Reverse Mortgages

How do reverse mortgage loans work?

In order to help you make an informed decision about this versatile mortgage loan given your unique situation, we want to make sure you know all the facts about it.

It can be frightening to make a big decision about your most valuable investment, the place you cherish most. If you’re considering a reverse mortgage loan, education and expert advice are often required. Please consider the following information as you consider a reverse mortgage loan.

Reverse mortgage loans allow homeowners 62 years of age and older to draw on the value of their homes, which are paid to them in a variety of payout options or used as a line of credit. A reverse mortgage differs from a traditional mortgage in that repayment is not required until both borrowers have passed away or the loan is not fully repaid. Paying property taxes and insurance is a requirement of HECMs, and maintaining the house according to FHA guidelines (if it’s a FHA HECM loan).

Different types of reverse mortgage loans

Reverse mortgage loans come in different forms. HECMs (Home Equity Conversion Mortgages, insured by the FHA) and jumbo reverse mortgages are the two most common.

Getting a reverse mortgage loan may be right for you if you speak with our reverse mortgage loan specialists. We want you to have as much information about reverse mortgage loans as possible so that you can make an informed decision. Our services are top-notch.

Qualifications for Reverse Mortgage Loans

There are a few basic requirements for reverse mortgage loans, such as:

It is required that at least one borrower (on title) be at least 62 years old (in Texas, both borrowers must be 62 at closing).
Every year, the borrower/s must maintain the home as their primary residence for at least six months.
Equity in the home must be sufficient. For the purposes of paying off your existing mortgage, you should have at least 50% equity in your home. If you have more equity, you will have more borrowing power.
A HECM loan is underwritten more leniently than a conventional loan. A financial assessment is completed on each applicant to determine their ability to repay the loan and their willingness to pay taxes and insurance.

Each lender may have different qualification requirements depending on your financial situation, age, interest rate, and home value. It is not necessary to pay off your home before applying for a reverse mortgage.

Based on the appraised value of the home, the interest rate, the age of the youngest borrower, and the type of loan chosen, you may be able to receive cash. The loan amount an older homeowner has access to will typically be higher than the loan amount an older homeowner with a similar home value and expected interest rate would receive. Loan amounts are limited for the first year. See our reverse mortgage loan FAQs for more information.

Get more information about reverse mortgages by contacting us today.

Key features of reverse mortgages

It can be challenging to make an informed decision about whether or not a reverse mortgage loan is right for you and your family, but we are here to clear up any confusion and provide you with all the information you need.

Reverse mortgages have the following key characteristics:

Taxes, insurance, and property maintenance must still be paid, but no mortgage payment is required.
Equity in your home can be used in many ways to help you achieve your financial goals, such as monthly payments, a lump sum, or building a line of credit over time.
The proceeds of reverse mortgages are usually tax-free, but you should consult your tax advisor.
Borrower protection reduces the risk of foreclosure. One example is limiting the amount of equity the borrower can access during the first year of the loan. The borrower/s must also prove that they can pay property taxes and insurance and maintain the home for the duration of the loan. Furthermore, a non-borrowing spouse under the age of 62 may remain in the home if their borrowing spouse dies or leaves permanently.
Those who choose to access their equity through a line of credit will only be charged interest on funds they use. You will accrue interest on any unutilized funds at the same rate as your loan. If you need or wish to access your retired funds later in life, this feature allows you to grow the amount of cash you have available.
Non-recourse mortgages are offered by the FHA HECM. As such, your heirs are not responsible for the debt if the home is sold for less than the loan balance. Repayment of the loan can only be accomplished through the sale of a house.

You don’t have to pay off the balance of your home mortgage when you apply. If you have an existing mortgage or liens (if you owe one), the reverse mortgage loan proceeds must go towards paying them off. As long as the reverse mortgage is secured by a mortgage, you will retain ownership of your home.

If you live beyond the loan term, do you have to pay it back?

The lender will not be repaid if you outlive the loan if you have a HECM loan. Neither borrower has to repay the loan as long as the house is maintained well, the property taxes and insurance are paid, and one of the borrowers maintains the house. Borrowers must repay the loan when the last surviving borrower (or any non-borrowing spouse) passes away, the house is sold, or the repayment obligations are not met.

Upon the death of my parents, how much of my estate will be left to my heirs?

Upon the death of the last surviving borrower, upon the sale of the primary residence, or upon ceasing to live in the residence, the reverse mortgage loan must be repaid, along with interest. Any remaining equity will be yours or your heirs’. When a loan is repaid, your estate or you are not responsible for more than the value of your home. Until the estate (heirs) has paid 95% of the home’s appraised value, less customary closing costs, the estate may sign a deed in lieu of foreclosure, releasing the property.

Can I find a reverse mortgage loan using an estate planning service?

Obtaining a reverse mortgage loan should not be done by using a service that charges a fee (except for HECM counseling, which is required). HUD provides this information free of charge and can direct you to HUD-approved housing authorities that provide reverse mortgage loan counseling or other services that are free or minimally priced.

HECM lenders typically charge between $125 and $150 for reverse mortgage loan counseling. For qualified borrowers, some counseling agencies waive the fee. Alternatively, you can call 1-800-569-4287 toll free to locate a housing counseling agency in your area.

Receiving Loan Proceeds Options

One of five ways to receive payments from a reverse mortgage loan with adjustable interest rate is:

Tenure: equal payments each month
Term: Equal monthly payments over a specified period of time as determined by the borrower
Line of Credit: Payments made over time and according to the borrower’s requirements
Modified Tenure: Monthly payments plus a credit line

Modified Term: A fixed period of months with a line of credit2

How Is A Reverse Mortgage Loan Different From A Home Equity Line Of Credit?

As reverse mortgage loans have become more popular, they allow the borrower to receive funds without having to pay back the borrowed funds immediately as long as you remain in your home as your primary residence, do not sell your home, live in the home with at least one other borrower, meet the basic income and credit requirements, and follow the loan guidelines.

For instance, to qualify for a home equity loan (or home equity line of credit or second mortgage), you must have adequate income to cover the interest and principal payments for your mortgage.

You do not have to pay principal and interest for a reverse mortgage, unlike traditional mortgages. Pay all property taxes, fees, and insurance, and maintain the property in good condition.

Reverse Mortgage Loans and Home Equity Conversion Mortgages

Necessity is the mother of invention and the first reverse mortgage loan is no exception. Today, many use the terms reverse mortgage loan and HECM or Home Equity Conversion Mortgage interchangeably. But are they the same? Not necessarily.

The first reverse mortgage loan was born out of necessity. HECM and reverse mortgage loans are often used interchangeably today. Can they be considered the same? It depends.

By 1961, the first reverse mortgage loan had been originated by Deering Savings & Loan. In the aftermath of the death of Nelson Haynes’ former high school football coach, his widow was trying to keep the home. Nellie Young became part of mortgage history as she took out the first reverse mortgage loan.

Over the next few years, interest grew in the concept of reverse mortgages, which allowed homeowners to defer their payments until a later date-usually upon their deaths. In securing this niche market, private lenders used ‘equity-sharing’ schemes in addition to accruing interest on the money they loaned.

A reverse mortgage loan was developed when Congress recognized that older homeowners were becoming increasingly reliant on home equity to fund their retirement. In 1969, the Senate Committee on Aging held its first hearing on a possible government role in such a program.

In 1987, Congress formalized the Home Equity Conversion Mortgage as part of an insurance bill nearly two decades later. The nation’s first federally-insured reverse mortgage was first offered as a pilot program, then became a permanent fixture in mortgage lending. There were numerous consumer protections included in the government-insured, government-supervised loan.

Today, many refer to the Home Equity Conversion Mortgage as a reverse mortgage loan due to the fact that payments are reversed with the homeowner not having to make payments but rather receiving payment directly from the lender.3 However, not all reverse mortgage loans are the same. Federal insurance covers HECMs, which have unique eligibility requirements and guarantees. As well, private reverse mortgage loans1 offer access to a homeowner’s equity without monthly payments required, but with different terms and conditions.

Reverse mortgages offered by private institutions are closely scrutinized by regulators since only FHA-insured and HUD-regulated HECMs are insured and supervised by HUD. Homeowners should research their options carefully to find out which loan fits their needs best. Considerations include costs, features, eligibility rules, insurance, and interest rates.

Either a HECM or a reverse mortgage loan reverses the traditional mortgage and enables homeowners to take advantage of the value of their home.

The History of Reverse Mortgages

Over the last 40 years, reverse mortgage loans have evolved dramatically in terms of origins and history.

Nelson Haynes of the Deering Savings & Loan Company (Portland, Maine) made the first reverse mortgage loan to Nellie Young in 1961. It enabled her to remain in the home despite losing her husband’s income.

As the reverse mortgage market developed in the 1970s, several private banks began offering reverse mortgages. These programs did not offer the same level of protection to seniors as they do today, since FHA insurance was not available. A reverse mortgage has been available since 1989.

A standardized reverse mortgage loan program was advocated by the Senate Special Committee on Aging in the 1980s. The FHA insurance program and uniform lending practices were recommended in the mid-80s by other committees. A reverse mortgage insurance bill was passed by Congress in 1987. That same year, Ronald Reagan signed the FHA Reverse Mortgage loan bill into law.

Reverse mortgage loans have gained popularity since 1989, especially in the mid-to-late 1990s. In the mid-1980s, other committees recommended that FHA insurance and uniform lending practices be implemented. This would allow seniors to access a portion of the value of their homes without having to make a monthly mortgage payment.

Fixed rate HECM mortgages can only be paid with a single disbursement lump sum, which is a full payment at loan closing and no subsequent payments. Mortgages with adjustable interest rates offer five flexible payment options, as well as the possibility of future draws. Initially, distributions are capped.

It is possible that the loan will mature and the balance will become due and payable in certain circumstances. Property taxes, homeowner’s insurance, and maintaining the property to HUD standards remain the borrower’s responsibility. Failure to comply with these requirements may result in default of the loan. You may be denied credit if you are over a certain age, have a poor credit rating, or have no property. All rates, fees, terms, and conditions are subject to change and may not be available in every state.

Advertisements do not constitute financial advice. Consult your financial advisor for advice tailored to your specific situation. For reverse mortgage loan proceeds, borrowers should seek professional tax advice.

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