What is a Reverse Mortgage: the What, How and Who
If you’re retired or semi-retired, own your own home, and are looking for extra income to fund a home renovation, medical costs, or other significant expenses, you should become familiar with the term “reverse mortgage.”
What is a Reverse Mortgage?
A Home Equity Conversion Mortgage, commonly known as a reverse mortgage, is a loan guaranteed by the US Federal Housing Administration (FHA) that allows homeowners aged 62 or older to borrow a portion of their home’s equity.
With traditional mortgages, the borrower makes monthly payments to the lender, gradually paying off the loan and increasing their equity in a property. A reverse mortgage works in the opposite direction: the lender makes payments to the borrower, causing the borrower’s loan balance to grow and home equity to shrink. As with a traditional mortgage, the borrowers also owe interest and fees.
How Does a Reverse Mortgage Work?
After a reverse mortgage has been approved, the borrowers must use the property as their primary residence for the duration of the loan, and they remain responsible for paying property taxes and insurance, and for fulfilling any other FHA guidelines.
The borrower may choose whether to receive the cash in a lump sum, as a regular monthly payment, as a line of credit, or a combination of these options. It is important to emphasize here that a reverse mortgage is not a government benefit. The FHA’s role is as an underwriter; if a lender is unable to meet its commitments, the FHA guarantees the borrower will receive all the payments to which they are entitled.
Repayment is payable only after the last borrower (or non-borrowing spouse) sells the property, dies, or fails to live in the property for more than 12 months. Once repayment is due, the borrowers or their heirs have a couple of options. They can pay off or refinance the balance to keep the home; or they can sell the home (or allow the lender to sell it) and keep the remaining equity.
Who Can Apply for This Type of Loan
The first rule of a reverse mortgage is that the youngest borrower on the title must be at least 62 years old.
The FHA also requires that borrowers:
- Own the property outright or have paid off a considerable amount
- Occupy the property as their principal residence
- Not be delinquent on federal debt (which means debt that is at least 30 days overdue)
- Have the financial resources to pay ongoing property charges including property taxes, home insurance, and Homeowner Association fees
- Participate in a consumer information session with a licensed HECM counselor
How to Apply
Borrowers should expect to wait around 30-45 days from the beginning of their application to a final decision.
Before applying, prospective borrowers must participate in a counseling session with a counselor approved by the Department of Housing and Urban Development (of which the FHA is a part). Counseling can be conducted by phone or in person. The borrowers will receive a signed HEMC Counseling Certificate, and are then free to continue their application.
The application process consists of 4 steps:
- The borrower submits an application to a preferred lender. This application can actually be submitted before or after counseling, but the lender is only legally authorized to incur costs on the borrower’s behalf once counseling has been completed. The borrower may cancel the application at any time. During the application stage, the lender will look at the borrower’s income, assets and credit to determine that the borrower can fulfill all tax and insurance obligations.
- An FHA-approved appraiser determines the market value of the borrower’s home.
- The lender employs an underwriter to review the application and decide if the borrower must meet any conditions. Once this is done, the lender sets a closing date.
- Finally, the borrower signs the final closing documents in the presence of an attorney or notary. The borrower is given 3 business days in which they may cancel their application without penalty. Once this 3-day rescission - or cooling-off – period ends, the loan payments can begin.
When is a Reverse Mortgage a Good Option?
There are no fixed rules about when a homeowner should take out a reverse mortgage, but it is generally used by retirees who need cash to fund significant expenses that they cannot afford to pay by other means. This could include things such as home repairs, medical expenses, or needing to give financial assistance to children or grandchildren.
Before applying, it is important to be aware of the risks: you can lose your home if you don’t meet the loan requirements, and if you can’t pay your taxes and insurance; or, if you stop using the home as a primary residence, you can lose your home to foreclosure.
The Consumer Financial Protection Bureau recommends that you consider the following options before applying for a reverse mortgage:
- Wait. If you take out a reverse mortgage when you are in your 60s or 70s, you risk running out of money when you are older and subject to high health costs
- Other home equity options. A home equity loan or home equity line of credit can often be a cheaper way to borrow cash against your equity. However, these options also carry their own risks
- Refinance. It may be possible to lower your monthly mortgage payments by refinancing your current mortgage with a new mortgage
- Sell your home. If your expenses are too high, downsizing to an affordable home is one good way of reducing your expenses
- Lower your expenses. Go over your monthly and annual expenses, and determine which can be reduced or cut
The Best Reverse Mortgage Lenders
Some lenders offering traditional mortgages will also be able to offer you a reverse mortgage. As with a traditional mortgage, it is worth comparing between lenders to find the one with reverse mortgage requirement, interest rates, and fees to suit you:
AAG has a handy reverse mortgage calculator; input your home value, mortgage balance, and the age of the oldest homeowner, to find out what type of reverse mortgage you are eligible for. It is also among a few lenders who offer a “jumbo reverse mortgage,” which is a reverse mortgage for homes valued above the $679,650 usual maximum loan.
LendingTree also offers a calculator and a free tool to compare live rates from different lenders. They have a broad network of over 350 lenders, some of which offer reverse mortgages with a range of repayment options.
Quicken Loans offers homeowners aged 62-plus the option of securing a loan with its reverse mortgage partner, One Reverse Mortgage. They'll give you a pre-qualification quote with no personal information needed to get your loan process moving forward quickly. They have an A+ rating from the Better Business Bureau and offers adjustable or fixed rate repayments.
A reverse mortgage could be exactly what you're looking for if you're a senior who owns your home and is looking for some extra cash. Take care to check the requirements and terms and that you have the funds for repayment. Once you've compared the best lenders for your reverse mortgage, chose the one that works for you.