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 the loss of 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 evolved greatly 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 which 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 causes 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 seen a steady rise in 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 2020’s, 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 in order to fund daily expenses.
Who is eligible for a reverse mortgage?
There are two umbrella categories that 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 principal residence
- The borrower must not be delinquent on any federal debt
- The borrower must have the financial resources to continue making timely payment 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 is rising, going up in each of the past four years, from $636,150 in 2017 to $765,600 in 2020.
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 a variety of forms, including tenure payments, term payments, a line of credit or 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.
Typically, seniors use reverse mortgage funds on their basic needs, often health care or home improvements. Borrowers may use the funds for anything they want. They simply 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 are the increasing protections 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 pay back the remainder of the debt.