Learning Center

A Reverse Mortgage is a loan that provides you with cash by using the equity in your home. This type of loan is often used by senior borrowers to remain in their homes and/or provide funds that can supplement their retirement income. The most common type of Reverse Mortgage is a loan insured by the Federal Housing Administration (FHA), which is also called a Home Equity Conversion Mortgage (HECM).

With a Reverse Mortgage loan, borrowers have access to cash, either in a lump sum or as a monthly amount (see below for payment options), without having to make a monthly principal and interest payment to pay it back. The loan does not need to be paid back until the home is sold or otherwise vacated, generally through the passing of the last borrower or eligible non-borrowing spouse.

Here are a few key points:

• The borrower remains the owner of the home and retains title.
• The borrower must continue to pay property taxes, homeowner’s insurance, and must keep the house in good repair.
• With this type of loan, the borrower will never owe more than the house is worth. If the loan balance exceeds the home’s value, the Federal Housing Administration will cover the difference.
• The borrower must maintain their home as their primary residence.
• This will be a non-recourse loan, meaning that if there were a default, the lender cannot do anything to recover debts other than foreclose on the home.

It is possible to receive a Reverse Mortgage even if you still have an existing mortgage. To do so requires that the existing mortgage be paid off so that the Reverse Mortgage is in the first lien position. Funds from the Reverse Mortgage can be used to pay off the existing mortgage, but that does reduce the funds you will have available for other uses. Other options for paying off the existing mortgage are funds from savings accounts or assistance from family/friends.

As an example: your existing mortgage is $50,000 but you can qualify for a Reverse Mortgage for $110,000. Thus, you can pay off the existing mortgage and still have $60,000 to use for various purposes.

The loan amount is dependent on:

• Age of the youngest borrower(s) or eligible non-borrowing spouse
• Current interest rate
• Lesser of appraised value, HECM FHA mortgage limit ($1,149,825) or sales price

There are several reasons why a senior may be interested in a Reverse Mortgage. Here are the top 4:

• Eliminate Monthly Mortgage: a Reverse Mortgage can eliminate your monthly mortgage payment, leaving you with cash for other expenses
• Access to Cash: the funds you receive from a Reverse Mortgage are tax-free and can be used for any purpose including health care, home renovations or daily expenses
• Remain in Your Home: a Reverse Mortgage allows you to stay in the home where you live, and may have lived for many years
• Guaranteed Growth of Line of Credit: the growth of a reverse mortgage line of credit is guaranteed (as long as it’s not withdrawn) and grows at the same rate as the interest rate plus the mortgage insurance rate

Overall, the funds can help older adults achieve their financial goals and have a better retirement.

• To supplement income or social security and maintain your standard of living in retirement
• To reduce the need to use your investment portfolio as income
• To eliminate your monthly mortgage payment
• Establish a Reverse Mortgage line of credit to help cover unforeseen expenses
• Provide an opportunity to leave the workforce and retire
• To purchase a new home without having a monthly payment using the ‘Reverse for Purchase’ type of Reverse Mortgage

This is a Reverse Mortgage that allows seniors to purchase a new principal residence using loan proceeds from the Reverse Mortgage. Payments on this loan can be as much or as little as the borrower(s) wish, including no payment at all. It allows the borrower(s) to afford the home they really want, preserve more savings and retirement assets, and improve cash flow. Required down payment amounts are between 45% and 62% of the purchase price, depending on various factors, with the balance of the purchase funds coming from the Reverse Mortgage.

There are a few requirements that borrowers must meet in order to qualify for a Reverse Mortgage:

• 62 years or older for at least one spouse, although some programs may be available for those 55 years and older
• Must own your home, not renting
• Occupy the property as your principal residence
• Not delinquent on any federal debt
• Have financial resources to make payments on property taxes, homeowners insurance, Homeowner Association fees, maintenance and upkeep, etc.
• Participate in a consumer information session given by a HUD-approved Reverse Mortgage Counselor
• Verification of income, assets, monthly living expenses, and credit history

Although Reverse Mortgages received some bad publicity initially, the offering has improved over the years, and includes some important safeguards:

• Borrowers must complete Reverse Mortgage counseling prior to receiving a loan
• Borrowers undergo a financial assessment to ensure they are able to meet the financial obligations of the loan
• If the borrower’s spouse is younger than 62, they can qualify as an eligible non-borrowing spouse and remain in the home even if the borrower leaves or passes away
• This is a non-recourse loan, and the family can never be held responsible for the debt
• Line of Credit amount is guaranteed and cannot be cancelled due to market conditions

• The property must meet all FHA standards and flood requirements
• The property must be one of these types:
  • Single Family Home
  • 2-4 unit home with one unit occupied by the borrower
  • FHA approved condo complex or single-unit approved condo
  • Manufactured home that meets FHA requirements

Reverse Mortgages include two options when it comes to interest rates – fixed and adjustable.

For fixed interest rate loans:

• Funds are received in a single lump sum disbursement

For adjustable interest rate loans:

• Tenure: equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence
• Term: equal monthly payments for a fixed period of months selected
• Line of Credit: funds available to the borrower at any time and in the amount desired until the line of credit is exhausted
• Modified Tenure: combination of line of credit and scheduled monthly payments for as long as at least one borrower remains in the home
• Modified Term: combination of line of credit plus monthly payments for a fixed period of months selected by the borrower

Most of the costs of a Reverse Mortgage can be paid with the proceeds of the loan, so the homeowner doesn’t need to provide any out-of-pocket cash.

• Mortgage Insurance Premium (MIP): this is the FHA mortgage insurance which guarantees that you will receive the expected loan payments. The initial MIP charge is 2% of the home value and there is an annual charge of 0.5% of the outstanding loan balance.
• Third Party Charges: these can include an appraisal, title search/insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.
• Origination Fee: there will be a fee to compensate the lender for processing your loan. Lenders can charge the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. Origination fees are capped at $6,000.
• Servicing Fee: Lenders will provide servicing throughout the life of the loan which includes account statements, disbursing loan payments and confirming loan requirements such as paying taxes and homeowners insurance. Lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate or has a fixed interest rate, and up to $35 if the interest rate adjusts monthly.

All borrowers must meet with a Reverse Mortgage counselor to discuss program eligibility requirements, financial implications, alternatives to obtaining a Reverse Mortgage, and conditions when the loan is due and payable. The intent of the counseling is to allow the borrower to make an independent, informed decision on the Reverse Mortgage. For more information, contact a Waterstone Mortgage Reverse Mortgage Specialist.

Upon the death of the Reverse Mortgage borrower(s) and the eligible non-borrowing spouse, the loan becomes due and payable. Heirs have 3 months (can be extended to 12 months) to buy the home, sell the home, or turn the home over to the lender to satisfy the debt. In some cases, this timeline can be extended up to a year. To buy the home, the heirs will have to repay the lesser of the full loan balance or 95% of the home’s then appraised value.

An eligible non-borrowing spouse is a spouse who is not a co-borrower on the reverse mortgage, but is protected by:

• Being legally married to the borrower when the loan closes and become due
• Living in the home as their primary residence during the same timeframes
• Participating in the HUD-approved counseling

New laws in 2021 offer improved options for eligible non-borrowing spouses including the ability to remain in the home when the borrowing spouse dies or permanently moves into an assisted living or nursing home.