A reverse mortgage is a type of loan that you can gain access to once you reach age 62. Many retirees use this tool to provide income during their retirement years. To get a reverse mortgage, you have to have a certain amount of equity in your home.
Function
The purpose of the reverse mortgage is to allow senior citizens to borrow against the equity in their homes without having to make any payments. Instead of making payments to a lender, the retiree actually receives payments from the lender. The mortgage does not have to be repaid until the house is sold or the homeowners pass away. This is one way many senior citizens help supplement Social Security income and retirement benefits.
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Equity Requirements
Several types of reverse mortgages are available. For most reverse mortgages, you have to have at least 40 percent equity in your home to qualify. You will only be able to borrow a certain amount of money depending on the loan-to-value-ratio requirements of the lender you are working with. If you have a small loan balance or own the property free and clear, you will have a better chance of getting approved.
Credit
One of the benefits of this type of mortgage is that it does not depend on your credit history. Since you will not be making any payments to the lender once you get your money, the lender does not care if you have a poor credit history. This makes it significantly different from any other type of mortgage loan. Lenders also do not take into consideration how much money you make from retirement benefits.
Mortgage Balance
While you could potentially qualify for a mortgage as long as you have 40 percent equity, you have to be able to pay off your mortgage balance with the funds from the mortgage. The government backs these loans and it requires that you pay off your mortgage with the funds from the loan before using the money for anything else. This allows you to get out of making a monthly payment and improve your financial situation.
Counseling
To qualify for a reverse mortgage, you have to go through an informational session with a qualified mortgage counselor. The government mandates that you sit down with a counselor so that she can help you see what your options are before getting involved with a reverse mortgage. While the process of getting a reverse mortgage can be beneficial, it also can deplete the equity in your home. The counseling session will ensure that you understand exactly what you are doing.