I wanted to write an article for people just beginning to learn about reverse mortgages. This is basically a short FAQ page that takes a 30,000 foot view and answers the very basic questions everyone has when they first learn about this amazing loan program. I hope you enjoy it and feel free to share it around. Also, please feel free to contact me with any additional questions. My contact information is at the bottom of the article.
I hope you enjoy it and find it useful.
What is a Reverse Mortgage?
Most reverse mortgages are insured by the Federal Housing Administration (FHA) specifically designed for homeowner’s aged 62 and above, that allows them to convert a portion of the of their home into money they can spend, without having to sell their home, give up title or obligate themselves to a monthly mortgage payment.
There are also “non-FHA insured” reverse mortgages available called “proprietary” reverse mortgages. The FHA insured loans are called “Home Equity Conversion Mortgage” (HECM).
How do Reverse Mortgages Work?
A reverse mortgage is just a loan against the borrower’s home. The lender has a lien against the title. The customer is still charged interest, just like any other loan, however, they do not pay it on a monthly basis. The customer is not required to send monthly payments because the interest and mortgage insurance are deferred to the end of the loan.
The customer has the benefit of no mortgage payments, but every month, the interest that is charged is added to the loan balance, so the balance continues to grow over the life of the loan. This is truly a 100% negative amortization loan.
All reverse mortgages, both FHA insured and proprietary, are 100% non-recourse. This means that if the loan balance ever exceeds the value of the home, the lender can never come after the homeowner, the estate or the heirs to attempt to recover their losses. The homeowner will never pass a debt to the estate beyond the value of the home.
This is why there are mortgage insurance premiums (MIP) charged on the HECM loan program. The MIP pays the lender if they incur any losses on the loan. Because the lender is not losing any money, they can never come back on the borrower, the heirs or the estate if the property value is less than the amount owed on the reverse mortgage.
There is no MIP charged on proprietary loans because the interest rate is higher than on the HECM, and individual companies are willing to take on the risk of loss for the reward of higher interest rates.
Proprietary reverse mortgages do not have to follow FHA underwriting guidelines (although they are pretty similar) and the individual companies that write these loans, will most of time also service them.
Please note, while no payment to the lender is required, the homeowner must pay their own property taxes and homeowners insurance, as well as maintain the home, live there as their primary residence and keep their names on title. If the borrower fails to meet these property requirements, they could lose the home to foreclosure.
Why Am I Charged Interest On My Own Money?
This is a very common question. The reason interest is charged is because reverse mortgages are loans, not gifts. Every loan charges interest. The homeowner is not borrowing his own money, he is simply using the home as security for the loan. The reverse mortgage loan can be paid off any time with no pre-payment penalties.
Every month, the borrower will receive a statement (either digital or hard copy), and it will show the amount of interest and MIP (if it is a HECM), added to the loan balance. It is very important that the benefits the borrower receives from the reverse mortgage (no mortgage payments, receiving a monthly payment, having a line of credit for emergencies), outweigh the negative amortization.
This loan is intended to relieve financial stress, not create it. If someone gets worried about the amount being added to their loan balance and this causes them stress, they probably should not have a reverse mortgage. This is why it is so important for people to understand how this loan works and how the loan balance increases every month.
I make sure to emphasize this with every one of my customers and in twenty years of originating reverse mortgages, I have never had a customer (or family member), tell me they have regretted doing this loan.
Who Is Eligible For A Reverse Mortgage?
- The home must be the primary residence (no 2nd homes or investment properties) of the borrowers
- At lease one homeowner must be 62 years old (for the HECM) or both need to be at least 55 (for the proprietary)
- There needs to be substantial equity in the home (the amount required can vary based on the interest rate and ages of the borrowers)
- All homeowners must have reverse mortgage counseling by an independent third party
How Much Money Can I Receive From A Reverse Mortgage?
The amount someone qualifies for can vary. Reverse mortgages have no set loan-to value ratios. The amount a lender can loan is based on:
- The age of the youngest homeowner or spouse (rounded up to the nearest age)
- The value of the home up to the “maximum claim amount” (this can change every year but at the time of this writing – December 2022 – the maximum claim amount is $970,800. However, in 2023 it will be $1,089,300)
- The current interest rate (the higher the rate, the lower the loan amount)
Will I Lose My Home?
No. The home stays in the name of the homeowners and as long as the borrowers keep current on the property taxes and insurance, maintains the home and continues to live in the home and keep their name on the title of the home. As long as these property requirements are met, the lender can never foreclose, even if the loan balance exceeds the value.
How Does The Lender Make Money?
Remember, this is still a loan and there is still interest being charged and added to the loan balance. Lenders make money from the interest that is accruing.
They also typically bundle hundreds of loans together and sell them on the “secondary market” to investors who pay a premium for them.
They also usually retain the servicing rights to the loans and the investors they sell to pay them to service the loans.
What happens At The End Of The Loan?
Reverse mortgages only come due when the last borrower, or non-borrowing spouse, permanently leaves the home. Or if the borrowers fail to meet the property requirements mentioned above. At that time the heirs inherit the home and the loan balance becomes due and payable in one lump sum.
FHA allows the heirs six months to pay the loan off. Most of the time the heirs sell the home and pay off the loan balance and keep the remaining equity as an inheritance. However, the they can also keep the home and refinance it to get the money to pay off the reverse mortgage loan. The lender does not care where the money comes from, they just need to get paid.
If there is no equity in the home, they family can leave it in broom swept condition and just sign it over to the lender. Remember the lender has no recourse against the estate or the heirs.
However, if they still want to keep the home, even if more is owed on the home than it is worth, the heirs can do so by getting a new loan for 95% of the current value (regardless of the actual loan balance), and the lender must accept this as payment in full.
There is a book that I highly recommend for people to read called “Understanding Reverse”. The author, Dan Hultquist updates this book every year. He has graciously allowed me to use a great little matrix that very clearly explains the options the heirs have by asking two simple questions:
- Is there any equity left?
- Do I want to keep the home?
What Is The Process To Get Started?
I’m going to break this down into steps for you here:
- Gather as much information as possible before calling anyone. Here are a couple of sites to assist you:
- Call three companies to get them to e-mail you quotes and answer any questions you still have.
- Compare the quotes. However, make sure you pay attention to the interest rate margin more so than just the interest rate. Here is a link to a radio show I did earlier this years on how to shop for a lender: https://reverse-mortgage-colorado.net/podcast/tips-you-need-when-shopping-for-a-reverse-mortgage/
- If you think a reverse mortgage is the best option for you, then you will need to talk with a reverse mortgage counselor. All homeowners/borrowers/non-borrowing spouses must talk with an independent third-party before signing any documents. Once you decide on a lender, that lender should give you a list of counselors. Do not let them tell you who to use. You should choose one off the list yourself.
- Once you have completed the counseling, you will receive a “counseling certificate” that you can provide to the lender as proof. Then you can begin the application
I hope the answers to these questions help you without overwhelming you. Please feel free to contact me directly with any questions.
Bruce E. Simmons, CRMP
Reverse Mortgage Manager
American Liberty Mortgage, Inc.
1932 W 33rd Ave
Denver, CO 80211
Office: (303) 458-3778
Direct; (303) 467-7821
Cell: (303) 513-2748