HUD reverse mortgages account for over 90% of all reverse mortgages. It is a very popular type of reverse home mortgage because it has something good for all the parties involved. It is truly a win-win situation.
You, the homeowner, win because FHA (the Federal Housing Administration,) an agency within HUD (U.S. Department of Housing and Urban Development,) oversees how this type of reverse home mortgages work. It guarantees that you don’t get charged high fees when applying for a HUD reverse mortgage. In addition, it audits the reverse mortgage lenders to make sure that they treat you in a fair way.
It also benefits the lender because it limits potential loses. Limiting potential loses also benefits you because it allows the lender to offer you better terms.
The Workings of a HUD Reverse Mortgage
A HUD reverse mortgage is a mortgage designed for seniors over 62 years old. It’s a mortgage based on the equity in the house. In order to apply for a reverse mortgage, the borrower must have enough equity in the home.
It allows homeowners the possibility to enjoy the benefits of the retirement years with tax free income that doesn’t have to be paid back for as long as they live in the home. When the house is sold, the proceeds from the sale are used to ay the lender and the remaining funds are given to the borrower.
The HUD reverse mortgage is the basic kind of reverse mortgage and it is endorsed by the US HUD. Whenever a bank would like to offer HUD reverse mortgages, it needs to complete the credential process to do so. In order to conclude the documentation, lenders need to comply with a few hard prerequisites.
With a HUD reverse mortgage, the Government guarantees that it will pay the remainder of the balance due to the lender in case the home is sold for a lower amount that is owed to the lender. It also ensures that if you outlive the actual amortization tables, the HUD insurance will continue to make your monthly payments for as long as you live in the house (if that’s the method you have chosen to receive payments.)
Because of the backing of FHA, the reverse mortgage lender is able to offer you better terms because they know that their liability is limited to a set amount of money.
The FHA reverse mortgage insurance is a pool paid by all borrowers who have a reverse home mortgage. Every time someone gets a FHA reverse mortgage, two percent of the value of the mortgage is placed in the pool in addition to an added half a point paid every year.
You may be interested in knowing that these fees are already included in the cost of the loan and don’t represent an out-of-pocket expense for you. Usually, the only out-of-pocket expense is the cost of the appraisal.
The added costs make this type of loan a more expensive mortgage than a traditional loan. Before you get a reverse mortgage, you may want to think about how long you plan to stay in the house. If you are planning on staying under 5 years, you may want to consider a different alternative. If you’re not sure, talk to your reverse mortgage broker or counselor for advice.
Governmental Agencies Overseeing Reverse Mortgages
Most reverse mortgages are lent through private lending companies. However, most of these loans are insured by FHA. It may be a good idea to apply for a reverse mortgage ender certified to issue HUD reverse mortgages.
There are two main benefits for this. First, you get a better deal because the lender doesn’t risk as much in case of a loss since potential losses are covered by the insurance. Second, in order for a lender to be certified, it must be audited and it must comply with very tight regulations set by the Federal Government.
Always recall that although FHA does not really loan you the funds, it determines rigid policies that lenders must abide by. Lenders are continuously being scrutinized to guarantee that they stick to these policies.
One of the guidelines FHA has set for reverse mortgages is that anyone applying for a reverse mortgage is entitled to receive free counseling. During this session, the borrower can ask any questions related to a reverse mortgage and the different advantages and drawbacks related to getting this type of loan.
FHA Has as well set boundaries on how much funds may be borrowed by utilizing a reverse home mortgage. The sum changes depending upon the are of the country where you live on.
The HUD Reverse Mortgage Process
As more and more baby boomers reach retirement age, they start looking for creative ways to complement their incomes. For many retired people, social security and pension payments are just not sufficient to keep a lifestyle they have grown accustomed to. To solve this problem, many senior citizens are turning to reverse mortgages.
Applying for a reverse mortgage is very simple. Once you know you qualify for a reverse mortgage, the rest of the process is very easy. A good reverse mortgage broker should be able to help throughout the mortgage process and answer any additional doubts you may have.
There are four main steps in the mortgage application process:
1. Get familiar with how reverse mortgages work. These mortgages are different than traditional ones. Read about how they work AND when they are a good choice for you.
2. Find a professional and experienced reverse mortgage broker. We strongly recommend a lender is FHA certified. Make sure the lender specializes on this type of mortgages.
3. Go to the required counseling. FHA regulations indicate that you must receive a free counseling session from a third party. During this session, you may ask any questions you want. To set up an appointment, just ask your broker about it.
4. Compile the needed documentation. This documentation is much less that if you were applying for a traditional mortgage because there is not need to prove income and your credit score is of no concern.
Even though getting a HUD reverse mortgage is an important financial decision, you may keep in mind that thousands of people do it every day. Just make sure you get a reverse mortgage broker you trust and who can guide you and educate you throughout the whole loan process.