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Borrower Requirements and Responsibilities
Age qualification: All title-holders must be at least 62 years old.
Primary lien: A reverse mortgage must be the 1st lien on the home. You can use a reverse mortgage to payoff your existing 1st mortgage.
Occupancy requirements: The property used as collateral for the reverse mortgage must be the primary residence. Second homes and investment properties do not qualify.
Taxes and Insurance: You must pay taxes, insurance and HOA dues at all times.
Property Condition: You must maintain your home properly.
Conveyance of the mortgaged property by will or operation of law to the estate or heir after mortgagor's death: When a reverse mortgage becomes due and payable as a result of the borrower's death and the property is conveyed by will or operation of law to the estate, they may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property.
Common terms you will hear throughout the Reverse mortgage process
Appraisal:
A report from a licensed appraiser that states an opinion on the value of a property based on similar sales of other properties in the area.
Closed End Line of Credit:
A line of credit that no longer allows a draw of new credit.
Counseling:
An independent third-party service approved by HUD, to make sure the borrower fully understands the terms of the reverse mortgage. This is mandatory for all HECM programs and in most states for all types of reverse mortgages.
Equity Sharing:
A feature offered in proprietary reverse mortgages that allows a borrower to receive cash for giving up more of their home's equity than initially agreed. These are no longer offered to the best of our knowledge.
Initial Principal Limit:
Maximum amount of funds you are qualified to receive.
Interest Rates
Expected Interest Rate: The interest rate used to calculate the principal limit. It equals either the 10-year CMT or the 10-year LIBOR rate plus a margin.
Actual Interest Rate: The interest rate first charged on the loan beginning at closing; it equals one of the HUD-approved interest rate indices (1-month CMT, 1-year CMT, or 1-month LIBOR) plus a margin. Also called Initial Interest Rate.
Interest Rate Structure 1. Index: Reverse mortgage interest rates are tied to one of two indexes, the Constant Maturity Treasury rate (CMT) or the London Interbank Offered Rate (LIBOR).
2. Margin: An amount added to the Index (CMT or LIBOR) to determine both the Expected and Actual interest rates. The margin is determined by the loan investor.
Variable Rate: An interest rate that adjusts monthly or annually.
Fixed Rate: An interest rate that remains constant over the life a the loan.
Loan Closing Date:
Date that your reverse mortgage closes. There will be a 3 day right of rescission prior to funding. You must wait 3 business days prior to receiving cash.
Maximum Claim Amount:
The lesser of a home's appraised value or the maximum loan limit that can be insured by FHA. Used in determining the principal limit.
MIP (Mortgage Insurance Premium):
An insurance fee charged to borrowers that is equal to a percentage of the maximum claim amount. There will also be a annual premium based on the loan balance. The MIP guarantees if the lender goes out of business, the FHA will step in and ensure the borrower will continue to receive their loan funds. The MIP also guarantees that when the property is sold to pay back the loan, the borrower will not owe more than the value of the home.
Monthly Service Fees:
The lender will incur costs servicing your reverse mortgage. The service fee compensates them for that service.
Net Principal Limit:
Amount of funds you will have available after closing costs are deducted.
Non-Recourse Loan:
This limits liability for the borrower or his or her heirs if the loan balance is more than the value of the home.
Open End Line of Credit:
A line of credit that allows the borrower to draw funds up to the limit.
Origination Fee:
A fee charged by the lender. It is capped at 2% or $6,000, whichever is less.
Prepayment Penalty:
If you pay off the reverse mortgage completely before it is due, you will not be charged a penalty by HUD.
Principal Limit:
The total loan proceeds available at closing.
Principal Limit Lock:
A feature that allows borrowers to lock-in the principal limit for a specific period of time.
Recordation Tax:
A special assessment for recording a mortgage lien. The tax is typically paid at closing by the borrower.
Servicing Set Aside:
Amount of funds estimated at closing that will be needed to service the reverse mortgage over the projected life of the loan. These funds are deducted from the initial principal limit and automatically paid each month to the loan servicer.
Subordinated Debt:
A lien placed on the home behind the reverse mortgage.
Tenure Payment Option:
Fixed monthly loan advances for as long as a borrower lives in a home.
Term Payment Option:
Fixed monthly loan advances or payments for a specified period of time.
Title Insurance:
A type of insurance policy that protects a homeowner or lender against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. The cost for the policy is typically paid at closing by the borrower.
