Reverse Mortgage Guide: Everything You Need to Know

Homeowners who are nearing or in retirement can often find themselves in need of additional financial support to cover expenses such as medical bills, home improvements, or other unforeseen costs.

Reverse mortgages are a viable and increasingly popular option for those seeking supplemental income without having to sell their home.

It is not uncommon for older homeowners to find that a large portion of their net worth is tied up in their home. The U.S. Department of Housing and Urban Development (HUD) has reported that home equity accounts for an estimated two-thirds of an average retiree’s total wealth. As a result, many seniors are turning to reverse mortgages as a way to tap into this wealth.

Homeowners can access their home equity with a Home Equity Loan or Home Equity Line of Credit (HELOC), but both require regular payments to pay them back. This can be an obstacle for retirees who are hoping to increase their income without the added burden of debt.

But with reverse mortgages, older homeowners have another option: one that eliminates monthly payments and allows them to access the capital in their home.

This comprehensive guide to reverse mortgages will explain all the ins and outs of this special financial product. From eligibility qualifications to repayment terms, you’ll learn all about how these loans can help retirees make their golden years even more comfortable.

What is a Reverse Mortgage? 

A reverse mortgage is a loan product offered exclusively to homeowners who are aged 62 and above.

The most popular option is the Home Equity Conversion Mortgage (HECM), which is actively regulated and supported by the federal government through the Federal Housing Administration (FHA) and U.S. Department of Housing and Urban Development (HUD).

When taking out a Home Equity Conversion Mortgage (HECM), any existing mortgages will be paid off, and monthly payments that had previously been owed will be eliminated. For the remaining funds, borrowers will have the choice of receiving them as a single lump sum, monthly payments, a line of credit, or a combination of those three options.

[Read more: What is a Reverse Mortgage?]

Reverse Mortgage Requirements and Rules 

Before applying for a reverse mortgage, it is important to be aware of the basic requirements that must be met in order to qualify. Not everyone can obtain a reverse mortgage, so requirements must be met in order to receive approval.

In order to qualify for and maintain a reverse mortgage, borrowers must agree to fulfill certain obligations. These include the following:

• Keeping the home in good repair (according to FHA standards)
• Paying property taxes on time
• Paying homeowner’s insurance premiums
• Living in the property as their primary residence

A reverse mortgage does not require income, employment history, or good credit to be approved, which is different compared to a traditional mortgage. However, your reverse mortgage lender will verify to make sure that you are able to continue to pay the property taxes, insurance, and home maintenance costs.

Before officially filing a reverse mortgage application, all potential borrowers must first complete a reverse mortgage counseling session with a third-party HUD approved counselor.

Who Qualifies for a Reverse Mortgage?  

To be eligible for a reverse mortgage, borrowers must satisfy certain requirements:

• At least one of the borrowers must be 62 or older
• The borrowers must occupy the property as their primary residence
• The home must have sufficient equity
• The property must be a single-family residence, an FHA-approved condominium, a townhouse, a manufactured home that meets certain requirements, or a two to four-unit property wherein the borrowers occupy one of the units.
• The home needs to be in good condition
• The borrowers will need to demonstrate that they can afford to cover the property taxes, homeowner’s insurance, HOA fees and maintenance costs.

Want to learn more? Click here to read more about the reverse mortgage requirements.

How Much Money Can You Get from a Reverse Mortgage? 

When it comes to a reverse mortgage loan, the amount you receive is dependent on several key elements, including:

• The value of the home (which will be assessed with an appraisal)
• Interest rates  
• The borrower’s age
• The reverse mortgage type

The FHA puts a lending cap on Home Equity Conversion Mortgages (HECM). The current limit is set at $1,149,825 for 2024

If you want to borrow more than the FHA limit, most major lenders offer jumbo loans that in some cases allow homeowners to borrow as much as $4 million. However, these jumbo loans are not backed by the federal government.

Click here to learn more about the reverse mortgage loan amount you can expect to get.

Understanding the Costs, Rates and Fees of a Reverse Mortgage

Costs and Fees

Reverse mortgages, like traditional mortgages, come with costs and fees. The exact amounts may vary depending on the lender, but some of the expenses homeowners should expect include:

• Origination fees are paid to the lender and cannot exceed $6,000.
• Mortgage insurance premiums are charged when the loan is initiated, and each year that the homeowners have the loan. These payments are made to the FHA and serve to guarantee that homeowners will receive their loan advances. They also exit to make up any difference at the end of the loan, if the loan balance is more than the home’s value. The annual premium is 0.5% of the loan’s balance.
• Closing costs, which are typically paid to third-party vendors, may include fees for appraisals, recording fees, credit checks, surveys, title search, mortgage taxes, inspections and more.
• Servicing fees are charged by the lender for providing loan services, such as sending monthly statements, distributing funds and making sure the loan requirements are met.

Fees and costs can either be paid upfront or incorporated into the loan.

Homeowners are still responsible for any expenses required to keep the home in good condition, since they hold the title. This includes paying for property taxes, insurance, utilities, repairs and anything else that is needed for maintenance.

What are Reverse Mortgage Terms?

A traditional mortgage normally has a repayment period of 15-30 years, whereas reverse mortgages have no set term length.

The loan on a reverse mortgage does not need to be repaid until the homeowner leaves the residence permanently — either through selling or when that last remaining borrower passes away.

What are the Steps Involved in Applying for a Reverse Mortgage?

The reverse mortgage application process is not a quick one. Getting the cash you need through a reverse mortgage can take up to 45 days — so it’s important to factor that into your planning.

While each lender may vary, here are the steps that you can expect when applying for a reverse mortgage loan:

What is the Right to Cancel 

Homeowners can cancel their reverse mortgage anytime during the application and processing phase without any penalties, including three business days after the closing documents have been signed.

To qualify, the cancellation request must be sent in writing via certified mail with a return receipt requested. The lender must return any payments made by the homeowners within 20 days of receiving the cancellation notice.

It is advised that homeowners keep all records and communications of the transaction in case there is a dispute over the cancellation.

What are the Pros and Cons of a Reverse Mortgage? 

Click here to learn more about the pros and cons of a reverse mortgage.

Does the Bank own the Home in a Reverse Mortgage?

A frequent misunderstanding about reverse mortgages is that the bank owns the house; this is not true.

The title stays in the borrower’s name, and the homeowners remain responsible for taking care of the home, paying property taxes, purchasing homeowners insurance, and covering any other expenditures such as utility bills.

Do You Have to Pay Taxes on the Money You Receive from a Reverse Mortgage?

The money obtained through a reverse mortgage is not taxable, since it is treated as a “loan advance” and not income.

How is a Reverse Mortgage Paid Off?

Unlike conventional mortgages, no monthly payments are required with a reverse mortgage.

Typically, when the home is sold, the loan balance is paid off with the proceeds from the sale.

Early payments can be made without penalty if desired, but it is not necessary.

When a Borrower Passes Away, What Happens to the Reverse Mortgage?

A very common concern about reverse mortgages is what happens when the borrower passes away. In this situation, the heirs of the estate have two choices:

• The first option is for the heirs to sell the house and settle the loan balance, leaving the them with whatever equity remains.
• The second option is to keep the property by paying off the loan, which might involve refinancing it into a new mortgage.

The non-recourse feature of the reverse mortgage means that the homeowners or their heirs will never have to pay more than 95% of the home’s appraised value, even if the loan balance is higher. If the home’s appraisal is lower than the loan balance, they would only need to repay 95% of that amount.

Click here to learn more about what happens to a reverse mortgage after the homeowner passes.

Click here to learn more about how a reverse mortgage affects heirs.

Is a Reverse Mortgage a Scam?

While reverse mortgages are a legitimate financial product, there are unfortunately some people trying to take advantage of eligible homeowners.

It’s important to be aware of the common scams out there:

• Homeowners should watch out for high-pressure sales tactics from reverse mortgage brokers. Reverse mortgage brokers are there to inform and answer any questions about HECM loans, not to pressure homeowners into taking the loan or telling them how they have to use the money. Be wary of any broker who suggests putting the money into a financial product that would benefit them personally.
• Be alert for VA scams. Fraudsters may pose as employees of the Department of Veterans Affairs (VA). It is important to note that the VA does not provide reverse mortgages, even though some lenders may offer discounts for military members. This does not mean that the VA has any ties with the lender or loan.
• Pressure from contractors. Homeowners should be wary of contractors who try to pressure them into getting a reverse mortgage for home repairs. It is best to resist any influence that could lead to making a rushed decision.

To help protect against reverse mortgage scams, make sure you are dealing with a reputable lender. Check customer reviews and unbiased platforms such as the Better Business Bureau to get a better understanding of their performance.

Can You Refinance a Reverse Mortgage? 

Yes, a reverse mortgage can be refinanced. Refinancing a reverse mortgage may be the right option for you if your needs have changed. Refinancing could be an ideal solution to meet certain requirements and goals, depending on individual circumstances. 

Refinancing your Home Equity Conversion Mortgage (HECM) could be a beneficial move for several reasons: 

• Your home’s value may have gone up since taking out the original loan, opening the possibility to access additional funds with a new reverse mortgage.  
• The FHA increases reverse mortgage lending limits each year – this means you might potentially qualify for more money when refinancing if rates are favorable.  

• If interest rates are better than what they were when you took out your first loan, it may make sense to refinance. 

Still have questions? Go here to find the answers to more common reverse mortgage FAQs.

Is a Reverse Mortgage a Good Idea for You?

A reverse mortgage may be a viable option for those who are close to or already in retirement and find themselves in one or more of the following circumstances:

• You have considerable equity in your property, and intend to stay in the residence for at least five years
• You do not have sufficient funds saved for retirement and need a further source of retirement income
• You need more funds to use for unplanned expenses
• You have the ability to cover the costs of the property taxes, home insurance, and home maintenance costs
• You’re relying on a fixed income source like Social Security, and you need to find other ways to supplement your income.
• Your home requires significant upgrades or renovations
• You are seeking greater peace and security for yourself and your future

Every homeowner has their own personal explanation for why they are taking out a reverse mortgage.

It is highly suggested that you discuss this decision with your family members and financial advisor before making a commitment.

Where to Apply for a Reverse Mortgage? 

Are you ready to apply for a reverse mortgage? You will want to look for an FHA-approved lender. There are many different reverse mortgage lenders out there, and the products and rates they offer can vary.  

You can find a lender in your area by searching the National Reverse Mortgage Lenders Association’s online lender directory.  

Also, a number of mortgage company review websites publish customer satisfaction information that can help you learn more about reverse mortgage companies and make an informed decision. 

Reverse Mortgage Lenders 

At Review Counsel, we have put together thorough reviews of the following reverse mortgage lenders to assist you with making an informed decision:  

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This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement. 

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