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Reverse Mortgages

A reverse mortgage is a loan that allows homeowners aged 62 and older to convert part of their home equity into cash. Unlike a traditional mortgage where you make monthly payments to a lender, with a reverse mortgage, the lender pays you. The loan, along with accumulated interest, is typically repaid when the last surviving borrower sells the home, moves out, or passes away.

The loan balance grows over time as interest is added to the principal each month. Because the loan is secured by the value of the home, lenders may offer competitive terms. The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA).

A key feature of a HECM is that the borrower or their estate will never owe more than the appraised value of the home when the loan is repaid. Borrowers can receive their funds as a lump sum, a series of monthly payments, or a line of credit.

A reverse mortgage is a financial product designed for homeowners aged 62 and older, allowing them to tap into their home's equity. Instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The loan balance increases over the life of the loan and is typically repaid when the homeowner sells the house, permanently moves out, or passes away. The most prevalent type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the FHA.

General Eligibility Requirements:

  • Age: You must be 62 years of age or older.
  • Residency: The home must be your principal residence.
  • Home Equity: You must own your home outright or have a substantial amount of equity. Any existing mortgage will need to be paid off with the proceeds from the reverse mortgage.
  • Financial Standing: You must not be delinquent on any federal debt.
  • Property Condition: The home must meet FHA property standards and be in good condition.
  • Counseling: You are required to complete a counseling session with a HUD-approved reverse mortgage counselor.

A reverse mortgage must be secured by your primary residence. Generally, the following property types are eligible:

  • Single-family homes
  • Two- to four-unit properties, provided the borrower lives in one of the units
  • HUD-approved condominiums
  • Manufactured homes that meet FHA guidelines

  • Supplement Retirement Income: Provides an additional source of cash flow during retirement.
  • No Monthly Mortgage Payments: Borrowers are not required to make monthly loan payments.
  • Remain in Your Home: Allows you to continue living in your home and maintain ownership.
  • Tax-Free Funds: The money received from a reverse mortgage is generally not considered taxable income.
  • Flexible Payout Options: You can choose to receive the funds as a lump sum, monthly payments, a line of credit, or a combination of these.
  • Federally Insured (HECMs): HECMs are insured by the FHA, which provides certain consumer protections.

The application process for a reverse mortgage generally includes these steps:

  • Research and Education: Learn about reverse mortgages and compare different lenders.
  • Counseling: You must attend a counseling session with a HUD-approved reverse mortgage counselor to ensure you understand the loan's terms and implications.
  • Application: Complete the loan application with your chosen lender.
  • Appraisal and Underwriting: The lender will order an appraisal to determine your home's value. An underwriter will then review your application and financials.
  • Closing: If your application is approved, you will sign the final loan documents.
  • Disbursement of Funds: After a three-day right of rescission period, the funds will be disbursed according to the payment option you selected.

A reverse mortgage loan typically becomes due and payable when one of the following "maturity events" occurs:

  • The last surviving borrower passes away.
  • The borrower sells the home.
  • The borrower permanently moves out of the home. For example, moving to a long-term care facility for more than 12 consecutive months.
  • The borrower fails to meet the loan obligations, which include paying property taxes and homeowners insurance, and maintaining the property.

  • Growing Loan Balance: Because you are not making monthly payments, the loan balance increases over time as interest is added.
  • Upfront Costs: Reverse mortgages can have high upfront costs, including origination fees, closing costs, and mortgage insurance premiums.
  • Reduced Inheritance: The increasing loan balance will reduce the equity in your home, leaving less for your heirs.
  • Risk of Foreclosure: If you fail to pay your property taxes, homeowners insurance, or maintain your home, the lender can require repayment of the loan, which could result in foreclosure.