Reverse Mortgages Demystified: A Simple Guide for Homeowners

November 15, 2023 By Mike Branson Jr. 8 comments

In 1961, banker Nelson Haynes of Deering Savings & Loan in Maine wanted to ensure that the widow of his high school football coach could remain in her lifelong house despite losing her husband’s income. So, Haynes wrote what is believed to be the first reverse mortgage, which lent her money against the equity of her house.

The reverse mortgage has evolved heavily since its inception nearly six decades ago and has evolved dramatically since Congress approved it as a federally insured product in the late 1980s. But the story of that first loan remains instructive for current borrowers to understand the product and its purpose: it helps seniors stay in their homes.

What is a reverse mortgage ? and what is a HECM?

A reverse mortgage is a loan for homeowners age 62 and over that allows them to borrow against the equity in their homes.

But as the name suggests and how it differs from a standard or “forward” mortgage when a person uses a reverse mortgage to borrow money, instead of making monthly payments and the balance of the loan reducing each month, a borrower can receive funds and make no monthly payments which cause the loan balance to increase monthly.

This makes the loan operate in reverse of a standard forward loan. Borrowers can also purchase a home using a reverse mortgage, which allows them to avoid making monthly payments for as long as they live in the property.

It also explains the official name of the reverse mortgage backed by the Federal Housing Authority (FHA): The Home Equity Conversion Mortgage loan, or HECM. This name is another helpful way for consumers to understand the purpose of a reverse mortgage because, like a home equity loan, a reverse mortgage lets homeowners borrow against their home’s equity.

Since its approval by Congress in 1987, the HECM has steadily increased participation. Eight thousand loans were granted in FY 1999, soaring to just under 115,000 in FY 2009. The housing crisis brought those figures down in the 2010s, but as we enter the 2020s, the government-backed reverse mortgage remains a popular product for seniors, especially those on fixed incomes with wealth tied up in their homes.

For those seniors, a reverse mortgage’s appeal is simple: It offers an alternative to being forced to sell a lifelong house to fund daily expenses.

Who is eligible for a reverse mortgage?

Two umbrella categories must be satisfied for reverse mortgage eligibility: the homeowner and the home. Per the Department of Housing and Urban Development (HUD), borrowers must satisfy several additional requirements:

The youngest borrower must be 62 years of age or older
The borrower must own the property outright or have paid down the mortgage a considerable amount
The borrower must occupy the property as the principal residence
The borrower must not be delinquent on any federal debt
The borrower must have the financial resources to make timely payments of ongoing property charges, most notably property taxes, insurance, or homeowner association fees.
The borrower must participate in a consumer information session with a HUD-approved HECM counselor.

Along with these requirements, the borrower must also meet housing requirements. Typically, the borrower’s home in a reverse mortgage is a single-family house, but there are other eligible housing options too.

Again, per HUD, a borrower can take out a reverse mortgage on the following types of homes:

A single-family house
A two- to four-unit home with one unit occupied by the borrower
A HUD-approved condominium project
An FHA-approved manufactured home

Five key benefits of the reverse mortgage

There are many benefits to the reverse mortgage loan. Here are five of the biggest.

1. The lending limit is on the rise.

Several factors figure into determining the amount of money a person can borrow. HUD sets that figure annually, and it varies based on the size of the house and its location. What’s most significant for borrowers is that the figure has risen in the past four years, from $636,150 in 2017 to $1,149,825 in 2024.

2. Loan repayment is deferred.

Perhaps what is most important for borrowers to know is that the loan need not be repaid until the borrower sells the house or passes away.

3. Payment types can fit the borrower’s needs.

Borrowers may take out the money in various forms, including tenure payments, term payments, a line of credit, or a lump sum. Combinations of those types are possible, too, making that flexibility a key attraction for reverse mortgage consumers.

4. Borrowers can use the money for anything.

Seniors typically use reverse mortgage funds for basic needs, often health care or home improvements. Borrowers may use the funds for anything they want. They must repay the loan and interest once they sell the house or pass away.

5. Increasing protections for borrowers ? and non-borrowing spouses.

A final key benefit is the increasing protection for borrowers, as well as for non-borrowing spouses. Borrowers can never owe more than the house is worth at the time of sale, while non-borrowing spouses enjoy some new recent protections designed to help prevent foreclosure situations.

All these benefits reduce the fear of seniors ? and their families ? of crippling debts. Families can even inherit the home, provided the estate can repay the remainder of the debt.

Summary

When researching a reverse mortgage, you must consult your family and trusted financial advisor to weigh the pros and cons. Learn more about how a HECM loan might be right for you by contacting one of our top reverse mortgage lenders or checking your eligibility with our free reverse mortgage calculator.

8 Comments on “Reverse Mortgages Demystified: A Simple Guide for Homeowners”

Admin June 26, 2022

Sharon T.June 26, 2022

Can I pay on the loan monthly and how does it affect my living chidden from being able to inherited the home when I'm dead?

Reply
- Admin December 15, 2022
  
  ReverseMortgageReviews.orgDecember 15, 2022
  
  Hello Sharon,
  
  While there is never a monthly payment required on the loan, you can choose to pay any amount at any time all the way up to and including payment in full without penalty at any time. By paying the interest and any MIP that accrues as it accrues, you would prevent the balance from rising. If you paid more than that each month, you would reduce the amount owed while increasing the amount available to you later if you needed it. The loan becomes due and payable when you pass but your family still inherits the property in accordance with whatever provisions you set up. They would need to either sell the home to repay the loan balance at that time, or if they want to keep the property, they could pay the loan off with money available to them or refinance the loan with another loan.
  
  The single biggest issue we see are family members who are not prepared to act once their parents/grandparents or other relatives pass. The loan becomes due and payable, and they can't just go on thinking they can remain in the home with the reverse mortgage in place, not having to make a mortgage payment. If they do not have the funds to repay the loan and are unable to refinance the loan (they do not have the credit or income to qualify for new financing), then they need to be ready to sell the home to protect their equity. Interest continues to accrue until the loan is repaid so it is beneficial to know what the heirs plan to do in advance so that they can begin to execute their plan as quickly as possible. Dealing with things after the death of a loved one is difficult, but it is even harder when you have no idea what you need to do and on top of dealing with the grief of losing one so near and dear now you need to start worrying about what will happen next.
  
  It is always best if you have a plan already in place with your heirs and speak to an estate attorney in advance to determine the best method to transfer the title of the home after you pass. It is much more difficult after you are no longer available to make your wishes known and to sign documents so I wholeheartedly suggest you all discuss it now and take whatever steps you and your legal counsel deem appropriate to have the home ready at that time so that your heirs are not scrambling to meet the required time frames and there are no questions as to what should take place or how to do it.
  
  Reply
Admin September 30, 2023

Laurie CarreiroSeptember 30, 2023

If married, do we both need to be 62 or is it ok if one is younger than 62??

Reply
- Admin October 3, 2023
  
  ReverseMortgageReviews.orgOctober 3, 2023
  
  Hello Laurie,
  
  You can get a reverse mortgage if one of the spouses is not yet 62, but the amount will be less because it is based on the younger spouse's age. Also, the younger spouse is not old enough to be on the loan, so they are considered an eligible non-borrowing spouse. They can still be on the title and are allowed to remain in the home for life under the same terms of the loan even if something happens to the older, borrowing spouse (such as that spouse passing away). Still, as a non-borrowing spouse, the younger spouse cannot access the loan. Since the younger spouse is not a borrower, if there is still money left available for payments or on a line of credit that has not yet been borrowed when the borrowing spouse passes, the younger spouse would not have access to those funds.
  
  Since the funds were never borrowed, they are not owed and would not need to be paid back when the loan is repaid. In other words, If you have a loan with a $300,000 Principal Limit (money available) and the couple only uses $150,000 while the borrowing spouse is alive, but then the borrowing spouse passes, the remaining spouse would not have access to the remaining funds. The loan operates like any other line of credit; the documentation may show a higher amount. However, the remaining spouse or their heirs would only owe what was borrowed plus interest, fees, and mortgage insurance that had accrued and had not been paid. This may allow the younger spouse to obtain their reverse mortgage later if they and the property qualify under the current terms, but there is no guarantee based on current parameters, values, and rates.
  
  Reply
Admin October 7, 2023

Connie P.October 7, 2023

What if both you & your spouse pass away, and you have no heirs to leave your home to. Does the state take it over?

Reply
- Admin October 11, 2023
  
  ReverseMortgageReviews.orgOctober 11, 2023
  
  Hello Connie,
  
  No, the same thing would happen with any other property on which the owner passed with an unpaid loan. If no heirs came forward to claim the property, pay off the lien/sell the home, the lender would foreclose on the loan. Different states have various rules about notification requirements, but the property would be sold at a foreclosure auction to repay the loan. The starting bid at the foreclosure auction is the amount owed to the lender, and if no one bids higher, the lender will become the property owner to sell to recoup the money lent. If someone bids higher, the lender is repaid, and any excess funds (often surplus funds) are used to pay any other liens on the property. According to the online legal service NOLO, unclaimed surplus foreclosure proceeds are typically sent to the state's unclaimed property division if there are no such liens.
  
  Many people set their homes up to go to different charities or extended family, etc., when they have no direct heirs. The loan is due and payable when the last borrower is no longer living in the property as their primary residence, so it is not the easiest asset for most charities to work with. They need to pay off the loan or sell the home relatively quickly, but it can be done. If there is equity in the home, working with a senior real estate specialist to make it happen is certainly worth their while. Extended families may or may not wish to become involved in selling a property they know nothing about. In some cases, the rewards could be substantial, and the time and effort involved does not need to be extensive.
  
  Reply
Admin November 21, 2023

Sinclair D.November 21, 2023

How long do I have to be in the house before doing the reverse mortgage?

Reply
- Admin November 22, 2023
  
  ReverseMortgageReviews.orgNovember 22, 2023
  
  Hello Sinclair,
  
  There really is no minimum time if you have moved fully into the home. There may be some seasoning requirements some borrowers need to consider if they recently refinanced a loan and took cash out of their property or if you just bought the property and a very short while later you are trying to use a value much greater than the price you paid without having made any improvements to warrant a higher value, but there is no minimum timeframe you must have owned the home or been living in the property once you do move in.
  
  Reply

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