Florida Reverse Mortgage Guide With Types and Requirements

By the end of this guide, you will have a clear understanding of whether a reverse mortgage is the right choice for you. And if you need further guidance, our team at MakeFloridaYourHome is always here to help.

What Is a Reverse Mortgage?

A reverse mortgage differs from a home purchase loan, as it allows homeowners aged 62 or above, with significant home equity, to borrow money against their home's value.

The borrower can choose to receive the funds as a lump sum, fixed monthly payment, or line of credit. Unlike a forward mortgage, a reverse mortgage does not require the borrower to make any loan payments during their lifetime.

Instead, the borrower is not required to repay the loan until they die, move out permanently, or sell the home, up to a certain limit. Lenders must ensure that the loan amount does not exceed the home's value as per federal regulations.

If it does, the borrower or their estate will not be held accountable for paying the lender the difference, as the program's mortgage insurance covers it.

Key Takeaways:

• A reverse mortgage is a type of loan that enables homeowners aged 62 or above, with considerable home equity, to borrow money against their home's value.

• Unlike a forward mortgage, the borrower does not have to make any loan payments during their lifetime.

• The borrower is not required to repay the loan until they die, move out permanently, or sell the home, up to a certain limit.

Use Your Home Equity

Reverse mortgages can be a valuable source of funds for senior citizens who have most of their net worth tied up in their home equity.

Home equity refers to a home's market value minus any outstanding home loans. However, these loans can be complex and expensive, making them more suitable for some homeowners than others.

The National Reverse Mortgage Lenders Association states that in Q1 of 2022, homeowners aged 62 and above had $11.2 trillion in home equity, which is the highest recorded since 2000. This highlights how significant home equity is as a source of wealth for retirement-age individuals.

Home equity only becomes usable wealth if the homeowner sells their property or borrows against it.

Reverse mortgages can be beneficial, particularly for retirees with limited income and few assets, but also for those who want to diversify their income and minimize investment risk, sequence risk, and longevity risk.

Additionally, reverse mortgages provide a source of cash without requiring monthly debt payments.

How a Reverse Mortgage Works

In a reverse mortgage, the lender makes payments to the homeowner instead of the other way around. The homeowner can choose how they receive these payments (which will be discussed in the next section) and only has to pay interest on the proceeds received.

The interest is added to the loan balance, so no upfront payment is required. Furthermore, the homeowner retains ownership of the home. Over time, the homeowner's debt increases, and their home equity decreases.

Like a forward mortgage, the home is collateral for a reverse mortgage. When the homeowner moves or passes away, the proceeds from the home's sale are used to repay the reverse mortgage's principal, interest, mortgage insurance, and fees to the lender.

Any sale proceeds exceeding the amount borrowed go to the homeowner (if still alive) or the homeowner's estate (if deceased). In certain situations, the heirs may pay off the mortgage to keep the property.

Types of Reverse Mortgages

Reverse mortgages come in three types, the most common being the home equity conversion mortgage (HECM).

Almost all reverse mortgages offered by lenders on home values below the conforming loan limit (which is set annually by the Federal Housing Finance Agency) fall under the HECM category. This is the type of mortgage that will be discussed in this article.

It is also called a Federal Housing Administration (FHA) reverse mortgage and is only available through an FHA-approved lender.

If your home is valued higher than the conforming loan limit, you can explore a jumbo reverse mortgage, also known as a proprietary reverse mortgage.

When obtaining a reverse mortgage, there are six ways to receive the proceeds:

• Lump sum - Get all the proceeds at once with a fixed interest rate.

• Annuity (Equal monthly payments) - Lender provides consistent payments as long as one borrower resides in the home, also known as a tenure plan.

• Term payments - Lender gives the borrower regular payments for a specific time, as the borrower chooses.

• Line of credit - The homeowner borrows money from the lender as needed, paying interest on the borrowed amounts only.

• Annuity plus line of credit - Steady payments provided for as long as one borrower occupies the home, while a line of credit is available if additional funds are needed.

• Term payments plus line of credit - The lender gives the borrower regular payments for a specific time, with the line of credit available if needed later.

One can also use a reverse mortgage called "HECM for purchase" to buy a different home than their current one. However, to qualify for a reverse mortgage, the homeowner must typically have at least 50% equity based on their home's current value, not the purchase price.

Who Is a Reverse Mortgage Right For?

A reverse mortgage can provide a lump sum or line of credit similar to a home equity loan or HELOC. However, it differs because you don’t need an income or good credit to qualify, and you don’t make any loan payments while you occupy the home as your primary residence.

This makes a reverse mortgage an attractive option for seniors who:

• Don't want the responsibility of making a monthly loan payment.

• Can't afford a monthly loan payment.

• Can’t qualify for a home equity loan or cash-out refinance due to limited cash flow or poor credit.

Other types of loans, such as unsecured personal loans, are available but require monthly repayment and don’t allow seniors to tap into their home equity without selling the home.

What Is Required for a Reverse Mortgage?

There are a number of requirements you must meet in order to qualify for a reverse mortgage.

Property Type

You might qualify for a reverse mortgage if you possess a home, condominium, townhouse, or manufactured home constructed on or after June 15, 1976.

However, under FHA regulations, those residing in cooperative housing cannot obtain reverse mortgages since they do not legally own the real estate they inhabit; they hold corporation shares.

In New York, where cooperative housing is prevalent, state law restricts reverse mortgages in co-ops, making them available only in one- to four-family residences and condos.

Age, Equity, and Fees

Even though reverse mortgages do not have any income or credit score requirements, they do have specific criteria for qualification.

The borrower must be at least 62 years old and have significant equity in their home, which could be either owning the home outright or having at least 50% equity in it.

There are additional costs that borrowers will need to pay, such as an origination fee, an up-front mortgage insurance premium, standard closing costs, ongoing mortgage insurance premiums, loan servicing fees (sometimes), and interest.

It's important to note that the federal government has limits the amount lenders can charge for many of these fees.

Counseling

To comply with HUD regulations, all individuals interested in obtaining a reverse mortgage must participate in a HUD-approved counseling session. The counseling session typically lasts for 90 minutes and comes with a fee of approximately $125.

During the session, a counselor will discuss the advantages and disadvantages of taking out a reverse mortgage based on your financial and personal situation.

Additionally, the counselor will clarify how a reverse mortgage may impact your eligibility for Medicaid and Supplemental Security Income (SSI). The various ways to receive the proceeds will also be reviewed.

Collateral Protection

As a reverse mortgage borrower, you must pay your property taxes, homeowners insurance, and homeowners association fees (if applicable) on time and maintain the property in good condition.

You must repay the loan if you are away from the property for more than one year, even for medical reasons, and are no longer using it as your primary residence. Typically, this is done by selling the property.

What Are the Costs of a Reverse Mortgage?

In October 2017, HUD made adjustments to insurance premiums for reverse mortgages. These premiums give lenders a pool of funds to draw from so they don't lose money when the loan balance exceeds the home's value.

One of the changes was to increase the up-front premium from 0.5% to 2.0% for three out of four borrowers and decrease the up-front premium from 2.5% to 2.0% for the other one out of four borrowers.

Previously, the up-front premium was linked to how much borrowers took out in the first year, with those who took out the most paying the higher rate.

However, all borrowers now pay the same 2.0% rate based on the home's value, with a cap of $6,000, even if the home is worth more. Borrowers must also pay annual MIPs of 0.5% (formerly 1.25%) of the amount borrowed.

This change saves borrowers $750 a year for every $100,000 borrowed and helps preserve more of the homeowner's equity over time while increasing the possibility of passing down the home to heirs.

Reverse Mortgage Interest Rates

The only option with a fixed interest rate is the lump sum (single disbursement) reverse mortgage. This means you'll receive all the proceeds at the time of loan closing.

The other five choices have adjustable interest rates, which makes sense since you'll be borrowing money over many years, and interest rates tend to fluctuate.

These variable-rate reverse mortgages are linked to a benchmark index, often the Constant Maturity Treasury (CMT).

Along with one of the base rates, the lender adds a margin of one to three percentage points. For instance, if the index rate is 2.5% and the lender's margin is 2%, your reverse mortgage interest rate will be 4.5%.

Interest will accumulate over the life of the reverse mortgage, and your credit score won't affect your ability to qualify or the reverse mortgage rate you receive (though it can affect whether the lender may require a Life Expectancy Set Aside account for your property taxes, homeowners insurance, and other necessary property expenses).

How Much Can You Borrow with a Reverse Mortgage?

The amount of money you can receive from a reverse mortgage will be determined by your lender and your chosen payment plan.

In the case of a HECM, the amount you can borrow will be based on the younger borrower's age, the interest rate of the loan, and either the maximum claim amount set by the FHA, which is $970,800 as of Jan. 1, 2022, or the appraised value of your home, whichever is lower.

However, you cannot borrow the full amount that your home is worth. Part of your home equity must be used to pay for the loan expenses, such as mortgage premiums and interest.

Here are a few more details on how much you can borrow:

• The loan amount will be based on the age of the youngest borrower or the younger spouse if they are married, even if they are not borrowers. The older the youngest borrower, the higher the loan amount will be.

• You can borrow more if you have a lower mortgage rate.

• A higher property appraisal value will allow you to borrow more.

• A good financial assessment of your reverse mortgage application will increase the amount you can borrow. The lender will not hold back part of the proceeds to pay for your property taxes and homeowners insurance.

The amount you can borrow is determined by the initial principal limit, which the federal government lowered in October 2017. This makes it more difficult for younger homeowners to qualify for a reverse mortgage, but it also helps to protect their equity.

The government reduced the limit because the mortgage insurance fund's deficit had nearly doubled in the previous fiscal year.

Additionally, if you opt for a lump sum or line of credit, you can't borrow the full amount of your initial principal limit in the first year. Instead, you can borrow up to 60% or more if you use the funds to pay off your forward mortgage.

You will only receive the upfront amount if you choose a lump sum. If you choose a line of credit, your credit line will grow over time, but only if there are unused funds in your line.

Avoid Reverse Mortgage Scams

Reverse mortgages are a potentially lucrative product, and with a vulnerable population of borrowers who may have cognitive impairments or be in desperate need of financial assistance, scams are rampant.

Unscrupulous vendors and home improvement contractors often target seniors, promising to help them secure reverse mortgages to pay for home improvements so that they can make a profit. However, they may not deliver on their promises or may steal the homeowner's money outright.

In addition, relatives, caregivers, and financial advisors have been known to take advantage of seniors by using a power of attorney to obtain a reverse mortgage on their home and then steal the proceeds.

They may also convince seniors to purchase a financial product such as an annuity or whole life insurance policy that the senior can only afford by obtaining a reverse mortgage.

Unfortunately, these transactions are often in the best interest of the financial advisor, relative, or caregiver and not the homeowner. These are just a few scams associated with reverse mortgages that can cause significant harm to unwary homeowners.

How to Avoid Reverse Mortgage Foreclosure

A potential risk associated with a reverse mortgage is the likelihood of foreclosure, which can occur if the borrower fails to meet certain requirements, even though they are not responsible for making mortgage payments.

To prevent foreclosure, reverse mortgage borrowers must live in and maintain their homes. Neglecting upkeep can lead to a decline in the home's value, making it difficult for the lender to recover the full amount of the loan when the home is sold.

Additionally, reverse mortgage borrowers must keep up with property taxes and homeowners insurance to protect the lender's interest in the property.

Failure to pay property taxes can result in the seizure of the home by the local tax authority, while a lack of homeowners insurance could damage the lender's collateral in the event of a house fire.

When Do You Have to Repay a Reverse Mortgage?

The borrower of a reverse mortgage will be obligated to pay back the loan if any of the following events occur:

• The borrower sells the home.

• The borrower is absent from the home for a period exceeding one year.

• The borrower passes away.

• The borrower fails to maintain the property.

• The borrower stops paying their property taxes or homeowners insurance premiums.

However, certain exemptions to these regulations apply to qualified non-borrowing spouses who wish to continue residing in the home following the death of their borrowing spouse.

Can You Refinance a Reverse Mortgage?

It is possible to refinance a reverse mortgage, but due to its significant costs, it is recommended to do so only in specific situations.

These situations may include the need to add a spouse to the loan, the requirement for more equity, or a substantial reduction in the interest rate.

The costs of origination fees, upfront mortgage insurance premiums, and other closing expenses should be considered before deciding to refinance a reverse mortgage.

Get Help

In conclusion, a reverse mortgage can be a useful tool for some seniors to access their home equity and improve their financial situation in retirement.

However, it's essential to understand the risks and costs associated with this type of loan. If you're considering a reverse mortgage, it's crucial to research and consult a financial professional to determine if it's the right choice for your unique circumstances.

And if you're looking for guidance on reverse mortgages or any other aspect of retirement planning, don't hesitate to contact MakeFloridaYourHome.

Their team of experts can help you make an informed decision and navigate the complexities of the reverse mortgage process.