Reverse Mortgage Loans

A reverse mortgage loan is a special type of loan made to older homeowners to enable them to convert the equity in their home to cash to finance living expenses, home improvements, in home health care, or other needs.

With a reverse mortgage loan, the payment stream is “reversed.” That is, payments are made by the lender to the borrower, rather than monthly repayments by the borrower to the lender, as occurs with a regular home purchase mortgage.

A reverse mortgage loan is a sophisticated financial planning tool that enables seniors to stay in their home or “age in place” and maintain or improve their standard of living without taking on a monthly mortgage payment (property taxes, homeowner’s insurance and maintenance cost must be paid for by the borrower or a non-borrowing spouse). The process of obtaining a reverse mortgage loan involves a number of different steps.

The first most widely available reverse mortgage loan in the United States was the federally insured Home Equity Conversion Mortgage (HECM), which was authorized in 1987.

A reverse mortgage loan is different from a home equity loan or line of credit, which many banks and thrifts offer. With a home equity loan or line of credit, an applicant must meet certain income and credit requirements, begin monthly repayments immediately, and the home can have an existing first mortgage on it. In addition, there is no restriction on the age of borrowers.

In general, reverse mortgage loans are limited to borrowers 62 years or older who own their home free and clear of debt or nearly so, and the home is free of tax liens.

Borrowers usually have a choice of receiving the proceeds from a reverse mortgage loan in the form of a lump sum payment, fixed monthly payments for life, or line of credit. Some types of reverse mortgage loans also allow fixed monthly payments for a finite time period, or a combination of monthly payments and line of credit. The interest rate charged on a reverse mortgage loan is usually an adjustable rate that changes monthly or yearly. However, the size of monthly payments received by the senior doesn’t change.

The size of reverse mortgage loan that a senior homeowner can receive depends on the type of reverse mortgage loan, the age of the youngest borrower or eligible non-borrowing spouse, current interest rates, and the lesser of the home’s value or FHA’s HECM lending limit. The older the applicant is, the larger the monthly payments or line of credit. This is because of the use of projected life expectancies in determining the size of reverse mortgages.

Unlike a home purchase mortgage or home equity loan, a reverse mortgage doesn’t require monthly repayments by the borrower to the lender. A reverse mortgage isn’t repayable until the borrower or non-borrowing spouse no longer occupies the home as his or her principal residence. Although the borrower is not required to make monthly mortgage payments, they must continue to pay property taxes, homeowner’s insurance and cost associated with maintenance.

This can occur if the sole remaining borrower dies, the borrower sells the home, or the borrower moves out of the home, say, to a nursing home. There are other events that may cause the loan to become due and payable such as failure to pay taxes and insurance.

The repayment obligation for a reverse mortgage is equal to the principal balance of the loan, plus accrued interest, plus any finance charges paid for through the mortgage. This repayment obligation, however, can’t exceed the value of the home.

The loan may be repaid by the borrower or by the borrower’s family or estate, with or without a sale of the home. If the home is sold and the sale proceeds exceed the repayment obligation, the excess funds go to the borrower or borrower’s estate. If the sales proceeds are less than the amount owed, the shortfall is usually covered by insurance or some other party and is not the responsibility of the borrower or borrower’s estate. In general, the repayment obligation of the borrower or borrower’s estate can’t exceed the value of the property.

In general, a borrower can’t be forced to sell their home to repay a reverse mortgage as long as they occupy the home as their primary residence, pay applicable property taxes, insurance, HOA dues, maintenance cost and otherwise comply with the loan terms even if the total of the monthly payments to the borrower exceeds the value of the home.

These materials are not from HUD or FHA and were not approved by HUD or a government agency.