 62+ and the spouse is less than 62, the younger spouse may disclaim from the note and deed of trust. The downside to this scenario is if the older spouse passes away or leaves the home for 12 months, the lender will require repayment. In most cases the surviving spouse will be forced to sell the home to repay the bank.
No. Most people today are actually getting reverse mortgages to pay off a current mortgage, thereby eliminating the mortgage payment to free up funds to pay other important life expenses.
The bank has absolutely no ownership in the home. It simply has a lien against the property known as a reverse mortgage.
Closing costs are higher than forward mortgages. The primary reasons are that costs are generally charged on the value of a home rather than the actual loan amount. Additionally, FHA charges 2% of the value of the home for mortgage insurance. The lender's origination fee is .5% to 1% higher than a typical forward mortgage. Outside of those fees the costs are similar to traditional forward mortgages.
Borrowers may pay costs out of pocket or roll the closing costs into the loan. Most borrowers opt to roll the closing costs into the mortgage.
For FHA insured mortgages valued below the FHA maximum lending limits ($417,000 in Texas), borrowers can expect to receive 45% to 75% of the value of their home. The spread is wide because of multiple variables. Lenders must be on guard for the possibility that one day more will be owed on the home than the home is actually worth. Therefore, older borrowers are likely to get more money than younger borrowers for the simple reason that they have a statistically higher chance of being out of the home sooner.
Four ways to receive proceeds currently exist:
It is not taxable and does not affect social security and Medicare. However, if the borrow receives Medicaid or SSI exceeding the maximum asset levels can negatively affect those benefits. For those in this situation, the line of credit option, as outlined above, is an easy way to take money out as needed and used such that the borrower's asset limits are not exceeded. In this regard, make sure you check with your local Area Agency on Aging prior to moving forward on a reverse mortgage.
It may be used however the borrower sees fit. It is the borrower's money. The following is a list of the most popular ways people are using proceeds from the reverse mortgage.
This is a common question because people are familiar with mortgages ending in 15 and 30 years. Reverse mortgages in Texas and elsewhere are open ended mortgages. They have no set ending date. There are three main reasons a reverse mortgage comes to an end.
Generally, the lender is paid when the home sells. In the case of death, the home is typically willed to the estate. The estate is then required to pay the Texas reverse mortgage lender the amount of the original loan plus interest. Typically, the estate sells the home to do this.
Reverse mortgage lenders in Texas generally give 6 months to sell the home and 3 month extensions thereafter. The lenders don't want the home and would prefer it continues to accumulate interest while it is being sold. With this in mind, after six months and no sale, the lender will review the listing agreement with the local realtor, comparable properties, and the marketing process. Assuming the property is being marketing competently, the lender will give a 3 month extension. If, after the first the three month extension, the home still hasn't sold, the lender will give another three month extension, and so on.
Reverse mortgages are known as "non-recourse" loans, meaning if, under the circumstance more is owed to the lender than the home is worth, and the loan is due based upon death, sale, or vacating the premises, the maximum amount the heirs are required to pay the lender is the value of the home at the time of repayment. The bank cannot come after the family ("non-recourse") for the difference.
Like any other mortgage, a reverse mortgage in Texas works similarly. The people who own the home prior to sale get the proceeds. If the borrower sells the home, he or she gets the proceeds. If the heirs end up selling the home, they get the proceeds.
Eligible properties include owner occupied single family residences, 2-4 unit properties in which the borrower lives in at least one of the units, double or triple wide manufactured homes built after 1976 with FHA approved foundation, condominiums, and townhouses.
These are the borrower's responsibility. They must be handled and paid outside the mortgage.
The mortgage company makes money from the accumulation of interest on moneys loaned to the borrower. Remember, the borrower makes no payments but interest is still be charged and accumulates over time. Typically, when the borrower or the heirs sell the home, the mortgage company is paid back.
Not very likely. This is the worst possible scenario for a mortgage company. This is why they only loan from 45% to 75% on the value of the home. Banks use actuarial tables just like insurance companies and wouldn't lend money to you unless the numbers tell them it's a good deal for them. Certainly, there will be an occasional situation when more is owed than the home is worth, but it will be the exception to the rule.