Given today's economic conditions, more and more seniors are finding themselves without sufficient funds for basic living expenses, according to Meg Burns, director of the Federal Housing Association's Single Family Program Development.
"Maybe they face immediate large medical expenses, or they don't have sufficient funds to cover the increases in food, gasoline and utilities," Burns says. Whatever the reasons, sometimes there are financial needs that cannot be met on fixed incomes.
Enter the Home Equity Conversion Mortgage, or HECM, FHA's reverse mortgage program, which enables seniors to tap into their home equity to create additional income. Only available to individuals who are 62 or older and own their homes outright or have low mortgage balances, the program requires that borrowers live in the homes and pay real estate taxes, insurance and other payments, such as utilities.
The loans are deferred until they no longer occupy the dwellings and then are repaid through the sale of the homes or from the estates.
"If there are heirs who intend to keep the homes, they are obligated to pay off the liens," Burns says.
Is the reverse mortgage only for seniors in desperate financial need?
"We say 'no,'" says Burns, who is also the manager of HECM, which administers and insures 95 percent of all reverse mortgages made today. "Often when I talk to seniors, there are many who are mainly worried about future access to funds. What if the car breaks down or the roof blows off? They are looking for peace of mind. It's a great product for so many people."
It is also becoming increasingly popular. Since its development, in 1987, the HECM program has provided financial security to a half-million seniors.
The first step in the process to obtain an FHA reverse mortgage is to contact a counselor in your area. Advice administered by a trained counselor is required. A document certifying you have received and understand the product is issued before you visit a lender to get the loan.
You can contact a counselor and get a list of FHA-approved lenders in your area by calling 800-569-4287 or going to https://entp.hud.gov/idapp/html/hecm_agency_look.cfm.
You will receive a package from the National Council on Aging, including complete information about the product.
The counseling appointment, which can be conducted by telephone or in person, may cost $125. The lender will charge basic mortgage loan costs, including appraisal, pest inspection, title insurance, FHA mortgage insurance protection and county and state recordings, all of which can be paid from loan proceeds.
Using a formula based on age and the interest rate of the loan, the reverse mortgage counselor and lender will calculate for you what you will receive.
There are also a variety of options available for receiving reverse mortgage payments. Depending on your needs and wishes, you may have monthly payments sent to you as long as one borrower continues to occupy the property as a principal residence, or equal monthly payments may be selected for a fixed period of time.
Another option is a line of credit. There are also packages that include a line of credit combined with monthly payments.
Should the mortgage reversal process be a family affair?
"We recommend that if seniors trust and are comfortable with their children and heirs, their involvement is a positive addition to the process," Burns says. "In fact, we are seeing more seniors enter the program at the urging of their children."
Finally, what if the loan is used inappropriately?
"We do not mandate how the money is used," Burns says. But even when it is spent in what some might feel is an unwise way or for a nonessential, there often is a positive outcome.
"I hear people say, 'I was able to visit children and grandchildren I haven't seen in years, and it was wonderful,'" she says.