It’s possible to lose your home if you take out a reverse mortgage. As long as you follow a simple set of rules put in place by the federal housing administration, that won’t happen to you.
We’ll discuss homeownership, ways you can lose your home, and how to protect your investment while using HECM reverse mortgages (aka home equity conversion mortgages).
Who owns the house in reverse mortgage?
The homeowner always owns the home in a reverse mortgage. Reverse mortgage lenders never own the home, even if the loan balance exceeds the value of the property.
So, even in economic downturns you get the cash you need for retirement, and your family is never at risk of losing the home.
How you can lose your home with a reverse mortgage
As with any home loan, there are some requirements involved you must meet with a reverse mortgage.
As long as you live in the home as your primary residence, pay your property taxes and insurance and maintain the home according to Federal Housing Administration (FHA) guidelines, you should not lose your home.
However, if you fail to meet any of these requirements, the loan could become due and payable, and you could lose your home.
Failure to occupy your home as a primary residence
A requirement of your reverse mortgage loan is that you occupy your home as your primary residence.
This means that the home must be where you live the majority of the time.
If you move out of your home, the loan becomes due and payable. You would then have to pay back the loan in full or lose your home.
If you have a reverse mortgage and you’re thinking about moving, make sure you talk to your lender first. They may be able to work with you to find a solution that works for both of you.
How long can you be out of your house with a reverse mortgage?
You can spend up to six months of the year away from the home, but if you’re gone for more than that, it’s no longer considered your primary residence.
For medical reasons, you may be able to get an extension on this time. Talk to your lender if you have questions about this.
Typically, a reverse mortgage borrower has the option of leaving their residence for a maximum 12-month term for medical reasons.
If borrowers fail to return to the home after this period, their loan repayment is due.
Failure to maintain property taxes
Reverse mortgage borrowers must pay property taxes on their homes, just like any other homeowner with a traditional mortgage.
If you don’t pay your property taxes, the lender could foreclose on your home. This is why it’s so important to make sure you have a plan to cover your property tax bill each year.
Failure to maintain homeowner’s insurance
It’s also important to keep homeowners insurance on your home.
Paying for homeowner’s insurance protects the borrower and the reverse mortgage lenders in case of fire, theft, or other disasters.
If you don’t maintain your policy, the lender could foreclose on your home.
Failure to maintain the home in reasonably good condition
It’s important to keep up with the maintenance of your home when you have a reverse mortgage.
Not maintaining the condition of the home affects the value of the home and can hurt your chances of restructuring your loan if you need to in the future.
Reverse mortgages have flexible payout options and you should talk to a trustworthy reverse mortgage lender to help structure your loan in a way that best suits your needs and future maintenance of your home.
Reverse mortgage payout options
Reverse mortgages work by allowing you to tap into the equity you’ve built up in your home.
You can choose to receive the proceeds from your reverse mortgage in a lump sum, fixed monthly payments or as a line of credit.
Lump sum payout
With a lump sum payout, you receive the proceeds from your reverse mortgage all at once.
This can be a good option if you need a large amount of money for things like home repairs or healthcare expenses. It’s important to remember that with a lump sum payout, you’re borrowing against the equity in your home.
This means that the money you receive is not free and clear. You will need to pay it back with interest.
Fortunately, you can choose to make monthly payments or let the interest accrue and pay it back when you sell your home or it’s passed on to your heirs.
Fixed monthly payments
With fixed monthly payments, you receive a set amount of money each month for as long as you live in your home.
This can be a good option if you want to supplement your income or if you need a set amount of money each month to cover your living or long-term care expenses (link to article).
Line of credit
With a line of credit, you have an approved amount of money that you can borrow against when you need it.
This can be a good option if you’re not sure when you’ll need the money or how much you’ll need.
It’s also a good option if you want the flexibility to only borrow the money when you need it and not make monthly mortgage payments.
A combination of options
You can strategically mix and match these options to come up with a plan that works best for your retirement goals.
For example, you could choose to receive a lump sum of cash to pay off your mortgage and then opt for a line of credit to have access to money in the future if you need it.
Or, you can choose to receive monthly payments for a set period of time and then switch to a line of credit when you no longer need the income.
How do I avoid running out of reverse mortgage proceeds?
To avoid running out of loan proceeds, you first need to discuss your retirement plan with a trusted reverse mortgage professional.
Your loan specialist will help you calculate how much money you qualify for and structure your loan in a way that meets your needs.
It’s important to remember that you’re not required to make monthly payments on a reverse mortgage if your loan is structured properly.
This is why dealing with a reverse mortgage professional that solely focuses on reverse mortgages is beneficial.
They will have a better understanding of how to structure your loan in a way that meets your needs and doesn’t put you at risk for foreclosure.
Most reverse mortgage defaults are due to the structure of the home equity loan not being in line with what the borrower needs for their unique situation.
What happens if I lose the proceeds of my reverse mortgage?
Losing your reverse mortgage proceeds may require you to sell your home if the loan was not structured properly based on your retirement needs.
The FHA provides borrowers with protection should they lose their reverse mortgage proceeds.
You can avoid this by carefully managing your reverse mortgage proceeds and using them as intended.
Reverse mortgage loans should not be used as a loan of last resort but as a strategic tool to help you enjoy a comfortable retirement.
To learn more about how to properly structure reverse mortgage proceeds, contact us for your free info kit and consultation. Click here to get started.
Who owns the house at the end of a reverse mortgage?
At the end of a reverse mortgage, the borrower or their heirs own the property.
The lender is paid back through the sale of the property. If the property is worth more than what is owed on the loan, the borrower or their heirs keep the difference.
If the property is worth less than what is owed on the loan, the borrower or their heirs are not responsible for the difference.
Reverse mortgage protections
We already mentioned some protections that the federal government has put in place for reverse mortgage borrowers.
Now, we’ll go into more detail:
The FHA insures all reverse mortgages.
This means that if the borrower is protected if the home is worth less than the loan balance.
The borrower or their heirs are also protected if the lender goes out of business.
These protections give borrowers peace of mind that their investment is safe.
The FHA also requires that borrowers receive counseling from an independent third party before they can get a reverse mortgage.
This is to ensure that borrowers understand the terms of the loan and can make an informed decision about whether or not a reverse mortgage is right for them.
Non-borrowing spouses’ protection
If a reverse mortgage borrower dies, the eligible non-borrowing spouse is protected from having to immediately pay off the loan.
The non-borrowing spouse is also protected if the borrower becomes incapacitated.
These protections allow spouses to stay in their home even if the borrower passes away or becomes unable to make loan payments.
How reverse mortgages work?
To get a reverse mortgage or home equity conversion mortgage, you must be at least 55 years old and own a home.
You also must have equity in your home. The amount of equity you need will depend on the type of reverse mortgage you choose.
Some reverse mortgages require that you have paid off your mortgage, while others allow you to keep your mortgage and use the reverse mortgage to pay it off.
You’ll be able to choose from three different loan options:
- HECM Reverse Mortgage: This is the most common type of reverse mortgage. It is insured by the Federal Housing Administration (FHA). You can borrow about 50 percent of your home’s value.
- Jumbo/ Proprietary Reverse Mortgage: This type of reverse mortgage is for homes with a high value. This is a private loan, not insured by the government. You can also borrow about 50 percent of your home’s value.
- Homebuying reverse mortgage: This type of reverse mortgage is for people who want to buy a home with a reverse mortgage.
If you’re interested in getting a reverse mortgage, we can help!
We offer free info kits and consultations to help you better understand your options.