Reverse mortgages can be a valuable tool to help older people afford to stay in their homes longer, but like any other financial tool, there are hazards if the product is incorrectly used. Simply qualifying for a reverse mortgage does not mean it is necessarily the right tool for the home owner's needs.
The US Department of Housing and Urban Development (HUD) describes the FHA's Home Equity Conversion Mortgage (HECM, pronounced "heck em") program as a reverse mortgage that allows qualified home owners aged 62 or older to access some of the equity in their homes. This can be used to pay ongoing living expenses or even to purchase a new residence.
The HECM program is the most popular reverse mortgage -- about 90 percent of all reverse mortgages are HECMs. Some reverse mortgage lenders also offer proprietary programs (also referred to as "jumbo reverse mortgages"), but these are not government-backed and are usually more expensive. This article addresses obstacles to qualifying for a reverse mortgage under the HECM program, and then examines some of the financial and lifestyle considerations that should be factored into the decision.
Reverse Mortgage Eligibility
Here are the basic requirements for qualifying for a reverse mortgage:
- The borrower must be aged 62 or older. This gets tricky if one spouse is above 62 and one is below. It is possible in that situation to qualify for a reverse mortgage by removing the younger spouse from the title to the home; however, new rules aimed at protecting non-borrowing spouses substantially reduce the potential payout.
- The borrower must own the house outright or have a relatively small mortgage balance. If there is still a mortgage, it must be small enough to be paid off immediately with funds from the reverse loan.
- The property must be the homeowner's principal residence. Reverse mortgages are not a tool for accessing equity in vacation or investment properties.
- The borrower must resolve unpaid federal debt. A federal judgment or delinquent debt must be repaid completely, or the applicant must establish a satisfactory repayment plan with the agency owed.
- Proceeds from the reverse mortgage plus other resources must be sufficient for the homeowner to meet any ongoing financial obligations for the property. This includes property taxes, insurance, and association fees -- all of which are costs that can go up over time.
- The homeowner must participate in a consumer information session explaining the implications of reverse mortgages. This session must be conducted by a HUD-approved HECM counselor.
- The property in question must meet FHA standards. The most basic of these is that the property must either be a single-family home, or a 2-to-4 unit property with the borrower occupying one of the units, but there are some more specific standards as well.
Should a homeowner meet these reverse mortgage requirements, the next step is to look at some more specific considerations that should go into the decision.
The National Council on Aging reminds homeowners that just because they qualify for a reverse mortgage does not mean this is the best solution for their situation. There are other considerations, including the following:
- Costs -- Fees, mortgage insurance, and interest reduce the amount of home equity that the borrower can cash out. On the other hand, selling a home, moving and buying another one also have significant costs -- closing costs, real estate commissions, movers and more.
- Alternatives -- Traditional home equity loans are almost always cheaper for those who can afford the monthly payments. HECM counselors encourage retirees who just need a little extra money each month to consider part-time employment, taking in boarders, selling assets or getting help from family members. Bankruptcy experts often recommend that seniors completely overwhelmed by bills think about bankruptcy first, and keep their home equity for future emergencies.
- Accessibility -- Since the purpose of a reverse mortgage is generally to help home owners stay in their homes, potential borrowers should make sure they'll be able to get around their house as their mobility diminishes -- or that they can upgrade the property to increase its accessibility.
- Transportation -- Assuming the game plan is to stay in the property long-term, location and access to public transportation may become important issues in case the homeowner's ability to drive or otherwise get around becomes restricted.
- Help -- Continuing to live at home can be made easier with the right help, and this can be much cheaper than moving to assisted living or a nursing home. Home health care options may be the extra help that allows staying at home longer work out.
In essence, homeowners considering reverse mortgages should clear two hurdles beyond the basic requirements of qualifying for a reverse mortgage:
1) making sure it is the right financial instrument for the situation, and
2) assessing whether the long-term decision to stay in the home meet the life style needs of the homeowner.
These additional tests will help assure homeowners that not only is a reverse mortgage a tool that is available to them, but also that they are using it correctly.