Let’s start by describing a traditional/forward mortgage as a way to help describe the Reverse Mortgage.

Most people are familiar with a traditional/forward mortgage where a loan (Note) is made to a Borrower and the Borrower pledges a Real Estate property as a security for the loan (Mortgage).  The Borrower makes monthly payments to the Lender to pay down the balance of the Loan and therefore the loan balance decreases over time due to monthly payments being made.

The Reverse works in the opposite, in that the Lender pays the Homeowner and the balance increases over time.  The Homeowner can get money in various ways, or combination of ways while retaining ownership of the home.  No monthly payment is required by the Homeowner (even though they could make payments), and the balance increases due to the unpaid interest being added to the balance.

Does The Bank Own The House?

No. The Borrower/Homeowner retains title to the home.  Even on the rare occasion if the loan amount grows to where it exceeds the value of the house, the title still remains with the Borrower. 

Does The House Have To Be Paid Off?

No. There can be an existing mortgage on the home when the Reverse Mortgage is Originated, however all existing mortgages will have to be paid off with the proceeds of the Reverse Mortgage. The Reverse Mortgage has to be in first lien position.

Can I Own a 2nd Home Or Investment Properties?

Yes. However, the Reverse Mortgage can only be on your primary residence. This is the home where you spend more than half of the year, every year. NOTE: The Reverse Mortgage has to be paid back whenever the home ceases to be your primary residence.

What Happens To The House When I Die?

This is not much different than if you died with a traditional forward mortgage. Your heirs would end up owning the home after the required legal process (i.e. probate, if required) and they would be responsible for paying off the outstanding balance of the loan. This may be done by refinance or sale of the house. The heirs keep the equity. If there is no equity remaining, the heirs are not responsible for any excess as that will be paid by FHA insurance.

How Can I Prevent Losing Equity In My Home?

Many people still want to leave the equity in their home for their kids/grandkids and they are able to do so. The equity is eroded due to accruing interest, FHA mortgage insurance, and any maintenance fees (usually around $30). These can be paid monthly and the loan balance will not increase, thus retaining the original equity.  You may choose at any time not to make a payment, knowing that the accruing costs will be added to the existing loan balance. No late fees. No collection calls. 

Is The Money I Get From The Reverse Mortgage Taxable?

No. The funds received is a loan from the equity in your home. It is not earned income or gifted funds to be taxed.

Who Qualifies For A Reverse Mortgage?

Please note that there is a difference between “qualifying” and “suitability”. Even though many people may qualify for a Reverse Mortgage, it is not suitable for all those who qualify.  A silly example would be ….. a family with 4 kids may qualify to buy a 2 seater sports car, however a minivan may be more suitable for them.

• Borrower must be 62 years or older. NOTE: The spouse may be younger than 62 however the amount qualified for will depend on the age of the younger borrower.
• Must own their home. NOTE: The home does not have to be paid off, but must have sufficient equity.
• Must occupy that home as their primary residence.
• Document the ability to maintain the payment of taxes, insurance and Homeowner Association dues, if any.
• Cannot be delinquent on any Federal Debt (This is a Government insured loan)
• Participate in a Counseling session to determine suitability.

How Do I Know If This Is Suitable For Me?

The loan is designed for older homeowners (62 or over) who have equity in their homes and limited income to maintain their desired lifestyle.  Since the loan has to be paid off if the Homeowner vacates the home for more than 12 months, it may not be suitable for a Homeowner who is planning on turning the property into a rental.  If the Homeowner decides to sell the property, they are free to do so, and the loan balance paid off at closing as in any traditional mortgage.

The Homeowner should also keep in mind that as the loan balance increases over time, the equity decreases, leaving less for their heirs.  This may be a significant factor for those who think it is very important to leave that as an inheritance, and may not be that significant for those whose children are financially independent. 

What Types Of Properties Are Eligible?

The following eligible property types must meet all FHA property standards and flood requirements:

• Single family home or 2-4 unit home with one unit occupied by the borrower
• HUD-approved condominium project
• Individual Condominium Units that meet FHA Single Unit Approved requirements

Manufactured home that meets FHA requirements

Can I Prevent The Loan From Decreasing The Equity?

Yes. Even though there is no requirement for a monthly payment, the homeowner may choose to pay the monthly interest and the FHA monthly Mortgage Insurance (MI) premiums.  If no payment is made, then the interest and MI premium will just get added to the loan balance.  No late notices or calls from the Bank.

When Does The Bank Get Paid?

The Bank gets paid the loan balance plus accrued interest when the loan is paid off.  This can be several years after the loan was originally given, and that is part of the agreement with the Bank.  This typically would happen after the last Borrower dies, or the when the house is sold.

How Do I Get The Money?

The funds are made available in multiple ways, and the method has to be selected before the loan closes. Each option affects the amount of funds that will be available.

For adjustable interest rate mortgages, you can select one of the following payment plans:

• Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence
• Term - equal monthly payments for a fixed period of months selected
• Line of Credit - unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted
• Modified Tenure - combination of line of credit and scheduled monthly payments for as long as you remain in the home
• Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower

For fixed interest rate mortgages, you will receive the Single Disbursement Lump Sum payment plan.

How Much Can I Get?

The amount you get depends on a number of factors: age of the younger Borrower; amount of equity in the home; the method selected in getting the payouts; and current interest rates.  Just like when buying life insurance, the younger a person is, the cheaper their rates will be. In the Reverse Mortgage world, the older a person is, the more they are able to get.  It is also limited to the FHA loan limit that can change annually. For 2023, the max loan amount is $1,089,300.

You can get a FREE, no obligation assessment by providing the requested information here.

What Are My Responsibilities?

This is an FHA loan that requires that the property be maintained as with any FHA mortgage.  The property cannot also be used for a business (2-4 Unit properties may have tenants as long as the Borrower occupies one of the units as their primary residence) and must be owner occupied. Homeowner is responsible for paying the property taxes, adequate insurance, and Homeowners Association Dues, if any.

Is Counseling Required?

Yes. Counseling is required by a HUD Certified Counselor even for the most financially savvy Homeowner. This is done to ensure that all Homeowners are given complete and accurate information about the product, the pros and cons, responsibilities and expectations. 

Questions to ask a housing counselor 

(per CFPB - https://www.consumerfinance.gov/)

If you’re considering a reverse mortgage, here are some sample questions to discuss with a housing counselor:

• How does a reverse mortgage loan work? 
• How is a reverse mortgage loan different from a traditional mortgage?
• What are the upfront costs and fees in taking out a reverse mortgage loan? 
• What will be the ongoing costs and fees if I have a reverse mortgage loan?
• How will a reverse mortgage loan affect my spouse, or other people living with me?
• What happens if I want to sell my home once I have a reverse mortgage loan?
• What happens to my home when I pass away? 
• What happens if I have to move to a nursing home?
• How do I receive the money from my loan proceeds? Would it be better to take out the money as a line of credit, in monthly installments, or in a lump sum?
• If I already have a mortgage on my house, how is that affected by a reverse mortgage?
• What are my ongoing responsibilities once I have a reverse mortgage loan?
• What other options should I consider other than a reverse mortgage loan?

If you discussed reverse mortgages with a lender before speaking with a counselor, tell your counselor about that discussion. Did the lender recommend a particular loan type? Did the lender try to sell you anything in addition to the reverse mortgage, or describe any conditions? Your counselor can give you unbiased information about the characteristics of the loan you may be considering.

Useful links:

The following links provide information on Reverse Mortgages from the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), and the Housing and Urban Development (HUD). The information may be redundant however giving the same information in a different way.

What should I think about before applying for a reverse mortgage loan and what should I ask a reverse mortgage counselor? | Consumer Financial Protection Bureau (consumerfinance.gov)

Reverse Mortgages | Consumer Advice (ftc.gov)

How the HECM Program Works | HUD.gov / U.S. Department of Housing and Urban Development (HUD)