What's a Reverse Mortgage?

Learn about reverse mortgages, including the upsides—and many downsides—to getting one.

Updated by , Attorney

A "reverse mortgage" allows older people, usually those who are 62 and older, to get a loan using their home as collateral to secure the loan. In most cases, the borrower can receive a lump sum of money, a line of credit, or monthly income (or a combination of a line of credit and monthly payments).

But is taking out a reverse mortgage a good idea? Before getting a reverse mortgage, you should understand how they work and learn the considerable risks associated with them. You also need to watch out for reverse mortgage scams.

Once you learn more about this kind of loan, you might think twice about getting one.

Home Equity Conversion Mortgages

The most common type of reverse mortgage is called a "Home Equity Conversion Mortgage" (HECM). HECMs are FHA-insured, which means the government insures them through the U.S. Department of Housing and Urban Development (HUD).

Mortgage companies sometimes use this fact as a selling point, but this insurance protects the lender, not the borrower. The insurance comes into play if the loan is accelerated for one of the reasons listed below and the house isn't worth enough to pay back the lender in full through a foreclosure sale or other type of liquidation process. In those cases, the FHA will compensate the lender for the loss.

Other Types of Reverse Mortgages

Some lenders offer "proprietary" reverse mortgages. One kind of proprietary reverse mortgage is called a "jumbo reverse mortgage" because only people with very high-value homes can get them. Proprietary mortgages aren't FHA-insured.

Other proprietary reverse mortgages have a lower minimum age requirement than HECMs, such as age 55. But, again, the federal government doesn't back these mortgages. So, proprietary reverse mortgages carry all of the risks of a HECM with none of the government's regulation. (The federal government regulates the HECM program and provides certain protections to borrowers. For example, the federal government imposed a foreclosure moratorium for HECMs during the COVID-19 pandemic.)

Another kind of reverse mortgage is a single-purpose reverse mortgage, which restricts the homeowner's withdrawals to paying for specific costs, usually property taxes and home repairs. Some state and local government agencies, as well as non-profit organizations, offer these loans. If you qualify, these programs are a much better option than getting another type of reverse mortgage.

How Does a Reverse Mortgage Work?

In a regular "forward" mortgage, the borrower gets a lump sum of money from the lender, and then makes monthly payments towards repaying the money, including interest. In a reverse mortgage, rather than getting a lump sum that has to be steadily paid back, the homeowner typically receives periodic payments from the lender, which become the loan.

With a HECM, the lender's payments to the borrower may be in the form of a lump sum (subject to some limitations), monthly payments, or a line of credit you can draw on as needed. You can also get a combination of monthly installments and a line of credit.

When Does the Borrower Have to Repay the Loan?

A lender can call a HECM due if:

  • The home is no longer the borrower's principal place of residence. The borrower might still own the property, but live somewhere else most of the time. So, if you move out and let your kids live in the home, or rent the property out, the lender can call the loan due.
  • The borrower moves out due to a physical or mental illness and is gone for more than 12 consecutive months. If your health declines and you have to move into a care facility, like a nursing home, the lender can call the loan due after you've been out of the home for more than 12 months.
  • The borrower sells the home or transfers title (ownership) to someone else. If the borrower sells or transfers title to the property (or transfers his or her beneficial interest in a trust owning all or part of the property) and no other borrower retains title to the home or retains a leasehold that meets certain conditions, the lender may call the loan due.
  • The borrower dies and the property is not the principal residence of at least one surviving borrower. A nonborrowing spouse might be able to remain in the home if specific eligibility requirements are met.
  • The borrower breaches the loan agreement, like by not paying the property taxes, not having homeowners' insurance on the property, or not keeping the home in a reasonable condition. If you don't pay the property taxes or homeowners' insurance (assuming you don't have a set-aside account), fail to keep the property in reasonable shape, or breach any of the other mortgage requirements, the lender can foreclose. A reverse-mortgage lender once initiated a foreclosure after a 90-year-old woman didn't pay the $0.27 needed to get current on her homeowners' insurance. Reverse mortgage lenders have been known to foreclose on elderly homeowners for relatively minor mortgage violations.

After any of these occurrences, the lender may accelerate the loan (call it due).

Generally, if the lender calls the loan due, the borrower—or heirs if the borrower has died—must repay the loan (or pay 95% of the current appraised value of the property to the lender, whichever is less), complete a deed in lieu of foreclosure, or sell the property (for the lesser of the loan balance or 95% of the appraised value. FHA insurance covers the remaining balance). Otherwise, the lender will most likely foreclose.

Who Can Get a Reverse Mortgage?

HECM reverse mortgages are generally available to any homeowner over the age of 62 who has substantial equity in the home. Reverse mortgages don't require a credit or income test. But they require financial counseling from a HUD-approved HECM counselor, which indicates how complicated they are.

To get a reverse mortgage:

  • You must occupy the property as your principal residence.
  • You can't be delinquent on any federal debt.
  • You need to have financial resources available to pay ongoing property costs, like home maintenance, property taxes, and homeowners' insurance.
  • Your home must be in good condition.
  • The property must be an eligible property type, like a single-family home.
  • You must have financial resources to be able to continue making timely payments for ongoing property expenses, like property taxes, homeowners' insurance, and homeowners' association (HOA) fees.

How Much Can You Borrow?

The amount you can borrow is based on your home's value, current interest rates, and your age. Also, there are limits to how much of your home's value you can draw out.

As of 2022, the most money available with a HECM is $970,800. Also, a borrower may get only 60% of the loan at closing or in the first year, subject to a few exceptions.

Upsides and Downsides to a Reverse Mortgage

Reverse mortgages are sometimes worthwhile for someone who doesn't have much cash, is facing expenses, and has a valuable home. Also, HECMs are nonrecourse, which means the lender can't come after you or your estate for a deficiency judgment after a foreclosure. But for most people, getting a reverse mortgage is a bad idea.

Reverse mortgages have significant downsides:

  • As noted earlier, the lender may call the loan due in any of the above-described scenarios. Reverse mortgage lenders are typically quick to start a foreclosure after a default happens.
  • Reverse mortgages are expensive due to closing costs, interest, servicing fees, mortgage insurance, and other fees.
  • A reverse mortgage could affect your eligibility for Medicaid.
  • By taking out a reverse mortgage, you spend down the equity in the property, which means you won't be able to access it later on to cover costs for things like long-term health care costs, to finance a move, or leave to your heirs. (You can still leave the home to your heirs, but they'll have to repay the loan.)

Before you tap into the equity in your home by getting a reverse mortgage, be sure to explore all of the other options available to you. You might, for example, qualify for a state or local program to lower your bills or you could consider downsizing to a more affordable home.

Getting Help

You should proceed extremely cautiously if you're thinking about taking out a reverse mortgage. Reverse mortgages are very complex. HECM counselors have reported that it often takes at least a couple of hours to explain how these mortgages work and cover all of the topics—including costs and consequences—that borrowers need to understand before taking out this kind of loan.

Even after a HECM counseling session, many borrowers still don't fully comprehend all of the reverse mortgage terms and requirements. Consider also talking to a financial planner, an estate planning attorney, or a consumer protection lawyer to get additional advice about whether a reverse mortgage is right for you, especially if you think you need more information or you don't fully understand the terms of the loan.

If you're concerned about a reverse mortgage foreclosure, consider talking to a foreclosure lawyer in your state.

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