What Is A Reverse Mortgage?

Reverse mortgages are loans that give senior citizens in India who own or live in their own house an additional source of income. Payments made by the lender against the mortgage are given to the borrower.

Reverse Mortgage Loan Eligibility Criteria

• A reverse mortgage is available to anybody over the age of 60. In case a couple wishes to opt for one, the age of spouse should be more than 58 years.
• The borrower must have a fully owned house. In case of a couple, at least one of them must own a house.
• The property must have been in existence for at least 20 years.
• Properties that are let out or being used for commercial uses are not eligible.

Documents Required To Avail Reverse Mortgage

The documents required to avail a reverse mortgage are mentioned below.

• Proof of Identity
• Proof of Residence or address
• Employer Identity card
• Property papers
• Account statement of the last 6 months for all bank accounts held
• Loan account statement of the last one year (if any).

How a Reverse Mortgage Works

With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner gets to choose how to receive these payments (we’ll explain the choices in the next section) and only pays interest on the proceeds received. The interest is rolled into the loan balance so that the homeowner doesn’t pay anything up front. The homeowner also keeps the title to the home. Over the loan’s life, the homeowner’s debt increases and home equity decreases.

As with a forward mortgage, the home is the collateral for a reverse mortgage. When the homeowner moves or dies, the proceeds from the home’s sale go to the lender to repay the reverse mortgage’s principal, interest, mortgage insurance, and fees. Any sale proceeds beyond what was borrowed go to the homeowner (if still living) or the homeowner’s estate (if the homeowner has died). In some cases, the heirs may choose to pay off the mortgage so that they can keep the home.

Reverse mortgage proceeds are not taxable. While they might feel like income to the homeowner, the internal Revenue Service (IRS)considers the money to be a loan advance.

Types of Reverse Mortgages

There are three types of reverse mortgages. The most common is the home equity conversion mortgage (HECM). The HECM represents almost all of the reverse mortgages that lenders offer on home values below the conforming loan limit (set annually by the Federal Housing Finance Agency) and is the type that you’re most likely to get, so that’s the type that this article will discuss. Also called a Federal Housing Administration (FHA) reverse mortgage, this type of mortgage is only available through an FHA-approved lender.

If your home is worth more, however, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage. 

When you take out a reverse mortgage, you can choose to receive the proceeds in one of six ways:

1. Lump sum: Get all the proceeds at once when your loan closes. This is the only option that comes with a fixed interest rate. The other five have adjustable interest rates.
2. Equal monthly payments (annuity): For as long as at least one borrower lives in the home as a principal residence, the lender will make steady payments to the borrower. This is also known as a tenure plan.
3. Term payments: The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years.
4. Line of credit: Money is available for the homeowner to borrow as needed. The home owner only pays interest on the amounts actually borrowed from the credit line.
5. Equal monthly payments plus a line of credit: The lender provides steady monthly payments for as long as at least one borrower occupies the home as a principal residence. If the borrower needs more money at any point, they can access the line of credit.
6. Term payments plus a line of credit: The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years. If the borrower needs more money during or after that term, they can access the line of credit. It’s also possible to use a reverse mortgage called a “HECM for purchase” to buy a different home than the one in which you currently live.

In any case, you will typically need at least 50% equity—based on your home’s current value, not what you paid for it—to qualify for a reverse mortgage.