A reverse mortgage is a loan for homeowners age 62 and over, which allows them to convert some of their home equity into cash.
This explains its name: instead of a regular mortgage, where a person borrows money to buy a house, a reverse mortgage lets a person borrow money from the house that he or she already owns.
It also explains the official name of the reverse mortgage backed by the Federal Housing Administration (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.
But a reverse mortgage is a unique product, with its own pros and cons.
This is how to go about getting a reverse mortgage loan:
Step 1: See if you qualify
Being a homeowner who is 62 years or older is the baseline qualification for reverse mortgage eligibility, but there are other requirements too.
Per the Department of Housing and Urban Development (HUD), borrowers must:
- Own the property outright or have paid down the mortgage a considerable amount
- Occupy the property as principal residence
- Not be delinquent on any federal debt
- Have the financial resources to continue making timely payment of ongoing property charges, most notably property taxes, insurance or homeowner association fees
- Participate in a consumer information session with a HUD-approved HECM counselor
Along with these requirements, the borrower must also meet housing requirements.
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
Step 2: Select your loan type
Choose your interest rate. Like a “forward” mortgage, a borrower on a reverse mortgage has the option to select either a fixed-rate HECM or an adjustable-rate HECM.
Consumers who choose a fixed-rate HECM must draw their funds at closing, while consumers who choose the adjustable-rate loan have more flexibility.
Because of those funds restrictions — and because of a wave of defaults in the early 2010s tied to fixed-rate HECMs — nearly 90% of HECM borrowers today use the adjustable-rate mortgage (ARM).
The next item a borrower must consider is the amount of money they will receive, known as the principal limit.
This is determined by a formula tied to interest rates, the borrower’s age (and the age of any spouse) and the home value. Also determined via formula is the one-time origination fee paid to the lender at closing.
To learn more about how much money your reverse mortgage might bring you, and how much you might pay at closing, try our free reverse mortgage calculator.
Step 3: Meet the loan requirements during the life of the loan
While the reverse mortgage repayment does not come due until the borrower has died or moves permanently out of the house, there are other requirements borrowers must meet for continued eligibility within the program. Among the homeowner’s obligations are the following:
- Occupy the home. The home must be the borrower’s principal residence, and the borrower must occupy the home as his or her full-time residence. Home occupancy is considered broken once the borrower dies, or once the borrower is out of the house for 12 consecutive months. This includes extended stays in rehab facilities or nursing homes.
- Maintain the home. The borrower is responsible for general maintenance and upkeep of the home to FHA standards.
- Pay all property charges. The borrower must stay up-to-date on all property costs, including taxes, homeowner’s insurance, association dues and other similar standard costs associated with homeownership.
Step 4: Repay the loan upon leaving the home — but never owe more than it’s worth at the time of sale
The final step in a reverse mortgage is loan repayment. That repayment is due once the borrower is permanently out of the home, whether by death, extended illness (moving into assisted living or a long-term care facility) or choice.
When reverse mortgage borrowers pass away, their children or the inheritors or executors of their estate can sell the home and use those proceeds to repay the loan.
There are also options where the children can retain the home, if they want it.
Perhaps the best news about a reverse mortgage is that it is a non-recourse loan.
As a result — and this is a key benefit of the reverse mortgage — a borrower can never owe more than the home is worth at the time of sale.
This is a feature guaranteed by the FHA, supported by the collected borrower pool of mortgage insurance payments.