A reverse mortgage is a loan product that allows senior homeowners over the age of 62 to access cash from their home equity. Prior to October 15, 2019, very few condo owners qualified for this type of mortgage. Fortunately, since 2019, reverse mortgage guidelines have become more liberal, making it possible for many condo owners to obtain a reverse mortgage.
The Advantages of a Reverse Mortgage
The advantages of a reverse mortgage are worth considering for senior condo owners who require a cash infusion to pay for emergencies or any other expense associated with living a more fulfilling life. Retirees, in particular, find that this type of financial loan provides a viable solution for home repairs, medical bills, vacations, family educational expenses, and other cash outlays deemed necessary or desirable.
This option is appealing to many older homeowners who need financial relief because it is a loan that does not have to be repaid until the house is sold or the owner dies. Because the majority of seniors live on a fixed income, a reverse mortgage product is a welcome option for dealing with monthly cash shortfalls or unexpected expenses.
The Costs of Reverse Mortgages
A reverse mortgage, like any other loan, has fees. The good news is that many cash-strapped borrowers can finance the loan costs. If the costs are financed, the loan proceeds are deducted. The main impact on the borrower who finances the loan costs is that the available loan amount is reduced as a result of those expenses.
Fee for Origination
A reverse mortgage, like any other home loan, includes an origination fee. This fee compensates the lender for the time it takes to process the loan. The amount a lender can charge for an origination fee is limited. Lenders are allowed to charge $2500 or 2% on the first $200,000 of the home’s value, whichever is greater.
Any amount in excess of the first $200,000 in home value is subject to an additional 1% tax. The maximum amount that can legally be charged on a reverse mortgage loan is $6,000.
Mortgage Insurance Fee (MIP)
Borrowers will pay a 2% upfront MIP charge at the time of closing. There will also be an annual charge equal to 0.5 percent of the outstanding balance on the mortgage.
Closing Expenses of Various Kinds
Other fees associated with the closing process, in addition to the origination fee, include surveys, inspections, an appraisal, recording fees, mortgage taxes, title search, credit checks, and insurance. While this list of closing costs is indicative of the types of costs a borrower can expect, it is not exhaustive. Expenses can differ depending on the loan.
Fee for Servicing
A servicing fee is charged to compensate lenders or their agents for sending out account statements, disbursing proceeds, and ensuring that the borrower has paid all required real estate taxes and hazard insurance premiums. This fee is limited to a monthly maximum of $30 for an adjustable-rate mortgage that adjusts annually or on fixed-rate loans.
Requirements for Borrower Eligibility
A reverse mortgage loan requires both the borrower and the property to be qualified. This loan is similar to others in that it requires proof that the borrower meets certain criteria in order to qualify.
The borrower must meet the requirements listed below.
- The borrower must be over the age of 62.
- To qualify for a reverse mortgage loan, the borrower must have no outstanding debt on the property balance or substantial equity as determined by the lender.
- The borrower must have sufficient financial resources to pay ongoing property taxes, Homeowners Association fees, and insurance as required throughout the loan’s term.
- There should be no delinquencies on federal debt in the borrower’s name.
- The borrower must agree to keep the property as their primary residence for the duration of the loan.
- To discuss reverse mortgages, the borrower must meet with a HUD-approved counselor.
Requirements for Property Eligibility
As previously stated, the property must be reviewed and approved in accordance with strict guidelines for reverse mortgage eligibility. The minimum requirements for eligible condominium properties are listed below.
- The condominium property must have at least two units and be primarily used for residential purposes.
- Owners must occupy at least half of the total number of units.
- Commercial usage is restricted to no more than 35% of the total floor square footage of the property.
- No single investor may own more than 10% of the total number of units.
- The percentage of units that are more than 60 days behind on their mortgage payments may not exceed 15%.
- A minimum of 10% of the condominium’s budget must be set aside for a savings account.
- The condominium agreement must permit unit leasing.
- The percentage of FHA-insured units is limited to a maximum of 50%.
Is a Condo Reverse Mortgage a Good Option for You?
Obtaining a reverse mortgage is a major decision that should be carefully considered before proceeding. While this loan product benefits many people, it is not appropriate for everyone. That is why meeting with a HUD-approved counselor to discuss your options is critical. Knowing the answers to a few key questions will help you and your counselor decide whether a reverse mortgage is right for you.
Borrowers must answer the following questions before proceeding:
Will the loan proceeds be sufficient to keep you afloat for the rest of your time in the house?
The importance of this question stems from the fact that reverse mortgages require borrowers to stay current on necessary repairs, taxes, insurance, and homeowner fees in order to avoid default. Careful budgeting and planning are required to ensure that the borrower has enough funds to cover upcoming bills.
Can you promise that you will continue to live in the house as your primary residence?
This basic requirement for fulfilling the requirements of a reverse mortgage loan may appear to be self-evident, but keep in mind that circumstances can change.
It is not always possible to predict the aging process. There is always the possibility that you will require long-term care and will be forced to leave your home. It is critical that you understand how this will affect your reverse mortgage so that you can weigh the risk versus the benefit of the loan and make an educated decision.
Will the loan proceeds allow you to save money for future repairs or HOA assessments?
The ability to manage money is essential for success with this type of loan. Planning for future home maintenance issues is essential for adhering to the terms of your reverse mortgage.
How will the death of either spouse affect the other spouse’s loan obligations?
Borrowers must understand how the death of a spouse will affect a reverse mortgage loan and the surviving spouse. Depending on the terms of the loan, the surviving spouse may be forced to leave the home in order to fulfill the terms of the mortgage.
What other options are there for obtaining equity loans?
It is always a good idea to be aware of all of your options. While reverse mortgages have some distinct advantages, there are some drawbacks for certain borrowers that must be considered. A thorough examination of loan options is likely to produce the best results that will meet individual needs.