The Complete Guide to Reverse Mortgage Guidelines and Insights

The most definitive features of the mortgage include:

• The property is used as collateral for the lender to secure the loan.
• There is no monthly loan payment, but debt still accrues.
• The loan is repaid when a borrower or their heirs sell the house or a maturity event occurs.
• The borrowers continue living in their homes and enjoy their accumulated wealth. 
• The funds can be spent on anything (unless the reverse mortgage is a single-purpose mortgage, which we will explore later).
• The borrower is required to continue paying property taxes and insurance and keep up the maintenance of the property.
  

To qualify for a reverse mortgage, you must:

• Be at or above the age of 62.
• Own a significant amount of equity in the home (generally, 60 percent or more).
• Live in the home as your primary residence.
  
  

The Difference Between a Reverse Mortgage and a Traditional Mortgage

A traditional mortgage allows you to borrow money to pay for a home at the time of purchase. Over time, the borrower pays off the borrowed money and accrued interest to eventually own the home outright. As the loan decreases, equity increases. 

With a reverse mortgage, you borrow money on the equity already built into the home. This can be highly beneficial to the nearly 80 percent of seniors who own their homes outright, making their homes their largest financial asset and untapped source of income.

The Three Types of Reverse Mortgages

As you consider a reverse mortgage, you will have three types to choose from:

1. Single-Purpose: This is the least expensive option. These mortgages are generally offered by state and local government agencies and nonprofit organizations, but are not widely available. As the name suggests, these loans can only be used for one purpose specified by the lender, such as home repairs or property taxes.
2. Proprietary: These are private loans backed by the companies that develop them. Although they are not as regulated as federally backed reverse mortgages, most accepted applications are for homes above the value limit set by the Federal Housing Administration (FHA), making them difficult to acquire.
3. Home Equity Conversion Mortgage (HECM): A HECM is a federally insured reverse mortgage backed by the U. S. Department of Housing and Urban Development (HUD). This mortgage is the most popular of the three because it can be used for any purpose.

Because a HECM is the most common type of reverse mortgage, we’ll focus on them for the remainder of this publication, giving you the ins and outs of this type of reverse mortgage. 

Backed by FHA, a HECM is available to you if:

• You are 62 or older.
• You own a significant amount of equity in your home (60 percent or more).
• The home is your primary residence.

Some properties are not eligible for a HECM, including: 

• Second homes
• Vacation homes
• Rental homes
• Co-ops
• Single-wide manufactured homes (multi-wide are eligible)
  
  

Ideal Candidates for a HECM  

In addition to meeting the primary criteria listed above, you are an ideal candidate for a HECM if you:

• Can maintain your property charges and upkeep in your home.
• Are unable to qualify for alternative financing due to credit issues.
• Need the comfort of an emergency fund.
• Want to stay in place as you age and need healthcare services.
• Plan to stay in the home for the rest of your life. 

After the principal limit is set, you can choose one of three ways to receive your funds:

1. Lump Sum

With a lump sum, you receive all the available funds at once. This comes with a fixed interest rate, and you will pay interest and fees on the entire loan amount. 

2. Line of Credit

With a line of credit, you can receive the money at times and in the amounts you choose. The interest rate is adjustable, and the unused credit line grows over time. You will only pay interest on the money you have received.

3. Monthly Payments 

You can receive monthly payments through tenure or term:

• Tenure means you will receive equal monthly payments for as long as one of the borrowers lives in the home.
• Term means you will receive equal monthly payments for a fixed number of months.

Both methods of monthly payments have an adjustable interest rate. 

Here are a few of the most impactful benefits:

1. You can tap into equity. 

This is maybe the biggest benefit of a reverse mortgage. By receiving funds against your home, you can access extra money to pay for everyday expenses, eliminate outstanding debt, or take the vacation you’ve always dreamed about.

Plus, the funds are not considered income, meaning they are tax free.

2. You can be rid of monthly mortgage payments. 

A monthly mortgage payment is one of the largest expenses for most homeowners. Remember: The funds you receive are not “free money,” but instead will be paid back once you leave your home. 

Also, taxes and insurance related to the home are still the borrower’s responsibilities.

3. Your repayment cannot be more than the home is worth. 

Once you hit your maturity event—an event that requires a payback of the loan—you will only be required to pay back the appraised value of the home, even if the loan balance is more than this amount. In this case, the remaining balance is covered by the FHA Mutual Mortgage Insurance Fund (MMIF).

4. You can age in place.

You can age in place, so long as no maturity event occurs and you can continue paying taxes and homeowner’s insurance on time.

5. You can give your home to your heirs. 

Although many borrowers choose to sell their home to pay off their HECM, your heirs can keep the property after you pass away if they can pay the loan in full through other means.

6. You can defer Social Security benefits.

You can let your Social Security benefits grow as you use the funds from a HECM to cover expenses. By delaying the age at which you start taking your Social Security payments, you may be able to max out your payout. 

Remember that a HECM loan might affect your eligibility for need-based programs, such as Medicaid or Supplemental Security Income. Be sure to speak with your mortgage professional, financial planner, or a counselor at Medicaid to find out more.

Be sure to consider the following factors before making your decision:

It’s only a good idea for financially stable borrowers. 

Although you will no longer need to make payments on the house, you will still have expenses to take care of, including:

• Property taxes.
• HOA fees.
• Homeowners insurance.
• Other associated costs.

Neglecting to pay, or (in some cases) paying late, could lead to foreclosure on the house.

Your heirs might inherit less. 

If you choose to give your home away to your heirs, they will still be required to pay the full loan balance if they wish to keep the home. 

If the loan balance exceeds the home value, they can sell the home for 95 percent of the home’s appraised value and get 5 percent of the proceeds from the sale. The remaining balance would be used to pay off the loan balance, and the deficit would be covered by the MMIF. 

If the home is worth more than the loan balance, the net proceeds will pay the loan balance in full, and the heirs would get the remaining proceeds.

The payback time frame might shorten due to maturity events.

Certain maturity events can push the loan deadline to a significantly earlier date. For example, if the borrower cannot pay taxes or insurance on time or chooses to move, those would count as maturity events. 

If payback is not possible, this could lead to foreclosure of the home.

The process can be confusing without a good advisor. 

Although the reverse mortgage process is fairly straightforward, it can be difficult for borrowers, their family members, and their advisors to understand. Borrowers need trustworthy lenders to guide them to the right decision.

The requirements are as follows:

• You’re at least 62 years old.
• You have at least 60 percent equity in your home.
• The reverse mortgage will be applied to your primary residence.

With a HECM, you will need to meet one other requirement:

• Undergo a counseling session with a HUD-approved agency. During this session, a counselor unassociated with any party (lender or borrower) will provide you with information about how reverse mortgages work, their implications, the appropriateness of a reverse mortgage for your personal and financial situation, and possible alternatives.

Once you undergo the counseling session, you will receive a certificate that authorizes the session. This certificate needs to be provided during the application process.

Property Qualifications

Even if your home is a primary residence, it will still need to meet certain criteria, including:

• Home Type: Single-family homes, two- to four-unit multi-family homes, multi-wide manufactured homes, and FHA-approved condominiums all qualify.
• Home Condition: Before applying for the mortgage, complete necessary repairs and upkeep to ensure the property is in good condition.
• Primary Lien: The HECM must be the primary lien on your home.
• FHA Standards: The home must meet all FHA property standards and requirements.

Financial Qualifications

Although a HECM provides supplemental income, you need to be able to uphold the following financial responsibilities:

• Property taxes
• Homeowners association (HOA) fees
• Homeowners’ insurance 

Additionally, you will need to prove that you do not have any:

• Delinquent federal debt
• Bankruptcies in the last two years or foreclosures in the last three years 

 

Here is what you can expect: 

• The application is usually done over the phone and takes about five minutes.
• The application only looks at current income, debt, and repayment history.
• The application does not consider FICO scores.

During the application, you will need to provide the following documents to your loan officer: 

• Copy of social security award letter
• Most recent 1099 form
• Most recent insurance policy
• Social Security card
• Proof of identification
• Counseling certificate
• Current mortgage statement
• Bank statements 

Although it’s not necessary, it’s a good idea to have an email address to avoid mailing documents back and forth. Uploading documents and signing through e-signatures can move the process along faster.

 

1. Get your house appraised.

An independent appraiser will visit your home to determine the value of your property. Following HUD guidelines, your appraiser will submit findings to the FHA. Once approved, this will move your application forward. 

2. Complete underwriting.

A member of your lending team will complete the underwriting. Your underwriter will examine your finances, assets, and documentation to assess how much of a risk the lender is taking if they decide to provide you with loan approval.

3. Pay the costs and fees associated with the loan. 

Once approved for the loan, you’ll need to pay costs and fees, including origination fees and closing costs. These fees are generally deducted from the loan's proceeds, so you typically do not pay for anything out of pocket. However, you will need to pay out of pocket for the counseling session at the time of your session. Some lenders will also require you to pay for the appraisal out of pocket before closing.

Remember: You are still responsible for property taxes and homeowner’s insurance. You can pay these ongoing costs with HECM funds through a Life Expectancy Set Aside (LESA), which is sometimes required based on your qualifying profile. It can also be elected by the homeowner.

4. Close on the loan.

On your closing date, you will sign all the final documents to make your HECM official. You’ll want to make sure to review all the details. If it makes you more comfortable, include your lawyer in the review. 

From here, your application enters a right of rescission period (unless you are using the HECM to purchase your new primary residence), during which you have up to three business days to cancel your loan. Choosing to do so will not result in any penalties.

5. Use your new cash flow! 

Now that all the technical steps have been taken, it’s time to start reaping the benefits of financial freedom! You will receive the agreed-upon payments through check or wire transfer.

When you work with a Loan Officer from radius, we help you determine if a reverse mortgage is the right choice for you based on your financial profile, lifestyle, and the condition of your home, among many other factors. 

Ready to gain the financial freedom you deserve? Give one of our Loan Officers a call today!