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How Much Equity is Needed for a Reverse Mortgage?

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While a “reverse mortgage” may sound like an oxymoron, it is a very real niche form of financing reserved for homeowners aged 62 or older. The first Federal Housing Authority (FHA)-insured reverse mortgage through the U.S. Department of Housing and Urban Development (HUD) debuted in 1989 and since then, older people have used reverse mortgages as a way to leverage home equity as an income source. As opposed to a traditional home mortgage in which you borrow money outright, with a reverse mortgage, a homeowner borrows against a home’s equity in exchange for cash. The loan, including accrued interest and fees, is not repaid until the house is sold or the borrower dies, at which point the homeowner’s beneficiaries can opt to repay the loan (and reclaim ownership of the house), sell the home, or do nothing, resulting in foreclosure.

With a reverse mortgage, the borrower’s amount of home equity decreases during the life of the loan while the amount of interest owed increases. There are several types of payment terms to consider for a reverse mortgage, including a single lump sum, monthly payments, a line of credit (allowing the user to withdraw money as needed) or some combination of those options.

The most common reverse mortgages are the FHA-backed loans offered through HUD, known as Home Equity Conversion Mortgages (HECMs). Additional types include single-purpose reverse mortgages — which are not offered everywhere and which limit the funds received to one use — and proprietary reverse mortgages, which are secured by private companies.

How much equity do you need to get a reverse mortgage?

While the amount of equity required may differ by lender and location, a typical minimum equity requirement is 50%. The requirement for a HECM is listed as someone who owns his or her home outright or has paid down a “considerable amount.” However, in essence you need 50% equity because a HECM requires you to use the reverse mortgage money to first pay down any remaining balance on your original mortgage. If you have less than 50% equity in your home, the reverse mortgage financing won’t be enough to cover the gap.

Using a reverse mortgage calculator, here are examples of how much someone would receive from a reverse mortgage in two different scenarios:

Example 1: A 70-year-old woman owns a single-family home valued at $300,000 with no balance left on her mortgage, which means her equity is 100%. It’s estimated she could receive a lump sum as high as $145,902, or 48.6% of her home’s value.

Example 2: A 70-year-old man who lives in a single-family home valued at $250,000 has $65,000 remaining on his mortgage. He would be eligible for a sum as high as $56,085.

The more equity you have in your property and the less you owe on your current mortgage, the more money you’ll get.

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Other requirements for getting a reverse mortgage

The terms of a HECM reverse mortgage are primarily determined by the age of the youngest borrower (generally, the older you are, the more money you may be able to get), the appraised value of the home in question and the creditworthiness of the borrower. And just like with any loan, current interest rates play a role, too.

There are several qualifications borrowers must meet to receive an HECM, including:

  • All potential borrowers (including any partners, if applicable) must be at least 62 years old.
  • The home in question must be the borrower’s primary residence.
  • The borrower can’t be delinquent on any federal debt (such as student loans or HUD-insured loans).
  • The borrower must have the financial ability to pay for additional housing-related expenses like property tax, insurance, maintenance and homeowners association fees.
  • Borrowers must participate in a consumer information session led by a HUD-approved HECM counselor. A list of approved lenders is available through the HUD website. There is typically a fee (around $125) for these sessions.
  • The property must meet FHA standards and be either a single-family home or a two- to four-unit home with one unit occupied by the borrower, an HUD-approved condominium project, or a manufactured home that meets FHA requirements.

In October 2017, HUD made three changes to the HECM program. These updates, which grandfathered in existing reverse-mortgage holders, may keep the program viable through stricter regulations, some of which may also save certain borrowers money in fees, but they also reduced the amount a homeowner can borrow. The changes are the following:

  • A flat 2% rate for mortgage insurance premiums (MIP): This move is beneficial for those taking more than 60% of the loan proceeds upfront, who previously would have had to pay an upfront premium of 2.5% of the value of their home in exchange for the lump-sum option. For those seeking smaller (below 60%) loan amounts, this upfront fee is now higher than the previous 0.5% fee.
  • Reduced ongoing borrowing costs: The annual MIP borrowers will pay over the course of their loans has been reduced to 0.5% from 1.25%.
  • Principal limit factor changes: This is the most complex change HUD implemented, but essentially it means that due to a lowered interest-rate floor, borrowers likely will end up paying less in total fees but also will be able to borrow less money overall.

Are there other options?

For seniors who don’t qualify for a reverse mortgage or who don’t think it’s the right choice for their financial future, there are other options that can help keep you financially comfortable.

  • A home equity loan or home equity line of credit (HELOC): Similar to a reverse mortgage, a home equity loan or HELOC allow a homeowner to convert a portion of their home equity into cash, which can be used for house repairs, medical expenses, cash flow in retirement or other expenses. Qualifying for one of these products requires a credit check and results in recurring monthly payments, but you’ll still own your home and only pay interest on the amount you borrow.
  • Cash-out refinance: Depending on your current interest rate and the interest-rate environment, a refinance could reduce the monthly mortgage payment or generate a lump sum in cash. Again, your home remains a beneficial asset for you and your heirs. Unlike a reverse mortgage, however, the monthly payments do not go away.
  • Downsizing: You may opt to sell your home outright in favor of a smaller, less-expensive property and a lump sum of cash from the proceeds.
  • Selling to a loved one: Some senior homeowners opt to strike a deal with their children or other heirs; they sell below the market price but stay in the home for a predetermined period of time.

Conclusion

There are several risks associated with reverse mortgages that potential borrowers should be aware of before beginning the application process.

  • Fees: To take out a reverse mortgage, you’ll typically need to pay closing costs, the 2% MIP and a loan origination fee. These upfront costs can be thousands of dollars, which is a modest dent in any accrued home equity.
  • The impact of interest rates: While a single lump sum typically has a fixed interest rate, other payment options have a variable-rate structure. The higher the interest rate, the quicker the equity will depreciate.
  • Potential loss of home equity: Because a reverse mortgage monetizes the equity you have built in your home, it can deplete this equity and gradually transfer ownership of the property back to the lender. Those with a goal of passing along their home to children or a charity may not want to consider a reverse mortgage.
  • Loss of tax deductions: Interest on reverse mortgages is not tax-deductible.

Reverse mortgages are not the right option for every senior homeowner, but they do make sense in some circumstances. The important factor to mull over before you move forward is how much benefit you will get from exchanging equity in your home for liquid cash.

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Mortgage

How to Recover From Missed Mortgage Payments

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understanding good faith estimate vs loan estimate
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Can you bounce back from a missed mortgage payment or two? The answer is yes, but there’s work involved. After all, your payment history has the greatest impact in determining your credit score.

Falling behind on your mortgage payments can affect your credit and finances, and you could lose your home to foreclosure. It’s critical to be proactive and not wait until it’s too late to get help.

How missed mortgage payments affect your credit

In most cases, mortgage lenders give you a 15-day grace period before charging a fee — often around 5% of the principal and interest portion of your monthly payment — for late payments. But your credit history typically isn’t impacted until you’re at least 30 days behind on a mortgage payment. At this point, your mortgage servicer may report your late mortgage payment to the three major credit reporting bureaus: Equifax, Experian and TransUnion.

Your credit score could drop by 60 to 110 points after a late mortgage payment, depending on where your score started, according to FICO research. Being 90 days late on your loan could lower your score by another 20 points or more.

It can take up to three years to fully recover from a credit score drop after being a month behind on your mortgage, FICO’s research found. Once you’re three months behind on your mortgage, that time can increase to seven years.

Recovering from missed mortgage payments

Falling behind on your mortgage can be a frustrating and scary experience, particularly if you’re facing the threat of foreclosure. Here are some options to help you get back on track after missed mortgage payments:

  • Repayment plan. Your loan servicer agrees to let you spread out your late mortgage payments over the next several months to bring your loan current. When your upcoming payments are due, you’d also pay a portion of the past-due amount until you catch up.
  • Forbearance. Your servicer temporarily reduces or suspends your monthly mortgage payments for a set amount of time. Once the mortgage forbearance period ends, you’ll repay what’s owed by one of three ways: in a lump sum, a repayment plan or by modifying your loan.
  • Modification. A loan modification changes your loan’s original terms by extending your repayment term, lowering your mortgage interest rate or switching you from an adjustable-rate to a fixed-rate mortgage. The goal is to reduce your monthly payment to a more affordable amount.

Be proactive about getting back on track and reaching out to your lender for help instead of waiting until you get late payment notices. If you think you’ll be behind soon or are already a few days behind, make contact now and review your options.

Extra help for homeowners affected by COVID-19

If you’re behind on mortgage payments because of a financial hardship due to the coronavirus pandemic, you may qualify for a mortgage relief program through the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Homeowners who have federally backed mortgages, and conventional loans owned by Fannie Mae or Freddie Mac, can request mortgage forbearance for up to 180 days. They can also request an extension for up to an additional 180 days.

Federally backed mortgages include loans insured by the:

  • Federal Housing Administration (FHA)
  • U.S. Department of Agriculture (USDA)
  • U.S. Department of Veterans Affairs (VA)

Reach out to your mortgage servicer to request forbearance. Even if your loan isn’t backed by a federal government entity, Fannie Mae or Freddie Mac, your servicer may offer payment relief options. You can find your servicer’s contact information on your most recent mortgage statement.

How many mortgage payments can you miss before foreclosure?

Your lender can begin the foreclosure process as soon as you’re two months behind on your mortgage, though it typically won’t start until you’re at least 120 days late, according to the Consumer Financial Protection Bureau. Still, it’s best to check your local foreclosure laws since they vary by state.

Here’s a timeline of how missed mortgage payments can lead to foreclosure.

30 days late

Your lender or servicer reports a late mortgage payment to the credit bureaus once you’re 30 days behind. Your servicer will also directly contact you no later than 36 days after you’re behind to discuss getting current.

45 days late

You’ll receive a notice of default that gives you a deadline — which must be at least 30 days after the notice date — to pay the past-due amount. If you miss that deadline, your servicer can demand that you repay your outstanding mortgage balance, plus interest, in full.

Your mortgage servicer will also assign a team member to work with you on foreclosure prevention options. This information will be communicated to you in writing.

60 days late

Once you’re 60 days late, expect more mortgage late fees, as you’ve missed two payments. Your servicer will send you another notice by the 36th day after the second missed payment. This same process applies for every month you’re behind.

90 days late

At 90 days late, your servicer may send you a letter telling you to bring your mortgage current within 30 days, or face foreclosure. You’ll likely be charged a third late fee.

120 days late

The foreclosure process typically begins after the 120th day you’re behind. If you live in a state with judicial foreclosures, your loan servicer’s attorney will file a foreclosure lawsuit with your county court to resell the home and recoup the money you owe. The process may speed up in nonjudicial foreclosure states, because your lender doesn’t have to sue to repossess your home.

You’re notified in writing about the sale and given a move-out deadline. There’s still a chance you can keep your home if you pay the amount owed, along with any applicable legal fees, before the foreclosure sale date.

Can you get late mortgage payment forgiveness?

If you’ve otherwise had a good payment history but now have one missed mortgage payment, you could try writing a goodwill adjustment letter to request that your servicer erase the late payment information from your credit reports.

Your letter should include:

  • Your name
  • Your account number
  • Your contact information
  • A callout of your good payment history prior to missing a payment
  • An explanation of what led to the late mortgage payment
  • The steps you’re taking to prevent late payments in the future

End the letter by requesting that your servicer remove the late payment from your credit reports, and thank your servicer for their consideration. Print, sign and mail your letter to your servicer’s address.

The letter is simply a request; your servicer isn’t required to grant late mortgage payment forgiveness. If your servicer agrees to remove the late payment info from your credit reports, your credit scores may eventually increase — so long as you continue to make on-time payments.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

What Is the Minimum Credit Score for a Home Loan?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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If you’re hoping to become a homeowner, your credit score may hold the keys to realizing that dream. Knowing the minimum credit score needed for a home loan gives you a baseline to help decide if it’s time to apply for a mortgage, or take some steps to boost your credit first.

It’s possible to get a mortgage with a score as low as 500 if you can come up with a 10% down payment. Keep reading to learn the minimum credit score requirements for the most common loan programs.

What are the minimum credit scores for home loans?

Your credit score plays a big role in determining whether you qualify for a mortgage and what your interest rate offers will be. A higher credit score means you’ll likely get a lower rate and a lower monthly mortgage payment.

There are four main types of mortgages: conventional loans, and government-backed loans insured by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA). Conventional loans, which are the most common loan type with guidelines set by Fannie Mae and Freddie Mac, have a credit score minimum of 620. Although some loan programs don’t specify a minimum credit score needed to qualify, the approved lenders who offer them may set their own minimum requirements.

The table below features the minimum credit scores for these home loans, along with minimum down payment amounts and for whom each of the loans is best.

Loan type

Minimum credit score

Minimum down payment

Who it’s best for

Conventional6203%Borrowers with good credit
FHA500-579 with 10% down payment
580 with 3.5% down payment
10% with a score of 500-579
3.5% with a minimum score of 580
Borrowers who have bad credit and are purchasing a home at or below their area FHA loan limits
VANo credit minimum, but 620 recommendedNo down payment requiredActive-duty service members, veterans and eligible spouses with VA entitlement
USDA640No down payment requiredBorrowers in USDA-eligible rural areas with low- to moderate-incomes

What is a good credit score to buy a house?

Meeting the minimum score requirement for a home loan will limit your mortgage options, while higher credit scores will open the doors to more attractive rates and loan terms. A good credit score can also provide you with more choices for home loan financing.

  • 740 credit score. You’ll typically get your best interest rates for a conventional mortgage with a 740 (or higher) credit score. If you make less than a 20% down payment, you’ll pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your home loan.
  • 640 credit score. Rural homebuyers need to pay attention to this benchmark for USDA financing. Exceptions may be possible with proof that the new payment is lower than what you’re paying for rent now.
  • 620 credit score. The bare minimum credit score for conventional financing comes with the largest mark-ups for interest rates and PMI.
  • 580 credit score. This is the bottom line to be considered for an FHA loan with a 3.5% down payment.
  • 500 credit score. This is the lowest credit score you can have to qualify for an FHA loan, but you must put 10% down to qualify.

Annual percentage rates by credit score

Your mortgage rate is a reflection of the risk lenders take when they offer you a loan. Lenders provide lower rates to borrowers who are the most likely to repay a mortgage.

Here’s a glimpse of the annual percentage rates (APRs) and monthly payments lenders may offer to borrowers at different credit score tiers on a $300,000, 30-year fixed loan. APR measures the total cost of borrowing, including the loan’s interest rate and fees.

FICO Score

APR

Monthly Payment

760-8503.011%$1,267
700-7593.233%$1,303
680-6993.410%$1,332
660-6793.624%$1,368
640-6594.054%$1,442
620-6394.6%$1,538
*Based on national average rate data from myFICO.com for a $300,000, 30-year, fixed-rate loan as of May 4, 2020.

As the credit score ranges fall, the interest rates are higher. Borrowers with a score of 760 to 850, the highest range, saw an average monthly payment of $1,267. Borrowers in the lowest credit score tier of 620 to 639 saw their monthly payment jump to $1,538. The extra $271 in monthly payments adds up to an additional $97,560 in interest charges over the life of the loan.

Steps for improving your credit score

Now that you have an idea of the extra cost of getting a minimum credit score mortgage, follow some of these tips that may help boost your score.

  • Make payments on time. It may seem obvious, but recent late payments on credit accounts hit your scores the hardest. Set your bills on autopay if possible to avoid forgetting to pay one.
  • Pay off balances monthly. Try to pay your entire balance off each month to show you can manage debt responsibly.
  • Keep your credit card balances low. If you do carry a credit card balance, charge 30% or less of the available credit limit on each account.
  • Have a mix of different credit types. Mortgage lenders want to see you can handle longer-term debt as well as credit cards. A car loan or personal loan will help demonstrate your ability to budget for installment debt payments over time.
  • Avoid applying for new accounts. A credit inquiry tells your lender you applied for credit. Even if you were applying to get your best deal on a credit card or car loan, multiple inquiries could drop your scores, and give a lender the impression you’re racking up debt.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.