Features of Reverse Mortgages

With a reverse mortgage, the borrower always retains title or ownership of the home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.

The amount of funds that a borrower is eligible for depends on his or her age (or, in the case of couples the age of the younger spouse), the value of the home, interest rates and upfront costs. The older the borrower, the more proceeds he or she may receive.

There is a limit on the amount of funds a borrower can access during the first 12 months after closing. If a borrower is eligible for a $100,000 loan, for example, no more than $60,000, or 60 percent, can be accessed. In month thirteen, a borrower can take as much or as little of the remaining proceeds as he or she wishes. There are exceptions to the 60 percent rule. A borrower can withdraw a bit more if there is an existing mortgage, or other liens on the property, that must be paid off. A borrower can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount -- in which case that's an extra $10,000, or 10 percent of $100,000.

Lenders must conduct "financial assessments" of every reverse mortgage borrower to ensure the person has enough money to pay ongoing costs, such as property taxes and homeowners insurance, over the life of the loan.

Lenders will have to look at all of the borrower's income streams, such as Social Security and pensions, plus any additional resources, such as investments. Borrowers will have to provide documents, such as tax returns and bank account statements.

Any credit trouble (i.e., late payments) will have to be explained. The lender will determine whether the explanation qualifies as an "extenuating circumstance" in getting the reverse mortgage approved.

The financial assessment determines whether the lender will need to set aside a certain amount of money to pay for property taxes and other expenses over the course of the loan. The "set aside" will reduce the amount of loan proceeds available to the borrower.

To figure whether a set-aside will be required, the lender subtracts property charges, debt obligations and other living expenses from the borrower's income and assets. The resulting "residual income" is the amount of money left over each month. This figure is compared to a government threshold amount (based on region and family size) that determines whether a borrower has enough monthly residual income to pass the assessment.

If there is a shortfall in residual income or credit problems, the lender will be required to carve out a set-aside from the loan proceeds.

A large shortfall requires a full set-aside that covers all property taxes and insurance over the borrower's life. The lender will pay the expenses from the set-aside.