A reverse mortgage allows a homeowner to convert the equity in the home they live in into cash payments. There are several requirements for obtaining this type of loan, but basically the you must be 62 years old or older and live in the home as your primary residence. You will also have to pay the usual closing costs associated with obtaining a loan.
The benefit to obtaining a reverse mortgage is that as long as you live in the home, you do not have to pay back the loan. If you leave the home, either by choice or by death, the principal and interest will have to be paid back upon the sale of the home. If there is any equity remaining after paying back the principal and interest, then you or your heirs will be able to keep the remaining equity.
As a notary, you may see this type of loan (and that is what it is, a loan) so you need to be aware of the differences. I have closed several of these types of loans and the documentation is basically the same. The settlement statement (HUD-1) will be slightly different as there will be very little direct payout to the borrower. The borrower's payout will usually be over time, and the note and deed of trust will reflect the payment plan.
How much the borrower will get in payments will depend on how the loan is structured and how much equity the borrower(s) have in the home. It can range from a one time payout, to a multi-year monthly payment, to a combination of both.
The important thing to remember, however, is that when you check ID, make sure they meet the 62 year age requirement. Also, you should know that my experience has shown that the borrower(s) are usually not sure they want to do this, even at the closing table. They may ask you if this is a good idea (this has happened to me on several occasions). But unless you are licensed to practice law, you cannot give any advice on the process or legal ramifications of the documents. Hopefully, they have had adequate representation by the loan officer and an attorney. In today's fast paced, money saving world, this step is sometimes skipped or avoided because of pressures of time and money. So at the closing table, there are times where the borrowers will want advice.
All this being said, there are places that the borrower(s) can go to obtain some advice.
HUD's reverse mortgage Q & A sheet is a good place to start.
Also, there is some good advice at the
A couple of final points that seem obvious, but are important to understand.
First, with a this type of loan, the balance increases as you receive payments. With a conventional loan, the balance decreases as you make payments.
Second, the underwriting requirements are not the same to obtain this type of loan. With a conventional loan, you have to meet certain requirements to show the loan company that you can afford to pay back the loan. Here, you are receiving payments and will not pay back the loan until you sell the home or at your death when your heirs sell the home. Therefore, you will not have to show sufficient income to pay the loan back.
There you go, the basics for a reverse mortgage. Please feel free to contact us if you have any questions.