A reverse mortgage lender pays money to the senior citizen homeowner – it is the exact opposite of a traditional “forward” mortgage where the homeowner repays borrowed money to the lender.
To qualify for a reverse mortgage, the homeowner must be at least 62. In the case of husband and wife, both co-owners must be 62 or older. If one co-owner spouse is not yet 62, he or she can renounce home ownership by signing a quit claim deed to the other spouse who is 62 or older. If title is held in a living trust, the trustor-beneficiary cannot be less than 62, although subsequent beneficiaries can be younger.
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According to Peter Bell, president of the National Reverse Mortgage Lenders Association in Washington, D.C., reverse mortgage originations increased by 76 percent in 2003 compared to 2002. The reasons for their growing popularity are many, including (1) need for increased senior citizen monthly income, (2) stock market, pension, health benefit, and retirement fund declines, (3) large senior citizen home equities, and (4) desire to have sufficient retirement income to spend on luxuries such as travel.
There are no restrictions on how reverse mortgage tax-free income can be spent by the homeowner. Nor are there any credit or income requirements; however, the homeowner cannot have any unpaid federal obligations and must not be involved in bankruptcy.
Reverse mortgages are non-recourse with no personal liability for repayment. In addition to receiving tax-free income, the other major reverse mortgage advantage is the senior citizen homeowner has no personal liability – repayment only comes from the residence, not personally from the homeowner. No repayment is required during the period the qualified homeowner lives in the principal residence at least six months each year – if the homeowner vacates the home for more than 12 months, such as while living in an assisted living center, the reverse mortgage “matures” and becomes due. Of course, if the homeowner dies or sells the residence, then the reverse mortgage and its accrued interest must be repaid.
Contrary to widespread misbelief, the lender does not “own” the title to the residence, which is security for the reverse mortgage. Even if the residence declines in market value below the reverse mortgage balance, the homeowner can never be forced out, except for failure to pay the hazard (fire) insurance or the property taxes. After the homeowner dies, the heirs usually elect to sell the residence, pay off the reverse mortgage including its accrued interest, and keep the remaining equity. However, if the heirs want to keep the residence, they can pay off the reverse mortgage balance by refinancing with a traditional mortgage.
THERE ARE FOUR BASIC TYPES OF REVERSE MORTGAGES. Senior citizen homeowners can choose a reverse mortgage (1) credit line to be used whenever the homeowner wishes and for any purpose (this is the most popular choice – except in Texas, where it is not available); (2) lifetime tenure monthly income; (3) term monthly income (such as for 10 years); (4) up-front lump sum for the reverse mortgage maximum (no repayment is required until the homeowner dies, sells, or moves out); or (5) any combination of the above. During the reverse mortgage term, the homeowner can change their choice, or combination.
There is an additional “choice” where the homeowner chooses the lump sum alternative to buy an annuity, which will pay lifetime income to the annuitant, even after the homeowner sells the residence and moves elsewhere. Still another alternative is to use all or part of the reverse mortgage proceeds to purchase lifetime convalescent home care (which is not covered by Social Security).
Reverse mortgages don’t affect Social Security or Medicare payments, but they might affect your SSI (Supplemental Security Income) or Medicaid (Medi-Cal in California). Because reverse mortgage income is non-taxable, it has no effect on Social Security or Medicare payments to senior citizens. However, if you are receiving SSI and/or Medicaid, if you don’t spend your entire reverse mortgage payment received each month, your SSI and/or Medicaid payments can be reduced – for details consult your local Area Agency on Aging (phone 1-800-677-1116, or visit http://eldercare.gov).
Are all owner-occupied residences eligible for a reverse mortgage? No. Single-family houses (including manufactured homes attached to a foundation on a separate lot), most condominiums and townhouses (unless more than 50 percent of the condo complex is occupied by renters), modular homes, and 1- to 4-unit rentals (where the owner occupies one apartment), and New York City co-ops are eligible. However, mobile homes located on non-owned lots (with limited exceptions for long-term leased land), second or vacation homes, houseboats, commercial properties, agricultural properties, and most cooperative apartments (except in New York City) are not eligible.
If I have an existing mortgage and/or a home equity loan, am I eligible? Maybe. Just because you have an existing home mortgage and/or a home equity loan secured by your otherwise eligible residence, don’t despair. A reverse mortgage must be recorded as a first mortgage. That means any existing encumbrances and/or liens affecting your title must be paid off.
However, you can use a reverse mortgage lump sum to pay off those secured obligations. Obtaining a reverse mortgage lump sum can be a great way to get rid of your mortgage payments, even if you don’t need or want to increase your income. However, if you have large obligations secured by your home in relation to its market value, a reverse mortgage probably won’t work.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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