What is a Reverse Mortgage?

An Effective Financial Tool

A reverse mortgage is a loan that allows you to take a portion of the equity in your home to pay off your existing mortgage (if you have one) and then use the remaining proceeds however you like. You are still responsible for paying property taxes, homeowners insurance, and home maintenance costs.

How a Reverse Mortgage Works

  • You remain the owner of the home.
  • You can sell the home or pay off the loan with no prepayment penalty.
  • You can make payments if you like; however, no monthly mortgage payments are required.
  • You can receive the money in a lump sum, monthly payments, a line of credit, or any combination of the three when you choose the Home Equity Conversion Mortgage (HECM)
  • You have protection against declining home values because it is a non-recourse loan. That means you will not owe more than the value of your home. If your home sells for less than what is owed, FHA insurance pays the difference when you choose a HECM.

A reverse mortgage works the same way as a traditional mortgage, except:

  • If you decide not to make a monthly mortgage payment, interest for that month will be added to the loan balance and reduce the equity in your property.
  • If you decide not to make a monthly mortgage payment, the amount you would have paid in interest is added to the amount that will come due when you leave the home or pass away.
  • If you vacate your home or if the home is no longer your principal residence, the loan will become due and payable.

You can find out how much you may qualify for by using our reverse mortgage calculator.

Who Is Eligible?

  • You must own a home. The home can be paid off or have an existing mortgage.
  • At least one homeowner must be 62 or older.
  • You must be able to meet the financial obligations of the loan.

Eligibility Fact: The home can be paid off or have an existing mortgage.

Why get a Reverse Mortgage?

There are a variety of reasons why people get this type of loan. Some get it to fulfill an immediate need, while others use it to plan for the future. Here are two examples of how you can use a reverse mortgage.

    Planning for Now:
    Jim and Sue needed to update many features of their home and make it more suitable for their physical needs, so they got a reverse mortgage. The loan first paid off their existing mortgage, giving them more money to live on each month while they continued to pay their property taxes and homeowners insurance. With their remaining proceeds, they were able to purchase a new furnace and add a wheelchair ramp to their home. They even had some money left over to pay some medical bills and save for an emergency.

    Planning for the Future:
    Mark is 62 and planning to retire within the next year. His home is paid off, he has some investments that are doing well, and he believes he has o enough saved for retirement. However, he would like to feel even more financially secure before he decides to leave his career. So, he adds a to reverse mortgage line of credit to his retirement plan. Mark withdraws some of his proceeds to live off while he delays taking social security. This strategic move will give him access to larger monthly payments when he finally does begin to withdraw from social security. He keeps the remaining reverse mortgage proceeds in the line of credit. The money is there for him if he needs it for any unexpected cost, and while it remains unused, it continues to grow in value.

Separate Fact From Myth With Reverse Mortgages

Home equity conversion loans are not the bad boys of the lending world.

There are several common myths about reverse mortgages. Most of those myths, however, are simply the result of a lack of proper understanding of how reverse mortgages work.

Some of the common myths about reverse mortgages can be easily dispelled. Chief among them is the myth that a reverse mortgage is too risky.

Better protections
People are hesitant to obtain a reverse mortgage for various reasons. Many people may not be aware of the rules that have been put in place to make the reverse mortgage a safe financing option.

A common risk, or myth, that some worry about is that a borrower could end up having to pay back more than the home is actually worth. One of the most important details to take away regarding the most popular reverse mortgage program — the Federal Housing Administration-backed Home Equity Conversion Mortgage, or HECM — is that it is a nonrecourse loan. That means the family or estate will never owe more on the reverse mortgage debt than the value of the subject property.

Spousal protection is another factor now in place that is designed to protect a reverse mortgage borrower. In today’s market, if the senior
borrower is married, both individuals need to be accounted for in the underwriting decision for a reverse mortgage. That was not the case a few years ago.

If the borrower’s spouse is not of qualifying age when the reverse mortgage is taken out, this guideline now prevents the mortgage from being called “due” in the event of the eligible HECM borrower’s death. The nonborrowing spouse must meet specific guidelines to maintain this protection, however. Furthermore, a nonborrowing spouse can remain on the title.

Another major change to the program that protects a borrower is that underwriting re-quires a full credit, income and property assessment as part of determining borrower suitability. This was not the case prior to April 2015. Furthermore, property charges such as taxes, hazard coverage and homeowner association fees are reviewed for timely payments as well. The intent of this guideline is to minimize property tax and insurance defaults and help to ensure the desired loan is a net benefit for the borrower.

Other changes include limitations on accessing funds during the first 12 months of the loan. This rule helps to ensure that the borrower will
have money down the road. Also, the limitation on available proceeds keeps the loan balance from growing rapidly in the early years, thus protecting the future equity position of the borrower.

More options
When the reverse mortgage was originally popularized in the mortgage market in the late 1980s and on through the 1990s, it was often referred to by some as a “bailout loan” or a “loan of last resort.” With limited credit and income documentation, it was essentially an equity-driven product. Although that was not always the case, in many instances, those stereotypes were true back then.

The way that reverse mortgages are used today, however, looks entirely different and the notion that it is a loan of last resort has been retired into the dustbin of history. The primary reason senior borrowers look into a reverse mortgage today is to immediately eliminate their monthly home-payment obligation. This release of cash flow allows reverse mortgage borrowers to instantly free up income for other financial needs, such as medical care, home improvements and entertainment, just to name a few.

“ The reverse mortgage can clearly help seniors secure their retirement, allowing them to age in place with the peace of mind of not having a mortgage payment. ”

Another use of a reverse mortgage is as a purchasing tool to buy a home. Seniors are moving, whether it is to downsize or to be closer to
family, and they continue to be a major force in the home-purchase market. The benefit of being able to sell an existing home and use the proceeds for a downpayment on a new home as part of a HECM for purchase loan — which offers the security of not having a mortgage payment on that new home — is a major draw for senior borrowers.

The senior borrower, by taking advantage of a reverse mortgage on the new home, can often buy more home than they thought they could afford, or otherwise retain key retirement assets for the future. Regardless of the individual reason, the reverse mortgage can clearly help seniors secure their retirement, allowing them to age in place with the peace of mind of not having a mortgage payment.

Distinct differences
A common area of confusion, or myth, surrounding a HECM, or reverse mortgage, is that people think it’s the same as a HELOC or a home equity line of credit. A HELOC is another form of credit that uses the home as collateral. A borrower is pre-approved for a certain spending amount based on income and credit scores.

A borrower can draw on this HELOC credit as needed and within the terms of the loan, similar to using a credit card. They are then required to make regular payments for a fixed term.

There are some distinct differences between the HECM and HELOC programs, however. The HECM has a clear advantage over the HELOC in that the borrower is freed from making mortgage payments.

Tremendous upside
Another myth that should be dispelled relates to the ownership of the home after a reverse mortgage is closed. When a borrower takes out a reverse mortgage, the title for the home remains with the borrower. The bank doesn’t own the home.

The reverse mortgage becomes due once the borrower no longer occupies the home as their principal residence, as the result of death or moving out, failure to pay the property taxes or maintain hazard coverage or, lastly, failure to keep up with general home maintenance. When one of these events occurs, the lender will declare the mortgage due and payable. What has been borrowed, plus interest, is due to the lender at that time, and any equity remains with the borrower.

Many thanks to Mark Reeve for granting me permission to use his article, originally in Scotsman Guide Residential Edition, June 2018

Read NRMLA’s Response to USA Today Article

On June 13, NRMLA President and CEO Peter Bell submitted the following statement to USA Today in response to the investigative series of articles on HECM foreclosures written by reporters Nick Penzenstadler and Jeff Kelly Lowenstein. The statement appeared in both the print and online versions.

Congress established the Home Equity Conversion Mortgages program in the 1980s to allow seniors to stay in their homes without the burden of a monthly mortgage payment. Since then, more than 1 million seniors have obtained government-insured reverse mortgages to help them meet a variety of financial needs.

The program has evolved over the years, with stronger counseling requirements, enhanced consumer protections, limitations on loan amounts, and nonborrowing spouse provisions. Today, reverse mortgages are an important retirement planning tool.

Reverse mortgages help seniors access their home equity without having to sell, move, or take on a monthly payment. Many older homeowners have little to no savings and rely primarily on Social Security. Furthermore, they may be ineligible for home equity loans and cash-out refinancing because of insufficient income to cover monthly payments or poor credit profiles.

A reverse mortgage loan can be a lifesaver, particularly for those in need of cash with few options, as there are no monthly payments and nominal income requirements. The reverse mortgage enables them to pay off credit card debt, medical bills and other daily expenses. However, as with all property ownership, the owner is responsible for paying taxes.

An important point USA TODAY overlooks is that a foreclosure is often the natural resolution of a reverse mortgage after the borrower passes away. Few result in actual displacement. If the balance due exceeds the home’s value, or there is no next of kin to handle a sale, the estate will simply allow the home to go into foreclosure.

As with all major financial decisions, a reverse mortgage should be part of an overall strategic plan, with input from knowledgeable professionals, and family members who may be impacted.

Lenders never want to make loans that will default. We’ll continue working with federal regulators and counseling agencies to ensure borrowers and lenders understand the important responsibilities each has in a reverse mortgage transaction