A FHA Reverse Mortgage Explained In Easy To Understand English

Many seniors are coming across the term 'FHA Reverse Mortgage' and are hearing of the benefits it could bring them in their retirement years. However, being a fairly recent financial product, many don't understand what it really offers them. What follows are the key points and what it offers you in real terms.

Also known as a HUD or HECM, a FHA reverse mortgage is backed and insured by the US government. What this means is that the government thinks this type of mortgage could be of real benefit for many seniors and that it backs up this belief with a promise that no citizen will be left out of pocket if they take out such a mortgage.

But first, what exactly is a reverse mortgage?

A conventional mortgage (often referred to as a forward mortgage) is when someone does not have enough money to buy a home outright. A lender agrees to loan them the money on condition that the lender holds the title deeds until all the money plus interest is paid back. If the borrower fails to make the monthly payments, they risk losing their home (because they don't yet own it; the lender does) and any money they have already paid towards buying the home. Over time, the amount owed decreases and the equity in the home increases.

A reverse mortgage works completely opposite. A homeowner owns their home outright but wants money they don't have. A lender agrees to give them the money (usually as fixed monthly payments) and guarantees that the borrower can live in their home for the rest of their life and each month they'll receive a payment from the lender. The homeowner stays just that; the homeowner keeps the title deeds and never the lender. No monthly repayments are made by the borrower as it's the lender who makes monthly payments. There is no risk to loosing the home. Unlike a conventional mortgage, the loan is not payable each month but only when the homeowner no longer lives in the house, because they have vacated it, sold it or died. The whole of the loan must then be paid back as one lump sum. However, this does not mean that the home has to be sold or surrendered to the lender - remember: the homeowner remains in possession of the title deeds and can pass on the home to their heirs.

Over time, the borrower is given more and more money, which means the loan amount grows and the equity in their home is reduced.

As you can see, there are great benefits for the homeowner. They get money they need, they can remain living in the home for the rest of their lives, they don't risk loosing their home, the home does not necessarily have to be sold to pay the loan and the home can even be willed to heirs. The loan can be paid back any way at all, by getting funds elsewhere or by applying for a regular mortgage on the home or by selling it.

So, why hasn't this type of loan been popular until quite recently?

Some of you may already have guessed what could go wrong. Firstly, the lender could go bust (for any number of reasons) and the borrower would then not get the money owing. Also, if the senior lived for a very long time, the equity in their home could eventually run out and the lender could make a loss and so go bust, which means that the borrower and others would not get the money that they were promised.

The US government looked hard at this type of loan and realized it offered many seniors a way out of debt and allowed them to better enjoy their retirement years. In 1989, the United States Congress authorized the Department of Housing and Urban Development (HUD) through the Federal Housing Administration (FHA) to issue a Home Equity Conversion Mortgage (HECM). The loan would be guaranteed through insurance premiums paid to the FHA.

This guarantees that any senior who joins a FHA reverse mortgage program will always, no matter what, get all the money they are entitled to. To date this remains the most popular program with over 90% of the market share.

By: Robin OBrien