This is a common and reasonable question to ask when considering reverse mortgages, also known as home equity conversion mortgages (HECM).
While there are some risks associated with any type of loan, which we’ll discuss, a reverse mortgage can be a safe and secure financial tool for senior homeowners.
It’s a loan that allows you to access the equity in your home without having to make monthly mortgage payments.
Instead, the loan is repaid when the house is sold or the last borrower leaves the home.
This is very different from traditional mortgages, leaving some skeptical about reverse mortgages’ safety.
So, let’s take a closer look at how reverse mortgages have become a safer option for seniors.
How reverse mortgages became safe
Some of the changes to reverse mortgages made over the past decade are as follows:
- Borrowers must undergo financial counseling before taking out a loan
- Tighter lending standards and requirements
- More protections for non-borrowing spouses
- Improved consumer education and awareness
These changes have made reverse mortgages a much safer option for seniors.
1. Protected by the federal housing administration
A reverse mortgage is protected by the Federal Housing Administration (FHA).
This means that the loan is insured by the government, which gives borrowers peace of mind knowing that their loan is backed by the full faith and credit of the United States government.
The FHA also has strict requirements for reverse mortgages, which helps to protect borrowers from predatory lenders or losing access to their funds if their lender goes out of business.
2. Required reverse mortgage counseling
Counseling is conducted by a Housing and Urban Development (HUD)-approved reverse mortgage counselor.
This counseling is required for all borrowers and must be completed before taking out a reverse loan.
A reverse mortgage counselor will help borrowers understand how using a reverse mortgage works, the risks and potential drawbacks, and whether or not a reverse mortgage is a right option for their unique financial situation.
Since this counseling is done by an approved third party, reverse mortgage lenders are not able to take advantage of borrowers by pressuring them into taking out a loan that isn’t in their best interest.
3. Reverse mortgages cannot be cross sold
Under the Housing and Economic Recovery Act of 2008, reverse loans cannot be cross-sold with other financial products.
This means that reverse mortgage lenders are not allowed to pressure borrowers into taking out a reverse loan in order to purchase other financial products such as annuities or insurance policies.
You can use the loan proceeds however you like and can take advantage of these other financial products if you want, but the reverse mortgage lender cannot advise you into doing so.
4. Reverse mortgages are non-recourse
A major benefit to using a reverse mortgage is that the loan is non-recourse.
This means that if the loan balance exceeds the value of your home, you will not be held responsible for the difference.
The lender will take a loss on the loan, but you as the borrower will not be liable for any additional funds.
Your heirs will also not be held liable for the reverse loan balance if the value of your home decreases and the loan balance is greater than the value of your home.
5. Non-borrowing spouses protections
If the borrower dies, the non-borrowing spouse is protected from having to repay the loan.
In the past, if the borrower died and the non-borrowing spouse was not listed on the loan, the reverse mortgage would become due and payable.
This often resulted in the non-borrowing spouse having to leave the home.
Now, as long as the non-borrowing spouse was living in the home as the primary residence at the time of the borrower’s death, they may remain in the home and won’t have to repay the loan.
This change has given peace of mind to many seniors who are considering a reverse mortgage.
Who Should Avoid a Reverse Mortgage?
Reverse mortgages are useful in many situations, but there are some considerations to make before taking out a reverse loan.
1. If you don’t plan on staying in your home for at least five years
Reverse mortgages are best suited for seniors who plan on staying in their homes for the long term.
If you think there’s a chance you may sell or move out of your home within the next five years, you may want to avoid getting a reverse mortgage.
This is because there are fees associated with taking out a reverse mortgage loan, and if you sell or move out before you’ve had the loan for at least 5 years, you may not be able to recoup all of the costs.
2. If you need immediate cash
Reverse mortgages are not designed to give borrowers immediate access to cash.
If you need immediate access to cash, a reverse mortgage may not be the right option for you.
Reverse mortgages typically have a 30-60 day turn time.
In addition, borrowers may only access up to 60% of their available proceeds in the first 12 months of having the loan. The additional 40%will become available after this 12-month period.
3. If you’re not sure you can keep up with loan requirements
Reverse mortgages have certain requirements that borrowers must meet in order to maintain the loan in good standing.
These requirements include living in the home as your primary residence, keeping up with property taxes and insurance, and maintaining the home in good repair.
If you’re not sure you can meet all of these requirements, a reverse mortgage may not be the best option for you.
Reverse Mortgage Requirements
The reverse mortgage loan program has certain requirements that borrowers must meet in order to qualify for a loan.
1. You must be at least 62 years old
First, you must be at least 62 years old.
This is because the reverse mortgage program is designed for seniors who are looking for financial assistance in retirement.
2. You must pay property taxes and homeowner’s insurance
Next, you must be current on your property taxes and mortgage insurance premiums.
If you’re not current on these payments, you may not be eligible for a reverse loan.
3. You must live in the home as your primary residence
Another requirement of a reverse mortgage is that your home is your primary residence.
This means that you cannot use the reverse mortgage loan to purchase a second home or investment property.
4. You must maintain the home in good repair
You also must keep the home in good repair and keep up with any necessary repairs or maintenance.
This helps protect the borrower and lender by ensuring that the property does not deteriorate and become a burden on either party.
Types of reverse mortgages
You have a few different options to choose from when choosing the right direction to take for your retirement.
Home equity conversion mortgage (HECM)
A HECM loan or reverse mortgage through FHA is the most common type of reverse mortgage available.
HECM reverse mortgages can be used for any purpose, including home repairs or improvements, medical bills, and living expenses.
The loan amount is based on the value of your home, and you can choose to receive the money in a lump sum, as monthly payments, or as a line of credit.
HECM reverse mortgages have flexible income and credit requirements and are a good option if you’d like to eliminate your existing mortgage payments.
Proprietary Reverse Mortgages
A proprietary reverse mortgage, also known as a Jumbo reverse mortgage, differs from a HECM in that it’s a private loan, not insured by the government and has a minimum age requirement of 55.
Proprietary reverse mortgages are usually offered by companies that specialize in reverse mortgages and are only available on certain types of properties, such as high-value homes.
Proprietary reverse mortgages typically have higher loan limits than HECM loans and may offer more flexible terms.
Home buying with a reverse mortgage
If you are looking to purchase a new home in retirement, a reverse mortgage can be a good option.
A reverse loan can give you the funds you need for a down payment or pay off an existing mortgage.
This is a good option when you’d like to downsize or retire to your dream city.
How to obtain a reverse mortgage if it’s right for you?
If you believe that a reverse mortgage would benefit you in your retirement, there are a few ways to get started.
1. Speak with a reverse mortgage specialist
A reverse mortgage specialist can help you determine if a reverse mortgage is right for you and can help you find the right reverse product for your needs.
It’s best to speak with a specialist that solely focuses on reverse mortgages, as they will have the most up-to-date knowledge on products and requirements.
If you are 55 or older and have at least 50 percent equity in your home, take 60 seconds to get a no-cost info kit to determine if a reverse mortgage is right for you. Click here
2. Get a reverse mortgage quote
After you have spoken to a specialist and have compared your options, be sure to get a quote so you know how much money you can qualify for.
You also should get a breakdown of how much a reverse mortgage will cost.
There will be origination fees, closing costs, and understanding your interest rate and repayment options are important too.
3. Read the fine print
Be sure to read all of the paperwork associated with your reverse mortgage loan agreement before signing.
It’s important to understand all of the terms and conditions of your reverse loan before agreeing to anything.
At this stage, you should have spoken to your reverse mortgage counselor but make sure you understand what you are signing.
By taking the time to educate yourself on reverse mortgages and understanding it is right for you, you can be sure that you are making the best decision for your retirement.
Frequently asked questions
Can borrowers lose their home with a reverse mortgage?
There only are a few instances when borrowers can lose their home, such as the home no longer being their primary residence, failure to pay property taxes or homeowners insurance, or if the home requires too many major repairs.
As long as borrowers meets the obligations of the reverse mortgage loan, they will not lose their home.
What happens at the end of a reverse mortgage?
At the end of a reverse mortgage, borrowers or their heirs will need to repay the loan.
This can be done by selling the home, paying off the loan with other funds or refinancing the loan.
What is the downside to a reverse mortgage?
There is always a risk with any type of loan but as long as borrowers use a trusted reverse specialist and understands the terms of their reverse mortgage, they should be able to avoid any downside.
However, some people may view the fact that a reverse mortgage loan must be repaid at some point as a downside.
This is still a loan but unlike a traditional mortgage, the repayment timeline is more flexible or deferred.