A reverse mortgage is a special type of loan arrangement for homeowners aged 62 or older. Homeowners can tap into the equity in their home without having to make monthly payments like they would with a traditional home equity loan or line of credit. A reverse mortgage may be an option if you own a single family home or a multi-family home when certain conditions are met.
Key points to remember
- A reverse mortgage allows eligible homeowners age 62 or older to tap into the equity in their home.
- A homeowner could get a reverse mortgage for a two-family home if they use the home as their primary residence.
- There are no monthly payments required for a reverse mortgage, although borrowers must meet age and credit requirements.
- Reverse mortgages must be repaid with interest when the borrower no longer lives in the house.
How a Reverse Mortgage Works
A reverse mortgage is not a traditional loan in itself. When a borrower gets a reverse mortgage, they are converting the equity in their home into regular cash flow. They receive monthly payments, which can be used to fund living expenses, health care or other costs in retirement. The owner must meet certain requirements, including:
- Use of the house as a principal residence
- Pay property taxes and insurance
- Maintain the house
During the borrower’s lifetime, he does not repay anything on the equity borrowed as long as he lives in the house. Interest and fees accrue on the balance. Once the borrower no longer lives in the home, for example because they have sold it, moved into a nursing home, or died, the amount borrowed is repayable in full.
This is different from a regular home equity loan or home equity line of credit. With these types of loans, the home serves as collateral. Borrowers can take equity up to the maximum amount allowed by the lender. The money is repaid over time, with interest and there is no age limit. If the borrower fails to repay a home equity loan or line of credit, the lender can initiate foreclosure proceedings to take possession of the property.
In a divorce settlement, one of the spouses can take out a reverse mortgage to “buy out” the other spouse’s interest in the home so that they can retain ownership of the property.
Reverse Mortgage and Two-Family Homes
Certain conditions must be met in order for someone to take out a reverse mortgage. Generally, if you get an FHA reverse mortgage, also known as a home equity conversion mortgage (HECM), you must:
- Be 62 or older
- Own the property or have paid off most of the mortgage
- Live in the property as your main residence
- Not be delinquent on federal debt, including tax debt and student loans
- Have resources to pay property taxes, insurance and maintenance
- Attend a HUD-approved Reverse Mortgage Information Session
There are also guidelines for the types of property that qualify for a reverse mortgage. Types of properties allowed include single-family homes and homes with 2 to 4 units.
This means that it is possible to take out a reverse mortgage if you own a two-family house, assuming all other conditions are met. For example, you might be a widow living with your adult daughter, her spouse, and their children. As long as you almost own the home and use it as your primary residence, you may qualify for a reverse mortgage.
You can also get a reverse mortgage if you own a duplex, triplex, or quadplex as long as you live in one of the units.
Who repays a reverse mortgage for a two-family house?
Over your lifetime, you typically pay nothing for a reverse mortgage as long as you live in the home. However, the money you borrowed from your own funds must eventually be repaid. If you live in a two-family house, who pays may depend on the name of the other person listed on the reverse mortgage and who is living in the house at the time.
If you co-borrow a HECM with a spouse, adult child, or someone else, that person can stay in the home even if you move or die without having to pay anything for the loan. Your spouse may also be able to stay in the home without having to pay off the loan balance if you die or move into nursing, even if they are not listed as a co-borrower. But they must continue to live in the house as their primary residence.
Anyone who is not a co-borrower on the reverse mortgage, such as a child, dependent or other relative, or a spouse who does not qualify as an eligible non-borrowing spouse, will be required to repay the loan balance if he wants him to stay at home. If they are unable to find the money to pay off the reverse mortgage, they will have to sell the house.
If the loan balance is greater than the value of the home, whoever is responsible for paying off the reverse mortgage does not have to pay the excess.
What is a Reverse Mortgage?
A reverse mortgage or home equity conversion mortgage (HECM) allows eligible homeowners aged 62 and over to earn income from the equity in their home. This type of loan must be repaid once the borrower no longer lives in the accommodation.
Can I get a reverse mortgage if someone else lives with me?
If you are married, live with an adult child, dependent or another relative, this will not affect your ability to get a reverse mortgage. You could also get a reverse mortgage if you live in a two-family duplex as long as you live in one of the units as your main primary residence.
When should a reverse mortgage be repaid?
A reverse mortgage does not require monthly payments while the borrower is alive, unless they no longer live in the home. If they move to another home, move to a full-time nursing facility, or die, the loan becomes repayable in full.
Who repays a reverse mortgage?
If other people are living in the home when a reverse mortgage becomes due, such as a spouse or adult child, they are responsible for repayment, unless they are listed as a co-borrower on the loan. If the borrower dies and there are no other co-borrowers or residents of the home, the borrower’s heirs would be responsible for paying off the balance.
Reverse mortgages can provide an additional retirement income stream for homeowners who have built up significant equity. If you live in a two-family home, it’s important to understand when you can and can’t get a reverse mortgage, and who is responsible for paying it off. It’s also worth comparing different reverse mortgage options to find the one that offers the most favorable terms for your situation.