If you’re at or near the age of 62 and are looking for ways you can adequately fund your retirement, it’s understandable that a reverse mortgage has become a potential option for you to consider. Maybe you’ve seen an ad on TV, or maybe you’ve just had to think about the future a little more intently and are open to some new options. But, if you don’t quite know how a reverse mortgage loan works, then you’ve come to the right place.

Please note that the details and provisions in this article primarily apply to a Federal Housing Administration (FHA)-sponsored “Home Equity Conversion Mortgage,” or “HECM” reverse mortgage. Some lenders offer their own private reverse mortgages that are not sponsored by the government, and the reverse mortgage program rules may differ from those that apply to HECMs.

In this article, you will learn:

  • What is a reverse mortgage?
  • How do I qualify for a reverse mortgage?
  • What are my obligations if I get a reverse mortgage?

What is a reverse mortgage?

Chances are that if you’re considering a reverse mortgage, you’re familiar with how a regular mortgage works: you apply for a mortgage loan, use it to buy a home, and you spend the next 15-30 years paying that loan off with interest so that you and your family can live your lives. It’s a key component of the American Dream.

So that concept – of applying for a loan, getting the proceeds, and buying a house – is a traditional, “forward” mortgage. When that process is reversed, you get the loan proceeds based on the amount of equity you’ve built up in your home (which is the home’s value minus the outstanding mortgage balance), or you can leave it sitting in a line of credit and withdraw that equity when you need it to pay for certain expenses. No monthly mortgage payments are required with a reverse mortgage, and the loans typically have a “non-recourse” feature which means you can never owe more than the home is worth at the time of sale.

As with any loan, a reverse mortgage accrues interest, and since you’re not required to make monthly mortgage payments, the loan balance increases over time as opposed to going down. You can choose to make monthly payments if you wish to maintain or draw down the outstanding balance, but it is not a requirement of a reverse mortgage. You are, however, required to stay current on any associated property taxes or insurance fees.

Getting rid of a forward mortgage payment is often a major reason that a borrower chooses to take out a reverse mortgage. A forward mortgage payment on a fixed income can account for a major regular, monthly expense, especially for a senior who may be relying on Social Security benefits to make ends meet month-to-month. Depending on an individual’s financial situation, a reverse mortgage could be an option to eliminate one of his or her greatest monthly expenses.

How do I qualify for a reverse mortgage?

First and foremost, you must be at least 62 years old at minimum to qualify for an FHA-insured reverse mortgage. If you are the spouse of someone 62 years of age or older but haven’t reached that age yet yourself, you can potentially be added to the loan as a “non-borrowing spouse.” Speak to one of our top 10 lenders for more information.

Getting rid of a forward mortgage payment sounds great, but a reverse mortgage loan is a loan after all, and it does come with some key requirements to be able to qualify. If you decide to get one, not only will you be getting rid of your forward mortgage payment, but you’ll also have to get rid of your forward mortgage, period.

A requirement of a reverse mortgage is that it must be in a “first-lien” position. In other words, there can’t be any other debts on the home ahead of the reverse mortgage. If you do not fully own your home outright and you qualify for a reverse mortgage, then your loan’s proceeds will need to be applied to any remaining forward mortgage balance you have before you can access any additional cash that comes from the reverse mortgage’s proceeds.

The home also must serve as your principal residence, meaning that it needs to be the primary place where you live. If you want to take a reverse mortgage out on a second or vacation home, unfortunately that’s not an option.

You will also have to do a few things before you can take the loan out, including going through required counseling from an agency approved by the U.S. Department of Housing and Urban Development (HUD) so you know exactly what you’re getting into, and you must have a property appraisal performed so that your loan’s proceeds can be accurately determined. A financial assessment will determine if you are willing and able to meet the loan obligations should you move forward.

You should also be advised that a reverse mortgage does not allow a borrower to access the full value of the home; the amount of equity you’ll be able to access is based on the age of the youngest borrower. Basically, the older you are, the higher amount you’ll be able to borrow. To determine how much you may be eligible for try our free reverse mortgage calculator.

What are my obligations if I get a reverse mortgage?

Prior to application, make sure your home’s condition meets FHA standards. If your home is in disrepair or needs serious work, then you may have difficulty qualifying for the loan upfront, and any major defects will be reflected in your property’s appraisal.

If you are approved, go through the financial assessment and counseling and close, then there are a few regular things you’ll have to do to keep your loan in good standing.

First, you need to live at home. There is an annual occupancy check performed that continues to make sure that the home which has the reverse mortgage on it continues to be the place you spend most of your year. That doesn’t mean that you can’t go on a long-term vacation; in those instances, it’s just best to keep the major point of contact for your loan after closing – the servicer – fully informed and aware of anything that might disrupt the occupancy check.

You also need to pay all associated taxes, fees and insurance costs. This is a condition of keeping the loan in good standing; any necessary property taxes, homeowner’s association fees and homeowners insurance related to the home must be kept in good standing, otherwise you could be at risk of default. Be sure to fully understand all the required fees and costs before getting a reverse mortgage to make sure you can keep up with the responsibilities.

You must also continue to keep the home in good repair. Allowing your home to fall into disrepair can cause a lot of problems for someone who has a reverse mortgage, which can also escalate into default.

Any questions you have about your own financial situation as it relates to getting a reverse mortgage should be discussed with your trusted advisors, family members, or anyone else who could be impacted by your getting a reverse mortgage. Any additional questions that remain – or new ones that might crop up – should be brought up with your loan officer, or your housing counselor in your required session.

A reverse mortgage can be a powerful tool for a senior in a particular situation, but as the reverse mortgage industry often says, it may not be for everyone. Arm yourself with good information so that if you do decide to avail yourself of the potential benefits, you know exactly what you’re getting into and what you need to do to keep the loan in good standing.