Reverse Mortgages

A reverse mortgage is when the owner of the home withdraws equity from the home and receives cash either as a lump sum, installment payments, line of credit or combination thereof. Reverse mortgages seem to give pause to most people. However, the negative reaction is most likely due to the lack of information regarding reverse mortgages.

Reverse mortgages can be beneficial to certain individuals but it is important that they fully understand the terms. I do not write purporting to be an expert on reverse mortgages but rather to provide some basics on the Federal Housing Administration’s (“FHA”) reverse mortgage program – the Home Equity Conversion Mortgage (“HECM”).

Requirements

There are several requirements for an individual to qualify for a reverse mortgage under HECM. An individual must meet the following:

• Be at least 62 years or older;
• Own his or her own home outright or at least have a small mortgage balance that can be easily paid off with the cash from the reverse mortgage; and
• Must live in the home.¹

The borrower also has to participate in an educational and counseling class on reverse mortgages in order to complete the process. The borrower must maintain hazard and flood insurance, pay property taxes and utilities.

The maximum amount that can be borrowed under HECM is $625,000. However, the actual amount an individual can borrow ultimately depends on the age of the borrower; the current interest rate; the lesser of the appraised value or the HECM limit of $625,500 or the sales price; and the initial mortgage insurance premium.² 

Advantages

Reverse mortgages provide liquidity to individuals when they do not have a steady stream of income to meet their needs. Homeowners do not need to have good credit or income to qualify because there is no underwriting involved in the process.³ Borrowers do not have to repay the reverse mortgage until they either sell the home or pass away. The loan will ultimately get paid out of the owner’s estate once he or she passes away or from the proceeds of the sale of the home. If there is no equity in the home when the mortgage comes due upon death, “…your heirs can just walk away with no personal liability.”⁴ However, they obviously then lose the home.

Pitfalls

Reverse mortgages can be expensive as they can come with high fees, such as closing costs and higher interest rates.⁵ Also, as noted above, the homeowner’s heirs can ultimately lose the home if there is no equity in the home to pay off the loan. Additionally, the problem for many individuals who run into issues with reverse mortgages is that the money from the reverse mortgage is not enough to cover all of their expenses. According to Consumer Reports, “About 54,000 HUD-insured reverse mortgage borrowers are in default, the vast majority of which are triggered when borrowers can’t pay their property taxes or keep up with their homeowners insurance.”⁶ Again, as long as you maintain your property taxes and homeowners insurance, you are fine, but “…if you run out of money and let these bills slide, you’re in default, and the bank can foreclose on your house.”⁷

It is important to consult with the proper advisors before taking on a reverse mortgage. You can find an appropriate HECM Counseling Agency at the U.S. Department of Housing and Urban Development website.

¹FHA Reverse Mortgages (HECMs) for Seniors

²Frequently Asked Questions About HUD’s Reverse Mortgages

^{3 & 5}A reverse mortgage offers older homeowners more financial flexibility when they need it – but is it worth the hassle?

⁴Reverse mortgages can be beneficial, if you know how to use them

⁶Oversight of reverse mortgages needed to protect seniors

⁷Are Reverse Mortgages Risky?