In summary, a reverse mortgage differs significantly from a normal forward mortgage in that a lender agrees to give the borrower money based on the equity value of the home and the loan is not paid back until the borrower no longer lives in the home. With a forward mortgage, equity is put back into the home with each monthly repayment: there are no monthly repayments with a reverse mortgage and the equity diminishes as more money is taken out by the borrower.
The FHA program is federally insured. The US government guarantees that the borrower will receive all the money that is owed no matter what. If the borrower lives for another 40 years in their home such that the payments exceed the equity in the home, the government guarantees the money will still be paid; if the lender goes out of business, the government guarantees the money will still be paid; if house prices fall so equity is reduced and can't cover the loan, the government guarantees the money will still be paid.
Without doubt, the fact that the government guarantees the loans is what makes this program so popular.
However, there are some limitations with the program. For one thing, only certain types of home are eligible. Single family dwelling, two-to-four unit properties, townhouses, detached homes, FHA-approved condominiums and some manufactured homes qualify, but holiday homes, trailer homes and commercial property and others don't.
Also, the maximum amount that can be borrowed is capped. Depending on location, the current limit varies from $200,160 to $362,790. The Home Keeper program has a higher maximum limit and for those with high-value homes who wish to take out more, a Jumbo reverse mortgage is a better option as there is no such maximum limit with these programs.
The amount that can be borrowed is usually less for a single person than it is with a Home Keeper but couples can usually borrow more than those who opt for a Home Keeper.
You can't use a FHA to buy a retirement home thereby eliminating monthly payments. Only a Home Keeper program offers this option.
The upfront costs also tend to be higher than proprietary programs. This can be a consideration, especially if you make early repayment on the loan. The higher cost is mainly because of the Mortgage Insurance Premium that must be paid when the policy is taken out - currently it amount to 2% of the property's value. There's also an annual premium of 0.5% that must be paid and is deducted from the amount given to the borrower.
Most brokers - originators - offer all three types of program. You should seek their advice as to which would best suit your needs. Chances are, a FHA reverse mortgage will be your best option but you will first need to tell the broker of your requirements.
Author: ROBIN OBRIEN
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