Homebuyers and homeowners have a wide array of loan options to choose from to help them meet their financial goals, including forward mortgages and reverse mortgages.
Forward mortgages, which are loans to help you buy a home, are how most people finance the purchase of a home and start to build equity. A reverse mortgage, on the other hand, allows you to tap the equity in your home.
Learn more about the differences between forward mortgages and reverse mortgages, including eligibility, maturity, and payment structures. Also learn how to use each loan type for different purposes so you can determine which one may meet your needs.
What’s the Difference Between Reverse Mortgages and Forward Mortgages?
|Reverse Mortgage||Forward Mortgage|
|Eligibility||62 or older, income and credit history||Income and credit history, plus lender criteria|
|Payments||Made to borrower||Made to lender|
|Loan-to-Value||Based on age of the youngest borrower, and interest rates||Based on lender’s limits|
|Mortgage Insurance||Insures borrowers||Insures lender|
Lenders look at your financial profile as part of their loan underwriting process for traditional mortgage, or forward mortgages. They take into account factors such as your credit score, credit history, income, debt, and assets.
Reverse mortgage lenders take into account income and credit history, but they also consider the age of the borrower to calculate an expected term of the loan. You must be at least 62 to use a reverse mortgage. Even though the bank will be making payments to the homeowner, the homeowner is still responsible to pay taxes and homeowners insurance.
Forward mortgages are for fixed terms, typically of 30 years, but also are available for other terms including 10 years, 15 years, or 20 years. With reverse mortgages, the loan is repaid when the borrower dies or no longer lives in the home.
Homeowners with a forward mortgage make regular fixed monthly payments that include principal and interest. Homeowners with a reverse mortgage receive regular monthly payments or can access a line of credit with a variable rate, or they can receive a lump sum with a fixed rate.
Forward mortgages are available with a low down payment. Mortgages offered by Federal Housing Administration (FHA)-approved lenders, for example, only require 3.5% of the home’s value as a down payment for first-time homebuyers.
The reverse mortgage loan-to-value (LTV) limit is called the “principal limit.” The principal limit is calculated based on the age of the youngest borrower, interest rate, and value of the home. Home Equity Conversion Mortgages (HECM) are reverse mortgages offered by FHA-approved lenders and have a maximum loan limit of $970,800.
HECMs are the most popular form of reverse mortgage. You can also get a proprietary reverse mortgage from a private lender for a larger amount than the FHA limit.
Mortgage insurance protects the lender if the borrower defaults on the payments. Forward mortgages lenders usually charge mortgage insurance for loans that have a loan-to-value ratio of more than 80%.
FHA-approved HECMs require mortgage insurance for all loans of 2% initially, then 0.5% of the loan balance annually. Reverse mortgages that are not from FHA-approved lenders, or proprietary reverse mortgages, may not require mortgage insurance.
The FHA guarantees mortgages for approved lenders. If the borrower defaults, the FHA pays the lender.
The FHA’s mortgage insurance for HECMs is paid for by the homeowner. If the home is sold for less than the remaining HECM, the homeowner isn’t responsible for the balance. FHA mortgage insurance would pay the balance to the lender. The FHA HECM program is the only federally insured reverse mortgage program. To qualify you must:
- Be 62 years of age or older
- Own the property outright or have a small mortgage balance
- Occupy the property as your principal residence
- Not be delinquent on any federal debt
- Participate in a consumer information session given by an approved HECM counselor
Reverse mortgages are complicated. The FHA requires potential HECM borrowers to attend a counseling session before the lender can issue a loan commitment. The counseling covers:
- Features of a reverse mortgage
- Client responsibilities under a reverse mortgage
- Costs to obtain a reverse mortgage
- Financial/tax implications of a reverse mortgage
- Financial or social service alternatives to a reverse mortgage
- Warnings about potential reverse mortgage/insurance fraud schemes and elder abuse
Forward mortgages usually contain a “due on sale” provision. If the property is sold, or ownership is otherwise transferred, the mortgage becomes payable in full. Federal law exempts transfer of a home at death to a spouse or children from “due on sale.”
HECM reverse mortgages are payable in full at the death of a surviving spouse. There are no exemptions for a transfer to children.
The Bottom Line
Forward mortgages and reverse mortgages both offer benefits, but in different ways. Reverse mortgages are used by seniors to unlock equity in their homes without obligations to make payments to the lender. If you want to tap your equity but you aren’t 62 or older, a home equity loan, home equity line of credit, or refinancing the mortgage are alternative options.
Reverse mortgages are complex financial products. If you are considering one to supplement your retirement plan, be sure you understand how it works and how it may affect your family in the future.
Forward mortgages provide funding to help you buy a home to start building your equity. Forward mortgages are used to finance the purchase of a home, or in the case of refinancing, access equity. Forward mortgages always have a regular payment schedule.
Frequently Asked Questions (FAQs)
What is an FHA forward mortgage?
FHA forward mortgages are mortgages backed by the Federal Housing Administration. If the borrower defaults, the FHA pays the claim to the lender. In this way, the risk is lower for the lender, and mortgages are more accessible to homebuyers.
What happens to a forward mortgage when the borrower dies?
Forward mortgages usually contain a “due on sale” provision that dictates what happens when the borrower dies. When the property is sold or ownership is transferred, the mortgage becomes payable in full. Federal law, however, exempts transfer of a home at the borrower’s death to a spouse or child from “due on sale” provisions.
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U.S. Department of Housing and Urban Development. “How the HECM Program Works.”
U.S. Department of Housing and URban Development. “Loans.”
Consumer Financial Protection Bureau. “When Can I Remove Private Mortgage Insurance (PMI) From My Loan?”
Cornell University, Legal Information Institute. “Preemption of Due-on-Sale Prohibitions.”