A reverse mortgage is a loan that lets eligible homeowners convert some of their home equity into money while continuing to live in the home, subject to the loan’s occupancy and maintenance requirements. Unlike a traditional mortgage, borrowers generally do not make monthly principal-and-interest payments, but they remain responsible for property taxes, homeowners insurance, upkeep and other loan obligations.
The most common type is the federally insured Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA). Other reverse mortgages may have different features, costs and protections, so it is important to identify which product is being considered.
A reverse mortgage may be worth exploring for an older homeowner who wants to access home equity without selling or moving right away. Depending on the product and the borrower’s circumstances, funds may help with expenses, supplement retirement income, pay off an existing mortgage or provide a line of credit. A reverse mortgage is not the right fit for everyone: it can reduce the equity available later to the borrower or heirs, and the loan comes with ongoing costs and conditions.
For an FHA-insured HECM, the youngest borrower generally must be at least 62. The home must typically be the borrower’s principal residence, and the borrower must meet program requirements, including a financial assessment. Eligible property types can include certain single-family homes, eligible two-to-four-unit properties where the borrower occupies one unit, and some FHA-approved condominiums or manufactured homes. Property and borrower requirements vary by product.
Homeowners generally need sufficient equity to qualify and to pay off any existing mortgage or other liens from the reverse mortgage proceeds or other available funds. A HECM is subject to credit approval and program guidelines. A required session with an independent, HUD-approved reverse mortgage counselor is part of the HECM process.
A reverse mortgage is a loan, not a grant. Interest and applicable fees are added to the loan balance over time, so the balance generally grows as funds are advanced and costs accrue. The amount of equity remaining may decrease, depending on home value, loan terms, how much is borrowed and how long the loan remains outstanding.
HECM costs may include an FHA mortgage insurance premium, an origination fee, appraisal and other closing costs, and servicing-related charges. The FHA mortgage insurance premium generally includes an upfront charge and an ongoing charge. Some costs may be paid from loan proceeds, which also increases the balance; others may be paid separately. Ask for a detailed estimate and explanation of when each charge is due.
HECMs are subject to an FHA lending limit that can change over time. The amount available is generally based on factors including the home’s appraised value and the applicable limit, along with borrower age and loan terms. A home value above the limit does not necessarily increase the amount available under an FHA-insured HECM. Proprietary reverse mortgages may use different limits and rules.
Borrowers must continue to meet the loan’s obligations. These typically include living in the property as a principal residence, paying property taxes and homeowners insurance on time, maintaining the home, and meeting any other requirements in the loan documents. Failure to meet these obligations could put the loan in default and may lead to foreclosure.
For an FHA-insured HECM, the loan is generally non-recourse: if the loan becomes due and the balance is greater than the home’s value, the borrower or estate generally will not owe more than the home’s value, provided program requirements are met. FHA insurance helps protect the lender against a shortfall. Heirs may have options to repay the loan or sell the home, subject to program rules and deadlines. Confirm the applicable terms with the lender and review the loan documents.
We can help you understand which reverse mortgage options may be available, estimate the costs using your circumstances, and compare the loan with alternatives. To begin, gather basic information about the home, any existing mortgage, your household’s plans and the people who live there. We can explain the application and counseling steps and answer questions about the terms. Any approval or eligibility decision is subject to credit approval and applicable program guidelines; available proceeds and terms depend on the product, property, borrower and market conditions.
