How Much Can I Get From Reverse Mortgage?

how much can i get from reverse mortgageHow much can I get from a reverse mortgage or what is the maximum loan to value for a reverse mortgage?

These two questions come up over and over from visitors to our
website and blog.

Admittedly, a Reverse Mortgage is confusing for people that are not familiar with this type of home equity loan. It is called a “reverse” mortgage for a reason. It is exactly the reverse concept of a typical mortgage that folks are familiar with.

The answer to – What is the maximum loan to value (LTV) is not cut
and dried. If you were going to refinance your home using a
traditional mortgage loan that requires monthly repayment of the
loan, you will be told by various lenders that your maximum LTV
might be somewhere in the range of 70 to 85% depending on
whether you are getting cash out of the new loan or simply
reducing your interest rate and monthly principal and interest
payment.

Reverse Mortgage Versus a Regular Mortgage

In the case of a traditional refinance loan, you will be required
to credit and income qualify for the monthly payments on the new
loan. If your credit is marginal or poor you might be declined.
However, let’s assume your credit is good or even above average but
you are on a fixed income or your income has declined recently. In
today’s environment of strict underwriting standards you may not
qualify for the monthly payments on the new loan from an income
standpoint.

Essentially, You’re Stuck!

You will have to stay with the mortgage loan you currently have and continue making the monthly payments as they are.

BUT….if you have enough equity in your home, meaning you owe a
lot less on your home than your home is worth, you may easily
qualify for a reverse mortgage loan.

Here is where we circle back to our original question which was,
“What is the maximum LTV or How much can I get from a reverse
mortgage?

The answer to those questions is where things get complicated.
Because you will not be required to make monthly payments on a
reverse mortgage, you will not have to jump through the hoops of
credit and income qualifying for this loan.  BUT….
YOU MUST HAVE
A LOT OF EQUITY IN YOUR HOME TO QUALIFY!

The LTV will not be the same for every borrower. It cannot be said
the maximum loan amount is X dollars or the maximum LTV is X percent across the board for everyone.

The fact of the matter is; each borrower’s loan amount will be
different because each borrower has a different number of years of
life expectancy.

The Equation Works Like This:

The youngest borrower’s date of birth will be used to determine how much the maximum loan amount will be. Other factors at play are the value of the home in today’s market and the current interest rate.

Because there are no monthly mortgage payments being made on a
reverse mortgage, the interest is being deferred…or in other
words, added to the loan balance. This is also known as negative
amortization, meaning that your loan balance is growing over the
length of time you are alive or the length of time the loan is in
force.

For these reasons, the loan amount you will be offered will be
based mainly on the life expectancy of the youngest person on the
title to the home. Life expectancy is determined by using
insurance actuarial tables.

For example sake, lets say the youngest person on the title to the
home is a female 68 years old. Her life expectancy could easily be
20-25 years. That means that for 20+ years whatever amount of money
borrowed on her reverse mortgage will accumulate interest for the next 20+ years.

Lender’s Calculation

Lenders attempt to calculate the loan amount maximum they will
lend to each borrower so that they leave enough room between the
base loan amount and the future deferred interest that will pile up
on the loan balance so that at the end of the lifetime of the
youngest borrower, the home can be sold for at least the amount
owed on the reverse mortgage.

A reverse mortgage loan balance gets larger the longer the loan is outstanding. You must understand that this loan is a declining equity loan. That means that at the end of your life the lender is calculating that they will at least breakeven with regard to what your home can be sold for and what their loan payoff amount is. If the home cannot be sold for at least the amount owed, the lender will receive the shortfall amount from the FHA Mortgage Insurance fund…NOT your family or estate.

So….that is why there is no set LTV or maximum loan amount
offered across the board to all borrowers.

To recap, the three factors entered into the calculation by the lender are: The youngest borrower’s age, the present value of the home, and the current reverse mortgage interest rates.

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