How to Get a Reverse Mortgage
We all want to feel at home. And as we age, we want home to be where we feel the most comfortable and secure. That might mean staying in the home that we own, but that can be a challenge on a fixed income. Property taxes go up, health care costs go up and our incomes don’t keep pace. If you need in-home assistance, that costs even more.
A reverse mortgage is a financial tool many seniors use to remain at home without compromising your financial security. It offers people a way to access the equity they’ve built up in their property without needing to make monthly payments.
The process for how to get a reverse mortgage is complicated, and there are several reverse mortgage requirements that you must meet. In this article, we’ll walk you through both to help you make an informed decision about whether a reverse mortgage is right for you.
- What is a reverse mortgage?
- How to qualify for a reverse mortgage
- Who offers reverse mortgages
- Steps to getting a reverse mortgage
- How to compare reverse mortgage offers
What is a reverse mortgage?
A reverse mortgage is essentially a type of home equity loan. You receive money from a lender in either a lump sum or monthly payments, with the amount based on the value you’ve built up in your home.
You don’t need to make payments on the loan until you no longer live in the home, but it does accrue interest over time. Once you no longer live in the home, the loan will need to be repaid. This is typically done by selling the home.
“It allows you to stay in your home and use whatever portion of that equity you have as you would like to use it,” said Vivian Dye, reverse mortgage specialist with GuardHill Financial Corporation.
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (also known as HECM), which is backed by the Federal Housing Administration. It has specific requirements and safeguards, including talking with an independent housing counselor. The lender must also verify that the reverse mortgage borrower will be able to keep up with home expenses.
Another type of reverse mortgage is proprietary reverse mortgage, and offered through private lenders. It functions similarly but adheres to its own rules on who is eligible.
In either a HECM or proprietary reverse mortgage, homeowners may use the proceeds to pay for in-home care, pay for home repairs pay off debt or simply to meet living expenses.
How to qualify for a reverse mortgage
Single-purpose and proprietary reverse mortgages are run by private organizations and vary widely in who qualifies. HECMs, however, adhere to strict qualification requirements. To be approved for a HECM, you must:
- Be 62 years of age or older.
- Use the property being mortgaged as your primary residence.
- Not be delinquent on any federal debt, such as student loans.
- Own a property that meets all FHA property standards and flood requirements. It must also be a single-family home, two- to four-unit home where you occupy one of the units, a condo in a HUD-approved condominium project or a manufactured home.
- Have an on-time payment history with your real estate taxes and insurance premiums.
The most a homeowner can borrow through a reverse mortgage is $726,525.
You don’t have to meet any specific income requirements or have a minimum credit score. Instead, your lender will review your financial situation as a whole to determine whether getting a reverse mortgage makes financial sense.
“What you look at, over the last several years, is how they behaved,” Dye said. “Have they paid their bills on time? Do they have a lot of late [payments]? Have they been late paying real estate [taxes]? You’re looking for a pattern of behavior.”
Who offers reverse mortgages
Though the HECM reverse mortgage is backed by the Federal Housing Authority, private lenders originate this type of loan — though they must be approved by the FHA.
Lenders that offer reverse mortgages may offer other home equity products as well, such as home equity loans or lines of credit, or they may specialize in reverse mortgages. You can find a HECM lender by visiting the Housing and Urban Development website.
Special purpose reverse mortgages specify how the borrower can use the funds they receive. These are typically offered through state and local government agencies or nonprofit organizations.
Proprietary reverse mortgages are reverse mortgages that are offered through lenders but are not guaranteed by the FHA. Many of these are designed to offer loans higher than the FHA limit. But they’ll still have terms and conditions specified by the lender.
“Because they have private investors, they’re not going to give their money away,” Dye said.
However, because reverse mortgages are so heavily regulated, many larger banks have pulled out of the market. For example, Wells Fargo pulled out of the reverse mortgage market in 2011, as did Bank of America.
Steps to getting a reverse mortgage
The steps to getting a reverse mortgage are similar to the steps you take when getting any other mortgage. It’s always worth shopping around before making a final decision.
Contact multiple lenders
Saving even a quarter of a point in interest saves you thousands of dollars on a mortgage, according to the Consumer Financial Protection Bureau. The same goes for reverse mortgages. The higher your interest rate is, the more quickly your loan balance will grow, leaving less money for you or your heirs when your home is sold and the loan is paid off. Getting multiple quotes gives you the best chance of finding the lowest interest rate.
Meet with a housing counselor
Meeting with a HUD-approved counselor is a requirement for a HECM, and some proprietary lenders require it as well. Your counselor is independent and will help you or your loved one assess your financial situation, learn more about how reverse mortgages work and give you the support you need to make an informed decision about whether or not to move forward with a reverse mortgage.
Choose a reverse mortgage and fill out an application
After meeting with a counselor, you’ll have the tools you need to choose a reverse mortgage.
You will need to complete an application and provide financial information for your lender to review.
Complete an appraisal
The amount you receive depends, in part, on the appraised value of your home. You will be borrowing a percentage of the equity in the home, or the difference between any outstanding mortgage balances and what the home is worth. Proprietary reverse mortgage lenders will also use your appraisal to determine the value of your home.
Close on the loan
The closing costs for a reverse mortgage are similar to those of a traditional mortgage. Fees generally include an origination fee, which is capped on a HECM at $6,000. They might also include the cost of the appraisal, any required surveys and your mortgage insurance premium. Your initial premium for a HECM is 2% of the loan amount, and over the life of the loan, you will be charged an annual premium that equals 0.5% of your mortgage balance, according to HUD. Many borrowers roll their closing costs into the reverse mortgage rather than paying them out-of-pocket, but this reduces the loan amount you receive.
How to compare reverse mortgage offers
As you shop around between lenders, it’s critical to carefully review and compare your reverse mortgage offers to ensure you move forward with the right offer. Your housing counselor can help you sort through the offers. Here’s what to evaluate.
Most reverse mortgages have variable rates, according to the Federal Trade Commission. This means that your interest rate will periodically change. Since you’re taking out a loan that doesn’t need to be repaid until all borrowers are no longer living in the home, the loan will accumulate interest. A higher interest rate will make the loan more difficult to pay off.
Your payment options
Your lender will show you your various payment options, which typically include:
- A single, lump-sum payment.
- A term option, which means you get monthly payments for a set time.
- A tenure option, which means you get monthly payments for as long as at least one borrower lives in the home.
- A line of credit, which means that you have access to a set amount that you can access as you need it.
- A combination of the above.
Individual lenders offer different origination fees and different monthly servicing fees. Origination fees are capped at $6,000 for a HECM, and service fees for HECMs are capped at $30 for a fixed-rate reverse mortgage and $35 for an adjustable-rate reverse mortgage.
To get an accurate sense of how much your reverse mortgage will cost, ask your counselor or your lender for your total annual loan cost. This provides you with the projected annual cost of your reverse mortgage, which you can use to compare offers.
The bottom line
A reverse mortgage can be a powerful tool for helping you or a loved one age in place. You can choose a payment option that meets your needs and use the funds to improve your financial situation. Carefully review your reverse mortgage options, keeping in mind that you are still responsible for paying for home repairs and property taxes, and choose the option that’s best for you.