What Does FHA Insurance Mean for Reverse Mortgages?
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If you have ever bought a house, you are probably familiar with the concept of mortgage insurance. Mortgage insurance, whether provided by the government or through a private company, helps protect the lender or investor in the event that a borrower defaults on his or her mortgage.
But in the case of reverse mortgages, the insurance also serves an additional purpose: it protects the borrower.
Mortgage insurance protections
Reverse mortgages are loans that allow borrowers to draw down on their home equity. While still a loan, a reverse mortgage does not require monthly payments; instead payments are made to the borrower, or the borrower can draw on his or her home equity via a line of credit. The interest is paid when the loan becomes due and payable, usually due to the borrower moving from the home or passing away.
Mortgage insurance protects lenders, but it also protects reverse mortgage borrowers, who can rest assured that even if their lender goes out of business, they will still receive their reverse mortgage payments as agreed upon in the loan contract.
FHA insurance also provides a very specific protection to reverse mortgage borrowers: it guarantees that the borrower will never owe more to repay the loan than the home is worth at the time of sale. In other words, if the loan balance exceeds the value of the home when the loan becomes due, the borrower (or his or her heirs) will not owe more than the home is worth.
Federal Housing Administration insurance
The Federal Housing Administration insures the majority of reverse mortgage loans through the Home Equity Conversion Mortgage (HECM) Program. A federal agency, the FHA maintains an insurance fund called the Mutual Mortgage Insurance Fund. It holds insurance money that can be paid out in the form of claims both to lenders and borrowers when those claims arise.
The FHA also insures many “forward” or traditional home loans that are made by FHA-approved lenders. The Mutual Mortgage Insurance Fund is managed by the government to protect lenders and borrowers and help the housing market function smoothly.
While FHA insures many mortgages, and most reverse mortgages, it’s also important to recognize that there are loans that fall outside of FHA’s insurance requirements, both on the “forward” and “reverse” lending markets.
Jumbo and Non-FHA Loans
Many of the non-FHA insured loans are loans on high-value homes. The FHA maintains a lending limit for forward loans that depends on the location of a property.
For reverse mortgages, the lending limit is set nationally at $625,500. This means that a reverse mortgage borrower under the FHA’s insurance program will only be eligible to borrow based on the $625,500 loan limit.
For homeowners with homes valued much higher than $625,500, there is another reverse mortgage option, often called a “jumbo” loan. These loans are less common, but may enable homeowners to borrow more than they would under the HECM program.
Private companies offer these jumbos with private insurance, and while many of the terms are the same, they are not required to adhere to FHA program rules.
Reverse mortgage insurance premiums
Borrowers under the HECM program must pay for FHA mortgage insurance in two ways: first, through an upfront Mortgage Insurance Premium (MIP), and second through an annual mortgage insurance premium.
The upfront MIP depends on the initial amount that a borrower withdraws during the first year of the loan and is paid upfront. The annual MIP is not due until the loan becomes due and payable, usually when the borrower passes away or moves from the home.
FHA insurance provides several protections to borrowers, and it can offer peace of mind for those who are considering a reverse mortgage. If you have questions about how a reverse mortgage may help your financial situation, consult a reverse mortgage professional for more information.
Photo courtesy of: paulbr75
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