Let’s Talk About Reverse Mortgages!

What is it and how do I get one?

Over the years, reverse mortgages have gotten a bad reputation in the financial community.They are sometimes considered to be complicated, predatory lending, have high fees, or are only for people desperate for cash. Some aspects of that negative reputation stem from misunderstandings, while others were true in the past but have since been addressed, and some may still persist.

HUD has often revised the program's administration to address various issues and ensure that reverse mortgages are used responsibly and, in the borrower’s, best interest.

When it comes down to it, it’s all about what’s best for you and your financial situation.

Read on, and you will learn more about reverse mortgages, the requirements, and other information that you may not have known before. So, let’s dive in…

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Just to get off on the right foot, let’s talk about the actual definition and history of reverse mortgage and the different types of reverse mortgages that are out there:

A Reverse Mortgage is a home loan for homeowners that allows them to convert part of their home equity into cash. While a traditional mortgage requires that you make monthly payments to your lender, a reverse mortgage does not require monthly payments. Interest accrues on your loan over time. The balance of the loan is repaid at the time that the borrower is no longer occupying the home as their primary residence, or any and all borrowers associated with the home have passed away.

The 1987 Housing and Community Development Act saw the federal government systemize reverse mortgages through the Home Equity Conversion Mortgage (HECM) program administered by the US Department of Housing and Urban Development (HUD).

One reason for the bad impression is that under previous rules, a spouse who didn't sign the loan could have the house sold when the borrower died.

HUD changed those rules in 2017. Now, a surviving spouse can remain in the dwelling, even if their name isn't on the loan, and the balance won't be due until they leave. However, that spouse must continue to pay the property taxes and insurance and won't be able to borrow-money through the reverse mortgage.

Types of Reverse Mortgages

Different financial institutions offer three types of reverse mortgages, each with its own stipulations. Here, you will find a brief description of each type of loan and who will most benefit from it

• Home Equity Conversion Mortgage or HECM: This is the most common type of reverse mortgage and is federally insured by the Federal Housing Administration (FHA).For this type of loan, your property must meet FHA minimum requirements, and you will need to go through counseling with a HUD-approved counselor. The youngest borrower must be a minimum age of 62 to qualify for this kind of reverse mortgage.
  • Who it may work best for: If you are looking to supplement your retirement income with a versatile option that has government backing and a range of payout choices.
• Proprietary Reverse Mortgage: Unlike the HECM mortgage, a proprietary reverse mortgage is a private loan offered by a private lender and is not insured by the government. This type of reverse mortgage has higher borrowing limits and may be used once the youngest borrower reaches the age of 55. While counseling is not federally mandated for proprietary reverse mortgages, private lenders may require it.
  • Who it may work for: People with higher-value homes who need access to a large portion of their home equity.
• Single-Purpose Reverse Mortgage: Much more rarely used, a single-purpose reverse mortgage is a loan backed by a state or local government or non-profit association. The funds are restricted to a specific purpose, such as home repairs, property taxes, or any other housing-related needs. This type of loan also has specific eligibility criteria but has lower costs and interest rates.
  • Who it may work best for: Fixed or limited income senior homeowners that need help covering specific housing-related expenses and want a low-cost option.

So, “who is a reverse mortgage for”, you ask?

It’s for any eligible senior who has equity in their home that may be looking for additional funds during their retirement to age in place. Be careful of companies that suggest a reverse mortgage would be an easy way to pay for your home repairs or a vacation when a different type of loan may be a better option.

Here are two checklists of things that you will need if you plan to start the process of applying to receive a reverse mortgage loan:

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Reverse Mortgage Requirements

Eligible borrowers must meet certain requirements to access funds from a reverse mortgage to protect their future, health, and well-being. Look through the requirements below, and if you check all the boxes, you could be a good candidate for a reverse mortgage.

• The youngest borrower must be 62 years of age or older. There are some exceptions, such as a proprietary reverse mortgage, which you can access at 55, but the standard age is 62.
• The borrower must occupy their home as their primary residence.
• The home must be owned by the reverse mortgage borrower, and there must be enough equity in the home. This number generally falls around 50%.
• Outstanding federal debt for things like unpaid taxes or student loans will disqualify a borrower from getting a reverse mortgage loan.
• For most loan products, you must complete a counseling session with a HUD-approved reverse mortgage counselor
• The property associated with the reverse mortgage loan, must be in good condition, and meet HUD requirements. You must also maintain your home in proper living condition when the reverse mortgage loan is in place.
• Your financial resources must be enough to keep up with utilities, taxes, property insurance, and any homeowner's association fees.

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Essential Documents

In order to fund a reverse mortgage for an eligible borrower, the underwriter must have proof of identity, age, residency, home ownership, and income.

You may be wondering, “Why do I need to prove my income if I don’t have to make monthly mortgage payments?”

This requirement is really in place to protect you as the borrower. One of the most important parts of a reverse mortgage is that the home is maintained in livable condition and that the taxes, insurance, utility bills, and homeowner association dues stay up to date. If the lender did not take the time to consider your financial situation before lending you the money, they would be doing you a disservice that could set you up for economic failure.

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These are the documents you will need:

• Government-issued photo ID and social security card.
• Birth certificate or other document that provides proof of age.
• Mortgage statement or utility bill to show primary residency.
• Deed or title to the home or a homeowners insurance policy for proof of ownership.
• Recent income statements like pay stubs, social security benefits statements, pension or annuity statements showing a consistent source of income.
• Generally, the most recent 2-3 months of bank statements showing enough funds to maintain the property.
• 2 years of tax returns.
• HUD - approved Counseling certificate (if applicable).
• If your home is held in a trust, you have a power of attorney in place, or in the event you have experienced a divorce or passing of a spouse, other legal documents may be required.

Now, it’s time to find out how you can take the next step toward applying for a reverse mortgage.

5 Steps to Take on the Road to Applying for a Reverse Mortgage:There are several key steps in the process that you should follow when you are preparing to apply for a reverse mortgage:

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Step 1: Understand Your Options: You want to make sure that you are clear on all of your options. So, start with doing your research just like you are now. Also, by talking with an organization that specializes in financial health or a financial advisor about how a reverse mortgage might work with your overall retirement plan, you will be able to find out if any other options may be a better fit for your situation, or if a reverse mortgage might be the right next step.

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Step 2: Meet eligibility requirements: You already made sure that you met most of the requirements above. Be on the lookout for our blog on HUD home requirements. and confirm with your local municipality that your home meets all zoning requirements and that there are no complaints or liens against the property.

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Step 3: Attend HUD-approved housing counseling: Do your research on organizations that can help you choose a HUD-approved housing counselor. Our reverse mortgage experts with the Reverse Mortgage Academy (link) are HECM-certified counselors, and we can provide that service to you. This service will help you understand your options.

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Step 4: Choose a Lender: This link takes you to the FHA-approved lender search for allFHA lenders: Click Here.You can also get a few referrals from friends, family, and social groups, so you have a well-rounded selection to choose from. Interview a few different lenders, at least three isa good rule of thumb, to get an idea of their pricing and fees. (Insider tip: you can even negotiate with them based on the figures you get from the other lenders and see if you can get better rates. Make sure you select a lender that is in good standing with theBetter Business Bureau (BBB). Look for complaints about any companies that may pressure homeowners to use the proceeds from a reverse mortgage to buy financial products, like annuities, that may be unnecessary or unsuitable for them.

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Step 5: Submit Your Application: During the application process, your chosen lender will work with you to gather the required documentation for the underwriter. If you worked through the checklist above, you should have all of those documents ready and on hand to send to your lender to get the ball rolling.

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As you can see, a reverse mortgage is similar in the document requirements to many types of standard home loans that are out there today.

A reverse mortgage isn’t right for everyone, but for those facing specific challenges or who have certain needs, it may be the solution they’ve been looking for a way to stay in their homes and remain financially independent. However, there are some situations in which a reverse mortgage may not be the right choice.

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The decision to pursue a reverse mortgage should not be taken lightly. It is not a one-size-fits-all solution and may not be suitable for everyone.