What You Need to Know About Reverse Mortgages in 2023

With a reverse mortgage, the lender makes payments to you rather than the other way around. But these loans are risky and you need to avoid reverse mortgage scams.

By , Attorney

Reverse mortgages are usually advertised as an easy way for older homeowners to access money. But most reverse mortgages are risky, and getting one isn't necessarily a good idea.

These loans are expensive, and the lender can call the loan due in several circumstances. Your home could be foreclosed if you don't repay the full amount.

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.

What Is a Reverse Mortgage?

The best way to avoid scams and determine if a reverse mortgage is right for you is to understand what loans are available and exactly how they work.

In a traditional, "forward" mortgage, a borrower takes out a lump sum of money and steadily repays the lender over time, like 30 years, usually by making monthly payments of principal and interest.

On the other hand, in a reverse mortgage, the lender makes payments to the borrower, which become the loan. With a reverse mortgage, you basically get an advance payment on your property's equity.

Three Kinds of Reverse Mortgages Are Available

Reverse mortgages come in three varieties: HECMs, proprietary reverse mortgages, and single-purpose reverse mortgages.

HECMs

The federally-insured Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage available to older homeowners. You can receive the proceeds in different ways, like in a lump sum, monthly payments, or a line of credit.

The U.S. government insures HECMs through the Federal Housing Administration (FHA). FHA is a part of the U.S. Department of Housing and Urban Development (HUD). Mortgage companies sometimes use this fact as a selling point, but this insurance primarily protects the lender, not the borrower.

If you default on your reverse mortgage loan or the loan is accelerated for some other reason, but the property isn't worth enough to fully repay the debt through a foreclosure sale or other form of liquidation, like a traditional sale or deed in lieu of foreclosure, FHA will compensate the lender for the loss.

While HECMs are readily available, the most you can borrow is $1,089,300 (2023).

Proprietary Reverse Mortgages

Some lenders offer proprietary reverse mortgages. Proprietary mortgages aren't FHA-insured.

Jumbo reverse mortgages. A proprietary reverse mortgage might be a "jumbo" reverse mortgage. Only people with very high-value homes can get this kind of reverse mortgage.

Jumbo reverse mortgage loans aren't limited in amount and can be as much as several million dollars. Again, unlike HECMs, jumbo reverse mortgages aren't federally insured (meaning federal insurance won't cover the lender's losses), so they're more expensive.

Other kinds of proprietary reverse mortgages. 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 without the government's HECM regulations. (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.)

You should be extremely cautious about taking out any reverse mortgage, especially a proprietary reverse mortgage where the minimum age to get a loan is even lower than what's required for a HECM.

And be on the lookout for scams and deceitful marketing tactics.

Single-Purpose Reverse Mortgages

Another kind of reverse mortgage is a single-purpose reverse mortgage, which restricts the homeowner 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, a single-purpose reverse mortgage is a much better option than getting another type of reverse mortgage.

How Does a Reverse Mortgage Work?

With a HECM, the borrower receives a lump sum, periodic payments, or a line of credit to draw upon (or a combination of monthly payments and a line of credit) from the lender. Though, you might be able to change your payment option later on for a fee.

The loan amount grows every time the lender sends a payment, or when the borrower makes a draw, until the maximum loan amount has been reached. The payments the borrower receives, along with accrued interest and fees, increase the loan balance and decrease the borrower's equity in the home. If you take a lump sum, you'll get the maximum loan amount at the time of distribution.

The amount available with a HECM is based on:

  • the borrower's age
  • the type of HECM selected (fixed or adjustable rate)
  • the home's appraised value
  • current interest rates, and
  • a financial assessment of the borrower's willingness and ability to pay property taxes and homeowners' insurance.

But federal law limits the amount you can borrow in the first year of the loan, which restricts the amount you can get in a lump sum to the greater of 60% of your approved loan amount or the sum of the mandatory obligations plus 10%. "Mandatory obligations" include, for example, existing mortgages and other liens on the property you'll pay off with the money you receive.

Proprietary reverse mortgages work similarly to HECMs: you can typically get a lump sum, monthly payments, or a line of credit.

With a single-use reverse mortgage, you get money to pay property taxes or home repairs. The cost of these loans is very low.

Age Requirements and Eligibility

Generally, homeowners over age 62 who occupy the property as their principal residence and have 50-55% or more equity in their home can usually qualify for a HECM reverse mortgage.

Other eligibility requirements include the following:

  • You must occupy the property as your principal residence.
  • You can't be delinquent on any federal debt.
  • 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 make timely payments for ongoing property expenses, like property taxes, homeowners' insurance, and homeowners' association (HOA) fees.

If you take out a HECM, you'll have to comply with some requirements, like paying mortgage insurance premiums, maintaining the property, and having a set-aside account if you might not be able to stay current on items like property taxes and homeowners' insurance bills.

How to Get a Reverse Mortgage

Various banks and lenders offer federally insured and proprietary reverse mortgages. If you're still considering getting a reverse mortgage even after learning about all the downsides (like confusing terms, high costs, and the likelihood of an eventual foreclosure), deal with reputable lenders. Big banks, like Bank of America and Wells Fargo, which used to be among the top issuers of reverse mortgages, have gotten out of the reverse mortgage business, which should tell you something about these loans.

Be sure to talk to more than one lender so you can compare costs and terms. To find trustworthy lenders, start with the HUD lender search on the HUD website rather than a basic online search.

Then, check the lender's rating with the Better Business Bureau and make sure the lender is licensed. Finally, check the lender's license status on your state's official website.

State, local, and nonprofit agencies usually offer single-purpose reverse mortgages. Staff at your local Area Agency on Aging might have information about the programs in your area. Find a local agency on aging at eldercare.gov, or call 800-677-1116. You can also contact your tax assessor to find out about single-use reverse mortgages for paying property taxes in your area.

When Do You Have to Repay a Reverse Mortgage?

Some mortgage lenders and brokers tell homeowners it's nearly impossible to lose a home to foreclosure with a reverse mortgage. But several events can prompt a lender to call a reverse mortgage due.

Once a triggering event happens, and the lender calls the loan due, the borrower has only a few options (discussed below). Otherwise, the lender will foreclose and sell the home to recoup its money.

When a Reverse Mortgage Comes Due

With a HECM, you must repay the loan, plus interest and fees, if one of the events described below happens.

  • The home is no longer your (the borrower's) principal residence. You 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.
  • You move out due to a physical or mental illness and are 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 over 12 months. But a nonborrowing spouse might be able to stay in the home if specific eligibility requirements are met.
  • You sell the home or transfer title (ownership) to someone else. If you sell or transfer title to the property (or transfer your 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.
  • You die, and the property isn't the principal residence of at least one surviving borrower. But a nonborrowing spouse might be able to remain in the home if specific eligibility requirements are met.
  • You breach the loan agreement. For example, if you don't pay the property taxes or homeowners' insurance, assuming you don't have a set-aside account (see below), fail to keep the property in reasonable shape, or breach any other mortgage requirements, the lender can foreclose.

After any of these occurrences, the lender may accelerate the loan (call it due). Proprietary reverse mortgages can come due under similar circumstances.

How to Avoid a Reverse Mortgage Foreclosure

After a lender accelerates a HECM, you can avoid a foreclosure by:

  • repaying the full amount of the loan, including interest and fees (or paying 95% of the current appraised value of the property to the lender, whichever is less)
  • promptly fixing the problem, like getting current on homeowners' insurance
  • selling the property for the lesser of the loan balance or 95% of the appraised value and repaying the lender with the proceeds (FHA insurance covers the remaining balance), or
  • giving the home's title to the lender.

Is a Reverse Mortgage Right for You?

Reverse mortgages have a few upsides and plenty of downsides.

Pros of Getting a Reverse Mortgage

If you have a lot of equity in your home but not much cash, a reverse mortgage might be a reasonable way to get the money you need to pay for living expenses.

Other advantages to reverse mortgages include the following:

  • HECMs are nonrecourse, meaning the lender can't come after you or your estate for a deficiency judgment after a foreclosure. (Jumbo reverse mortgages are sometimes nonrecourse, but not always.)
  • You don't have to make any payments until the loan comes due.

Cons of Getting a Reverse Mortgage

While reverse mortgages have some upsides, these loans also have significant drawbacks. The lender can accelerate the loan in any of the above-described scenarios. For instance, say you don't pay the property taxes or homeowners' insurance, you don't maintain the home in reasonable condition, or you breach the mortgage terms, the lender can foreclose.

In one well-publicized case, a reverse mortgage lender initiated a foreclosure because a 90-year-old woman failed to pay the $0.27 needed to get current on her homeowners' insurance. Reverse mortgage lenders have a reputation for foreclosing due to relatively minor mortgage violations. In another case, a mortgage company began a foreclosure against an 80-year-old man because he wasn't occupying the property as his primary residence after it was damaged in a fire.

Reverse mortgages are designed so that the lender gets fully repaid or ends up owning the home. Even if you do everything you're supposed to under the mortgage agreement, you probably won't have money or equity left when the loan comes due, and you'll likely lose the home.

Other downsides to reverse mortgages include:

  • The reverse mortgage could affect your Medicaid eligibility.
  • Reverse mortgage fees are often higher than a regular mortgage.
  • The more money you get from a reverse mortgage, the less equity you have in the home. So, you won't be able to access it later on to cover costs like long-term health care costs, to finance a move elsewhere, or leave to your heirs. (You can still leave the home to your heirs, but they'll have to repay the loan.)

Other Options to Consider

Even though a HECM or proprietary reverse mortgage might initially sound appealing, the downsides to these loans usually mean that it's a poor option if you're facing financial difficulties. Instead, you could consider the following:

  • selling your home and downsizing to a more affordable place to live
  • refinancing your traditional mortgage to lower the payments
  • taking out a home equity loan
  • applying for federal, state, or local programs that provide grant money or other financial assistance to seniors (like a single-purpose reverse mortgage), or
  • applying for a property tax credit or abatement (reduction).

Many jurisdictions provide tax-relief options and other forms of financial relief for older homeowners.

Reverse Mortgage Scams

Most of the time, a reverse mortgage loan isn't in the borrower's best interest. But that won't stop scammers from using unscrupulous tactics to get you to take one out.

It's not uncommon for scammer lenders and brokers to use the following tricks to convince people to get a reverse mortgage. Watch out for the following red flags.

High-Pressure Sales

Mortgage brokers sometimes target financially vulnerable senior citizens and pressure them to take out a reverse mortgage. Seniors may face pushy brokers who use aggressive sales pitches to push them into loans they don't need.

Misleading Claims About FHA Insurance

Again, the FHA insures HECMs. Lenders and brokers who sell reverse mortgages sometimes emphasize that the loan is federally insured, as though this insurance is primarily for the borrower's protection. However, this insurance program mostly benefits the lender.

Tricky Advertising

Some advertisements for reverse mortgages state that you get "tax-free money." But of course, reverse mortgage proceeds aren't taxed—a reverse mortgage is a loan, not income.

Also, the advertising usually fails to disclose the fees, conditions, or risks associated with the loan. Often, seniors don't fully understand the terms of reverse mortgages, and deceptive mailings only worsen this problem.

Getting a Reverse Mortgage and Delaying Social Security Benefits

While not exactly a scam, homeowners should beware of taking out a reverse mortgage to delay taking Social Security benefits.

Some reverse mortgage brokers and lenders advise elderly homeowners to get a reverse mortgage to make up the gap in income while delaying Social Security benefits until they're older. Because Social Security benefits are delayed, the homeowner gets a permanent increase in the monthly benefit when they start receiving benefits at an older age.

But, according to the Consumer Financial Protection Bureau (CFPB), the costs and risks of getting a reverse mortgage will likely be more than the cumulative increase in Social Security lifetime benefits that a homeowner would receive by delaying Social Security. For more information about the risks of obtaining a reverse mortgage to delay collecting Social Security, see the CFPB's August 2017 report.

Misrepresenting the Risk of Losing the Home

Some brokers incorrectly state that you will never lose your home or face foreclosure if you take out a reverse mortgage. As discussed above, this claim isn't true.

Use of Celebrity Spokespeople

Reverse mortgage lenders tend to use celebrities like Tom Selleck and Robert Wagner in their advertisements. While this isn't necessarily a scam, the use of celebrity spokespeople is calculated.

The lender's goal is to make you feel confident about the product. Because you trust the spokesperson, you might feel like you don't need to learn the details about the loan. It's in the lender's best interest for you to stay uninformed. Once you understand all the requirements and consequences of a reverse mortgage, you might think twice about getting one.

Keep in mind that hiring a celebrity for an advertising campaign is expensive. The lender must recoup this money somehow, and it will likely be in the form of high fees on its reverse mortgages.

Contractor Scams

Contractors sometimes approach older homeowners about getting a reverse mortgage loan to pay for property repairs. In almost all situations, getting a reverse mortgage for this purpose is a bad idea.

Even if you decide it's necessary to get a loan to pay for repairs, the contractor is likely a scammer who will charge an excessive amount. If someone tries to sell you a reverse mortgage and you didn't instigate the contact, it's probably a scam.

Scams That Target Military Veterans

The Department of Veterans Affairs (VA) doesn't guarantee any reverse mortgage loans. Sometimes, a reverse mortgage lender falsely promises veterans special deals or implies that the VA approves these loans. It doesn't.

Leaving a Spouse Off the Reverse Mortgage

Some brokers have encouraged homeowners to name the older spouse as the sole borrower on the reverse mortgage loan. Brokers take this tactic because the amount you can borrow is based on your current interest rate, home equity, and age.

The problem with this approach is that the surviving spouse risks losing the home when the older spouse dies. Because the loan becomes due when the last borrower dies, if the older spouse was the sole borrower on the reverse mortgage, the loan is considered due and payable when that borrower dies.

If you take out an FHA-backed reverse mortgage after August 4, 2014, you might be protected if your spouse passes away, but you're not named as a co-borrower on the reverse mortgage, if you meet specific criteria and strictly adhere to all requirements. For HECMs taken out prior to August 4, 2014, lenders have the option to foreclose or assign the mortgage to HUD, and the nonborrowing spouse can stay in the home—again, only if specific criteria are met.

If you're considering taking out a reverse mortgage with a nonborrowing spouse, be very careful and talk to a lawyer or HUD-approved housing counselor to learn how to protect the nonborrowing spouse in this situation adequately.

Getting Legal Help

To get more information about the pros and cons of reverse mortgages, visit the AARP website. The Consumer Financial Protection Bureau (CFPB) website and Federal Trade Commission (FTC) website also provide information for homeowners considering taking out a reverse mortgage.

Before getting a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. Go to the HUD website for a list of counselors, or call HUD at 800-569-4287, to learn more about how HECMs work.

These counselors can also provide information about proprietary reverse mortgages and single-use reverse mortgages. While federal law requires that borrowers talk to a loan counselor before taking out a HECM, not all counselors effectively explain all of the ins and outs of reverse mortgages. Even after a long counseling session, many borrowers still don't fully understand the reverse mortgage terms and requirements.

Because reverse mortgages are very complex and have serious consequences, consider talking to an elder law or consumer protection attorney, or financial advisor, too. If you're concerned about a reverse mortgage foreclosure, speak to a foreclosure lawyer in your state.



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