What Are Reverse Mortgages

Larry Villano, Publisher of Loopholelewy.com

You've seen them. Actor Robert Wagner, Henry "the Fonz" Winkler and even former U.S. Sen. Fred Thompson, touting the benefits of a reverse mortgage. But how much do you really know about reverse mortgages?

What is a Reverse Mortgage?

A reverse mortgage is a loan secured by a portion of the equity in your primary residence.

Whose Eligible for a Reverse Mortgage?

The Federal Housing Authority (FHA) insures reverse mortgages and requires that all homeowners be at least 62 years old and own a primary residence.

So, if you and your spouse own the home (you're both listed on the deed), both of you must be at least 62 years old and both of you must be listed as borrowers on a reverse mortgage.

Is there an Income Limitation or Credit Score Requirement?

There is no income limitation or credit score requirement.

When Do You Repay a Reverse Mortgage?

A reverse mortgage becomes due immediately upon the death of the last borrower or sale of the home or permanently moving away. What does immediately mean?

In the HUD Handbook 4330.1 13-34, it details the lender’s requirements in getting the mortgage paid and settled.

If the mortgagor or the mortgagor's estate fails to repay the outstanding balance on a due and payable mortgage or if the mortgagor fails to deed the property to the mortgagee within the prescribed time, the mortgagee must begin foreclosure proceedings within 3 months.  The Field Office may authorize the mortgagee to delay the beginning of foreclosure proceedings longer than 3 months if a sale by the mortgagor or the estate is in process.  If the estate is making a reasonable effort to sell the property, these extensions should be granted in 3-month.

Talk with your loan servicing agent to find out what their timeline policy is.

What Are the Loan Limits on a Reverse Mortgage?

The amount you can borrow generally depends on four factors:

  1. age (older is better)
  2. current interest rate
  3. appraised value of the home and
  4. government imposed lending limits.

Since early 2009, the HECM program loan limit nationwide has been set at $625,500.

Your Loan Proceeds:

If there is a mortgage balance on your home or any other liens, they can be paid off at closing with the proceeds from the reverse mortgage.

You can receive the loan proceeds in several ways:

  • In a lump sum received at closing.
  • In equal monthly payments as long as the homeowner lives in the home. This is referred to as tenure
  • In equal monthly payments for a fixed number of years. This is referred to as term.
  • A line of credit that you may draw on in any amount whenever needed until the funds run out.
  • Any combination of the above.

Is There any Risk of Losing My Home?

Yes. If you fail to stay current with property taxes, homeowners insurance, and keeping the property in good repair, you risk going into default.

Are the Loan Proceeds From a Reverse Mortgage Tax Free?

Yes. The loan proceeds on a reverse mortgage are tax free and there are no dollar limits on the amount that is tax free.

Can I Deduct the Mortgage Interest that Accrues on the Funds Borrowed?

No deduction can be claimed until repayment if made.

Will My Social Security or Medicare Benefits Be Affected?

No. Since the proceeds you receive from a reverse mortgage are tax free, social security and Medicare benefits will not be affected. However, Medicaid and other need-based government assistance can be affected.

How Would My Estate be Affected if I Die?

If you die, the estate can choose to repay the reverse mortgage or sell the home. If the home is sold for more than the amount owed on the reverse mortgage, the bank gets it's share, which includes the principle, accumulated interest, and any other fees. The estate gets what's left.

If the proceeds from the sale are insufficient to pay off the reverse mortgage, the lender takes the loss and requests reimbursement from the FHA. In other words, no other asset in the estate may be taken to satisfy the reverse mortgage. For example, if there is a second home, cars, jewelry, and any other assets in the estate, they remain in the estate. A good thing for the heirs!

Are There Any Fees and other Costs to Get a Reverse Mortgage?

The U.S. Department of Housing and Urban Development, HUD, regulates the costs and fees associated with reverse mortgages and most of the costs can be financed into the loan minimizing your out-of-pocket costs to get a reverse mortgage.

Some of the fees involved in getting a reverse mortgage include:

  • The origination fee
  • An initial mortgage insurance premium at closing
  • Annual Mortgage Insurance Premium (MIP) over the life of the loan based on the mortgage balance.
  • Closing costs that cover things like the appraisal, title search, inspections, recording, mortgage taxes and credit checks
  • There may be a monthly fee for the servicing of your reverse mortgage.

What are Some of the Negatives About Reverse Mortgages?

  • The fees on a reverse mortgage are the same as a traditional FHA mortgage but are higher than a conventional mortgage because of the insurance cost. The largest costs are:
    • FHA mortgage insurance
    • Origination fee
  • The loan balance gets larger over time and the value of the estate/inheritance may decrease over time.
  • The interest that accrues on the funds borrowed are not deductible until repayment if made.
  • Although Social Security and Medicare are not affected, Medicaid and other need-based government assistance can be affected if too much funds are withdrawn (and not spent) in one month.

Who Offers Reverse Mortgages?

The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender. The FHA is part of the Department of Housing and Urban Development (HUD).

Are Reverse Mortgages Safe?

Today, reverse mortgages are regulated by the U.S Department of Housing and Urban Development (HUD), and they’re insured by the Federal Housing Administration ( FHA). So, they are as safe and secure as any other government-backed mortgage loan.

For example, if you choose to set up a line of credit or take your proceeds in monthly payments, your money will be safe no matter what happens to the lender. The insurance protects your funds.

On the other hand, for the lender, if the home value isn't enough to repay the balance of the loan, the insurance makes up the difference. An FHA reverse mortgage is a non-recourse loan which means, the lender cannot come after you or your heirs for additional money if the loan is not able to be fully satisfied..

Tip: Deal directly with an FHA-approved lender. If you should deal with a mortgage broker and find yourself feeling uncomfortable with that person, run fast and go directly to an FHA-approved lender, preferably a large national bank or long-established local lender.

Go to the HUD Lender List page. This page allows you to lookup lenders using various selection criteria

Learn more about reverse mortgages