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A reverse mortgage is worth exploring if you want to use some of your home's equity in retirement — and you plan to stay in your home for the foreseeable future. Do your homework so you know what to expect before getting a reverse mortgage.
Here are some common questions (and answers) to help you apply for and get a reverse mortgage.
Where do I get a reverse mortgage?
Most reverse mortgages are issued as Home Equity Conversion Mortgages, or HECMs, which are insured by the Federal Housing Administration. So you’ll want to choose an FHA-approved lender. Non-HECM reverse mortgage lenders offer their own products, but they don’t have the same consumer protections as HECMs.
How do I qualify for a HECM?
You have to meet the following FHA requirements to get a HECM:
You’re 62 or older
You and/or an eligible spouse — who must be named on the loan even if he or she is not a co-borrower — live in the home as your primary residence. An “eligible” spouse means you are legally married before applying for a reverse mortgage.
You have no delinquent federal debts
You own your home outright or have a high amount of equity in it
You attend a mandatory counseling session with a HECM counselor approved by the Department of Housing and Urban Development
Your home meets all FHA property standards and flood requirements
You continue paying all property taxes, homeowners insurance and other household maintenance costs as long as you live in the home
How does a lender evaluate my application?
Your lender will do a financial assessment that includes pulling your credit, evaluating your payment history and any outstanding mortgage loans, and ensuring you don’t have active property liens or federal debts.
Lenders also require income statements — 401(k), pension, Social Security, pay stubs if you’re still working, etc. — that show you can afford to pay for ongoing housing costs.
Lastly, the lender will order a property appraisal to determine how much your home is worth and how much you can borrow in a reverse mortgage.
Why do I need to do HECM counseling?
The mandatory counseling helps you better understand the ins and outs of a reverse mortgage from a neutral third-party professional, says Cara Pierce, a housing finance specialist with Clearpoint Credit Counseling Solutions, a HUD-approved HECM counseling agency.
“As counselors, we don’t get kickbacks and, in fact, we don’t talk to the lender at all,” Pierce says. “We put the facts out there — warts and all — and let consumers make the decision.”
Because you’re borrowing against your home’s equity, it’s important to understand the extent to which a reverse mortgage could deplete that equity over time, depending on the amount you borrow and the value of your home, Pierce notes.
How much can I borrow?
The FHA’s HECM maximum borrowing limit is $970,800. But the amount you can pull out with a reverse mortgage will vary depending on the age of the youngest borrower (or eligible nonborrowing spouse), current interest rates and the appraised value of your home, Pierce says.
The overall amount that you can take out in a reverse mortgage is called the “initial principal limit.” In the first year, you'll have a cap of 60% of your initial principal limit (as determined by your lender). The only exception: If you have an existing mortgage amount totaling more than 60% of your initial principal limit, a HECM allows you to take out more than 60% to pay the loan off in full plus 10% of your initial principal limit in cash, according to the Consumer Financial Protection Bureau.
How long does it take to close?
This will vary from lender to lender, but usually you can expect to close a reverse mortgage within 30 days, says Rob O’Dell, financial planner at Coyle Financial Counsel in Naples, Florida. The appraisal can be the longest part of the process, because some markets have a shortage of property appraisers and high demand, O’Dell notes.
How and when will my funds be distributed?
You have a few options for your disbursements (that’s what the FHA calls the payments you’ll receive), and this is where some additional financial planning comes into play. Evaluating your other retirement income streams and long-term health care costs, for example, will impact how you choose to receive your reverse mortgage funds.
The FHA offers two reverse loan types: an adjustable-rate mortgage and a fixed-rate mortgage.
With an ARM, you can choose from these payment options:
Tenure: Set monthly payments for as long as you (or your eligible spouse) remain in the home
Term: Set monthly payments for a fixed period of time
Line of credit: Unspecified payments when you need them, until you’ve exhausted your funds
Modified tenure: A line of credit and set monthly payments for as long as you or your eligible spouse live in the home
Modified term: A line of credit and set monthly payments for a fixed period of time of your choosing
With a fixed-rate mortgage, you’ll get a one-time lump sum after you close on your loan. You’ll want to have a solid plan in place for how to use the proceeds, whether it’s for paying off debt, living expenses or medical bills, for example.
What next steps should I take?
Many people are leery of reverse mortgages, O'Dell says, because they've heard about sky-high origination fees and horror stories of spouses who were evicted after the borrower died. But that was before the implementation of recent FHA rules that protect consumers more broadly, he says.
Some of those rules include capping the amount allowed to be taken out in the first year, limiting loan origination fees to $6,000 and allowing eligible nonborrowing spouses to stay in the house after the borrower dies or moves to a long-term care facility.
There are risks to reverse mortgages, so you should do your research, contact a HUD-approved counselor and choose an FHA-approved HECM lender.
The FHA doesn’t insure loans from unapproved lenders, so there’s no guarantee you’ll get the same protections — such as letting an eligible nonborrowing spouse stay in the home after your death — if you use one.