With a reverse mortgage, the lender makes payments to you rather than the other way around. But these loans are risky.
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, a reverse mortgage involves payments to, instead of from, a borrower, which become the loan.
Reverse mortgages are usually advertised as a risk-free 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, in several different types of circumstances, the lender can call the loan due. If you don't repay the full amount, your home could be foreclosed.
Before you get a reverse mortgage, consider the upsides and, especially, the downsides. And you need to beware of scammers selling these loans. The best way to avoid scams and determine if a reverse mortgage is right for you is to understand exactly how they work.
What Is a Reverse Mortgage?
With a reverse mortgage, you take out a loan against the equity in your home. In this arrangement, the lender makes payments to you. Basically, you're getting an advance payment on your property's equity.
Three Kinds of Reverse Mortgages Are Available
- The federally-insured Home Equity Conversion Mortgage (HECM) (pronounced "heck-um") is the most common type of reverse mortgage available to older homeowners, and you can receive the proceeds in different ways, like in a lump sum, monthly payments, or a line of credit.
- Another kind of available reverse mortgage, which isn't federally insured, is called a "proprietary" reverse mortgage.
- Single-use reverse mortgages, also called "deferred payment loans," are need-based loans for a special purpose, such as making property tax payments or paying for home repairs.
HECMs
Most reverse mortgages are HECMs, which the U.S. government insures through the Federal Housing Administration (FHA). (FHA is a part of the U.S. Department of Housing and Urban Development or "HUD.")
But the insurance benefits 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 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 $970,800 (2022).
Proprietary Reverse Mortgages
Some lenders offer proprietary reverse mortgages to homeowners. The federal government doesn't guarantee this kind of reverse mortgage.
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 are available to people under age 62. 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.
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 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.
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 that 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 will qualify for a HECM reverse mortgage.
The amount you can get with a HECM is based on:
- the borrower's age
- the type of HECM you select (fixed or adjustable rate)
- your home's appraised value
- current interest rates, and
- a financial assessment of your willingness and ability to pay property taxes and homeowners' insurance.
Also, 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. And you can't be delinquent on any federal debt.
How to Get a Reverse Mortgage
Various banks and lenders offer federally insured and proprietary reverse mortgages. If you're still thinking about 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. To find out about single-use reverse mortgages for paying property taxes in your area, you can also contact your tax assessor.
When Do You Have to Repay a Reverse Mortgage?
Some mortgage lenders and brokers tell homeowners that it's nearly impossible to lose a home to foreclosure with a reverse mortgage. But a number of 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.
With a HECM, you have to repay the loan, plus interest and fees, if one of the specified events describes below happens.
- The home is no longer your (the borrower's) principal place of 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 more than 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 of the other mortgage requirements, the lender can foreclose.
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
- 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:
- 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.
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.
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:
- 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:
- deceptive claims that you can't lose the home to foreclosure
- misleading claims that FHA insurance benefits you (it doesn't)
- deceitful advertising claiming the money is tax-free (reverse mortgage money is a loan, not income you earned, so the payments you receive aren't taxable)
- high-pressure sales tactics, and more.
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 have to 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 all of 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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