As a veteran, you may be wondering if a reverse mortgage loan could be right for you when the time comes. The HECM reverse mortgage loan was introduced over 30 years ago to provide seniors with a secure financial tool for retirement. But how does it stack up against a home lending tool like the VA Loan, which you may be more familiar with from your original, traditional mortgage? As we will explore, a reverse mortgage loan, while different from what you may be used to, is a compelling tool for veterans.
Designed to allow older homeowners to borrow against the equity in their homes, most reverse mortgages are Home Equity Conversion Mortgages (HECM), insured by the Federal Housing Administration (FHA). These loans are unique in that instead of making payments to the lender, borrowers receive money from the lender that helps them subsidize their retirement savings. You can select the most convenient method for receiving payments (monthly, lump sum, a line of credit), and determine how to best use the funds, whether to cover medical bills, pay other bills, or save for a rainy day. To be eligible for this type of loan, you must be 62 years or older, and have equity in your home among other qualifications.
In contrast, VA Loan rules are directed by the Department of Veteran Affairs (VA) and help service members, veterans, and their families buy, build, repair, retain, or adapt a home for personal occupancy (not as a second or vacation home) using a traditional mortgage. The VA Loan does not require a down payment or monthly mortgage insurance premium. There is also no minimum age qualification, but eligibility for this loan requires that you have suitable credit, adequate income, and a valid Certificate of Eligibility (COE) verifying that you meet the requirements for a VA loan.
You often hear about these “unanticipated” payments but in reality, these costs are standard with both traditional and reverse mortgage loans. Some of the fees that you will pay with a reverse mortgage loan are for the home insurance, loan origination, and title insurance. Fortunately, these fees can typically be rolled into the loan total to be financed.
The great news for VA Loan borrowers is that there are some closing costs that a veteran does not need to pay. While you will be expected to pay origination fees, title insurance and several typical closing costs (recording fees, survey, state and local taxes), many additional charges must be paid by the lender (commissions, brokerages fees, preparation fees, and more).
With a reverse mortgage loan, as long as the homeowner continues to meet their loan obligations (including paying real estate taxes, insurance, and upkeep), they will remain in the home and collect all of the loan proceeds. Your heirs and spouse are also protected by the FHA against owing more than the value of the house when it comes due. Perhaps most significantly, as of 2014, an eligible non-borrowing spouse is allowed to remain in the home after the death of his/her spouse, as long as the conditions of the loan continue to be fulfilled.
As with any other traditional mortgage, though, the veteran homeowner will be responsible for the upkeep and any relevant insurances, in addition to property taxes. Unfortunately, traditional mortgages do not have special safeguards in place for the spouses of those veterans who pass away before paying off the loan. If you were to pass away and your spouse could no longer make the necessary payments, and the lender was unwilling or unable to refinance the existing loan, the FHA recommends selling the home quickly to avoid foreclosure.
Truthfully, as a veteran, you are in the ideal position to appreciate both types of loans. If you took out a VA Loan for your traditional mortgage, you likely experienced many of the advantages that come with a loan designed specifically for veterans. And now, as you approach retirement or consider ways to enhance your retirement, a reverse mortgage loan gives you the opportunity to pull from the equity that you’ve worked so long to amass in your home. Age-in-place within your own home, enjoy non-taxable cash*, and know that your family is protected.
*Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance.