FAQ: Questions People Ask About Reverse Mortgages

THERE IS A LOT OF INFORMATION ON THIS PAGE.  TAKE YOUR TIME REVIEWING THE INFO AND CONTACT ME WITH ANY QUESTIONS YOU MAY HAVE!

WHO INSURES REVERSE MORTGAGES?

The FHA (Federal Housing Administration) insures reverse mortgages. The FHA HECM, Home Equity Conversion Mortgage, the more correct term for this mortgage, is administered and regulated by the United States Department of Housing and Urban Development (HUD).  

WHAT IS THE HISTORY OF REVERSE MORTGAGES?
In 1961, Nellie Young got the first reverse mortgage through a company called Deering Savings & Loan in Portland, Maine through loan officer Nelson Haynes. Nellie was the widow of Nelson Hayne's high school football coach, and Nellie needed to supplement her income after the death of her husband. Getting a reverse mortgage helped Nellie to remain in her home. 

There was no FHA mortgage insurance on reverse mortgages at that time. They didn't provide the protection that the FHA reverse mortgage provides today. The FHA HECM had its inception in 1987 when the 100th Congress passed the  1987 Housing and Community Development Act. The act was signed into law by President Ronald Reagan on February 5,1988. The law gave the Department of Housing and Urban Development the authority to extend FHA insurance coverage to also include reverse mortgages. The first FHA HECM closed in 1989. 

How do I qualify for a Reverse Mortgage? 
You must be at least 62 years of age, own your own home, and live in the home as your primary residence or at least six months per year and not be delinquent on any federal debt. There are proprietary reverse mortgages where 55 is the accepted age.

Is there a minimum credit score to qualify?   There is no minimum credit score required in order to qualify for a reverse mortgage. But your credit history will be analyzed along with your real estate tax payment history during the required financial assessment done on each reverse mortgage. 

I cannot qualify for a reverse mortgage since I owe too much on my current mortgage.  Is there a jumbo reverse mortgage? 

Yes.  To see if you qualify for the proprietary jumbo product, contact your reverse mortgage specialist.  (All Jumbo loans are proprietary products and are arranged through third party providers).  

What types of homes qualify for a Reverse Mortgage?
Single Family homes, 2-4 unit dwellings, townhouses, detached homes, condominiums, and most manufactured homes are eligible for Reverse Mortgages. Condominiums must be FHA approved. Ask your condo board or HOA whether they are FHA approved.  If they are not, you can apply to have your own condo FHA approved (single unit approval) without having to have the entire condominium FHA approved. There are parameters for approval, so call your loan officer to inquire. Proprietary reverse mortgage also follow the same HUD guidelines for condos.

Co-ops are currently approved for Reverse Mortgages but only in New York state. 

Mobile homes are not eligible for a Reverse Mortgage as the land is not owned by the borrower. See Manufactured Homes page.

How much money can I borrow?  
The cash out with a FHA Reverse Mortgage depends on the age of youngest borrower, current interest rates, current liens and/or judgments, and the appraised value of the home. At present, the maximum FHA lending limit is $1,149,825. 

With the FHA Reverse Mortgage, the older you are, the more money you receive. So if your home is worth $900,000 and you are in your nineties, you would receive more proceeds than if you were in your sixties.  Typically, you can expect to receive anywhere from 38% to 68% of your home's equity depending on value, age of youngest borrower, and interest rates. 

How is my money disbursed?
HUD has split the proceeds of the HECM into two disbursements. The initial disbursement is available after a 3-day right of rescission or cancellation period in which you can cancel your loan. The maximum disbursement is based on 60% of the Principal Limit (lending limit) or all of the mandatory obligations plus an additional 10% of the Principal Limit. The second draw of funds is available to you 365 days after funding of the loan and is set up at closing as a line of credit. (See line of credit in next section for more info).

What types of plans are there for the FHA HECM (non-jumbo product)?  
Borrowers are offered two reverse mortgage products, both insured by the FHA, Federal Housing Administration:  the FHA HECM variable (adjustable) which is adjusted monthly and offers more flexibility for your proceeds and the FHA FIXED-RATE HECM. Let's review the variable FHA HECM: 

* Lump Sum + Line of Credit - A portion of cash out proceeds after a 3-day cancellation period and a line of credit available 365 day after funding.

* Tenure- equal monthly payments throughout the life of the loan as long as at least one borrower lives and continues to occupy the property as their principal residence

* Line of Credit- draw any amount at any time until the line of credit is exhausted. If the line is not used, it is not owed. The line of credit is a growing line which grows at the interest rate on the loan PLUS an additional 1/2 %. It is compounded. If left for a period of years, and if the initial line of credit was over $50,000, the amount could be considerable. Some borrowers use the line of credit to enhance their retirement funds.

 * Term - In order to increase your monthly proceeds, you may choose a term loan.  At the end of the term, any monthly proceeds will cease. However, the borrower does not have to depart from the residence but can continue to live there even though the term has expired. 

NOTE:  If there are sufficient proceeds, you can choose a combination of the first three. 

**** HOW IS MY INTEREST CALCULATED? *** 

Warning! May be a bit technical info but necessary for understanding how a reverse mortgage works!

The FHA HECM (variable rate) is tied to an index, the CMT, Constant Maturity Treasury index. The interest rate on the CMT FHA HECM which is applied throughout the life of the loan is the 1-yr CMT with a margin added to the index. The margin is a percentage indicating what the lender makes. The Index + the Margin become the fully-indexed rate on the reverse mortgage. It is called the initial rate or the applied rate. The rate will continue to adjust up or down along with the CMT index throughout the life of the loan. 

So what exactly is the CMT, Constant Maturity Treasury?

"When the average yields of Treasury securities are adjusted to the equivalent of a one-year security, the term structure of interest rates results in an index known as the one-year constant maturity Treasury.  The U.S. Treasury publishes the one-year CMT value daily, along with the respective weekly, monthly, and annual one-year CMT values." https://www.investopedia.com/terms/c/cmtindex.asp

The FHA HECM also uses another interest rate called the EXPECTED INTEREST RATE which is set one time on the loan, AT CLOSING. On every FHA HECM, borrowers receive a PRINCIPAL LIMIT amount, the max proceeds provided to the borrower (prior to closing costs and payoffs).  So which interest rate determines how much PRINCIPAL LIMIT a borrower will receive for their FHA HECM?

It is the 10-year CMT, Constant Maturity Treasury index!  Refer to your Reverse Mortgage Comparison page in your proposal where you will see the words  EXPECTED RATE about four lines down and usually in the first column. The EXPECTED RATE is based on the 10-year CMT.  As mentioned, this rate is applied ONE TIME, and it appears on the application documents and the final closing documents.  Borrowers will receive either the application EXPECTED rate OR the closing EXPECTED rate, whichever is less--and gives the borrower the most money.  When it comes to mortgages, the 10-year CMT is very important!

"The 10-year Treasury gets more press than any other government security. Investors pay keen attention to movements in 10-year Treasury yields because they serve as a benchmark for other borrowing rates, such as mortgage rates. When the 10-year yield fluctuates, it can have significant implications across the financial landscape." https://www.forbes.com/advisor/investing/10-year-treasury-yield/

** WHY IS THERE A RATE CAP ON THE FHA HECM?

Because the FHA HECM is an adjustable rate, there is a rate cap. There are two variable products offered: the CMT 5 CAP which has a 5% lifetime cap over the initial interest rate and the CMT 10 CAP which has a 10% lifetime cap over the initial rate. Both are adjusted monthly. 

WHAT IS THE  FIXED-RATE HECM?  HOW DOES IT WORK?   
You will receive a Single Disbursement Lump Sum at closing.  The rate on the Fixed-Rate  HECM remains the same throughout the loan. The Fixed-Rate HECM does not have the flexibility of the variable rate HECM. There is no line of credit available with the Fixed-Rate HECM and no monthly stipend is available with the fixed. There is only one draw of funds at closing. 

HUD does not specify an index or interest rate for Fixed-Rate HECMs.  Instead, these are determined by lenders or their investors.  On the Fixed-Rate HECM, the expected rate used to calculate the PRINCIPAL LIMIT is the loan's actual interest rate. So the rate, the expected rate, and the rate cap are all the same. And as stated, these are determined by lenders or investors -- or both.

What if My Spouse is Not 62 Years of age?  

If your spouse is underage, you can still take out a reverse mortgage.  It used to be that if a borrower had a spouse who was under age 62 and that borrower was not on the reverse mortgage (Home Equity Conversion Mortgage or HECM), once the borrower passed away, the spouse would eventually have to leave the home if they could not pay off the reverse mortgage. Death is considered a "maturity event" in the reverse mortgage world, and this was a difficult situation.  For this reason, we discouraged borrowers from taking out a reverse mortgage if their spouse was under 62 years of age.

Thankfully, through the Reverse Mortgage Stabilization Act of 2013 and changes to that law in 2015, there has been a change in reverse mortgage parameters as regards non-borrowers.  Among the changes, if there is an underage spouse, the reverse mortgage will not become due when the borrower passes away. Spouses who remain and are under age 62 will be able to remain in their home. However, the HECM line of credit would no longer be accessible, and any monthly proceeds would cease.  

NOTE: In Texas, all borrowers must be 62 years of age. 

 "Reverse mortgage means an extension of credit:
(1) that is secured by a voluntary lien on homestead property created by a written agreement with the consent of each owner and each owner's spouse;
(2) that is made to a person who is or whose spouse is 62 years or older;"

Source: Article 16 - GENERAL PROVISIONS Section 50 - HOMESTEAD; PROTECTION FROM FORCED SALE; MORTGAGES, TRUST DEEDS, AND LIENS. https://law.justia.com/constitution/texas/sections/cn001600-005000.html

 
If I decide to take out a Reverse Mortgage, will there be an appraisal of my home?
Yes, there will be an inspection of your home known as an appraisal. Your home, inside and out, will be evaluated to determine its value as compared to other comparable sales in your area. In some cases, a second appraisal will be required, but you will not be responsible for the cost.  If your home is valued at over 2 million dollars and considered a high-end home, a second appraisal will be required.

Can the interest rate be locked? 

Although you cannot lock the initial or applied interest rate on an FHA HECM ARM, your lender can generate an application, and the Expected Rate on the FHA HECM ARM can be locked for 120 days.  This means you will receive either the rate at application or the rate at closing, whichever is lower. There is no lock on the proprietary reverse mortgage for higher-value homes.

Does the lender own my home?
The lender does NOT own your home. Just as with any mortgage on your home, you retain title as the owner, not the lender.

How will the proceeds from a Reverse Mortgage affect my taxes, social security, or other benefits?
Proceeds from a reverse mortgage are not considered taxable income by the IRS (see https://www.irs.gov/faqs/other/for-senior-taxpayers/for-senior-taxpayers#:~:text=No%2C%20reverse%20mortgage%20payments%20aren,to%20live%20in%20your%20home.  Therefore, your income taxes will not be affected. Just as the proceeds from a conventional refinance are not considered taxable income by the IRS, neither is the equity from a reverse mortgage.  Your Social Security and Medicare benefits are also not affected nor are any of your retirement benefits. The impact on other federal, state, or local assistance programs such as Medicaid should be discussed with a financial advisor or Medicaid administrator. NOTE: Your Medicaid benefits may be affected if not spent in the month they are received. We are not Medicaid professionals, so it is best to contact Medicaid with your questions.

Will my reverse mortgage balance go up? 

Because the reverse mortgage loan does not require any monthly mortgage payments, it is referred to a rising debt loan, the opposite of a typical mortgage where you make monthly mortgage payments, and the balance goes down.  If you make no mortgage payments at all toward the Reverse Mortgage (not required, of course), the balance rises as there is interest accruing on the loan. Reverse mortgages have an important safeguard called "non-recourse." Simply put, the house stands for the debt.  You can never owe more than the house is worth.

Can I make payments on my reverse mortgage?

Yes.  There are no pre-payment penalties for doing so. You can make monthly mortgage payments or pay every other month or yearly or quarterly in an amount of your choosing. Call your lender or servicer , and they will instruct you further.

Can I refinance my reverse mortgage?

As long as 12 months have accrued between each mortgage transaction, and as long as there is sufficient equity in your home, you can refinance your reverse mortgage as many times as you wish.  There is no limit on reverse refinances as long as there is equity and as long as it benefits the borrower. The refinance transaction is called HECM to HECM or H2H. You can also refinance proprietary jumbo reverse mortgages. As borrowers age and home values rise, there may be more equity to be drawn from another reverse mortgage transaction.  Perhaps rates have gone down or the home was updated with solar panels, a new kitchen, updated bath, or other renovations that have increased the home's value. In these cases, there would be more proceeds available. Costs are lower on a reverse refinance depending on when the first refinance was done.  

Guidelines - The 5 x Rule:  Does the refinance benefit the borrower?

To make sure the refi is of benefit to the borrower, there must be an increase in principal limit at least 5X the costs of the transaction. Example, if the closing costs are $10,000, there must be an increase in principal limit of at least $50,000.

The benefit to the borrower from the refinance must be at least 5% of the borrower’s principal limit.  If a borrower has a $300,000 principal limit, there must be at least $15,000 in proceeds available to the borrower.  Note: You will need to qualify for the reverse mortgage refinance just as you did with your original reverse mortgage.

What is a Financial Assessment?

Lenders must determine your ability to meet ongoing tax and insurance obligations by reviewing your credit and housing history in order to assess any current financial difficulties and detect any future financial issues.  This process is called FA, Financial Assessment.  Lenders will review your credit report as well as tax and homeowner's insurance history. Due to a concern for default on HECM's, the Federal Housing Administration that insures reverse mortgages implemented a requirement in 2015 that all HECM lenders were required to conduct a financial assessment. The financial assessment will determine if borrowers can meet their HECM loan obligations such as the ability to pay property charges on their own. If it is determined that a borrower will not be able to pay their property charges and could actually default on their HECM loan, a set aside of funds called a LESA will be set up. 

What is a LESA? 

LESA, Life Expectancy Set Aside, was implemented by HUD in 2015 for those borrowers who have a poor credit history or tax payment history. The LESA sets aside a portion of the HECM mortgage proceeds to pay property charges such as taxes and insurance, etc. It is as the name implies, a life expectancy set aside and remains in place until the proceeds are depleted. After this, borrowers are responsible to pay these charges on their own. Since the introduction of the financial assessment and LESA, it has proven successful. (For more info, request our LESA FAQ flier).

If a maturity event occurs such as moving out of the home, residing for over 12 consecutive months in a nursing facility, permanently residing away from the home, or death of all the borrowers, the LESA will end, and the loan will become due.  

MORE INFO ON THE LESA

If a borrower requires a LESA to meet the Financial Assessment requirement, you cannot remove the LESA after closing.  Your loan servicer will provide monthly statements by mail showing the property charges paid on your behalf.  You can also call your servicer and ascertain that information.

Do I still need a LESA if I refinance my HECM?

Naturally, if a borrower refinances their HECM, another financial assessment will be conducted as the loan is a completely new mortgage. The financial assessment will determine if a LESA is required. All reverse mortgages require a financial assessment.

All reverse mortgage closing costs can be financed as part of the loan except the appraisal fee and HECM counseling fee. HECM Counseling, which is required by HUD, is a fee that can be postponed by the HUD-approved counseling agency based on income status and can be paid at closing. Here are typical reverse mortgage fees: 

FHA MORTGAGE INSURANCE
This info pertains to the FHA HECM reverse mortgage.  The up-front mortgage insurance fee is calculated at 2% of the appraised value of the home up to the max lending limit and 1/2% on the outstanding balance as the loan accrues. 

Here's how mortgage insurance protects you: 

a)  If you or your heirs sell your home, the total debt owed the lender will not be greater than the value of your home or 95%, whichever is less. 

b) Should your lender go out of business, you will continue to receive your proceeds from the federal government.  HUD steps in and takes over the loan. The loan has been insured by HUD to be certain that every borrower receives every dollar due under the terms of the loan. 

THE ORIGINATION FEE

This fee is the lender’s fee for doing your loan. The maximum fee is set by HUD and is 2% of the first $200,000 of your property's appraised value and 1% over $200,000. The maximum origination fee on the HECM is $6,000. 

OTHER FEES

Appraisal Fee From $450 to $900 (based on the value)

Manufactured home inspection (if a manufactured home)

Lender's title insurance 

Settlement or closing agent fee (attorney or title company)

Endorsements, recording fees, search fees, overnight fee, document preparation, flood certification, credit report, notary or signing fee, new deed creation fee (if a need deed is required), etc.

REGARDING FLORIDA FEES: State tax/stamps and intangible tax are mortgage fees in the state of Florida. Surveys are also required in Florida, so if you do not have a survey, you will be required to obtain one.

NEW YORK BORROWERS:  With reverse mortgages in New York state, you are required to obtain your own attorney who will review your documents and attend the closing.  You will be responsible for paying your attorney or this fee can be included in your closing and financed as part of your loan. 

Reverse Mortgages and Equity Loans - Similar, But Different
Although a Reverse Mortgage is a lot like an Equity Loan, there are some significant differences.

(a) With a Reverse Mortgage, your credit score is not a determining factor although a Financial Assessment is done to ensure you have enough funds each month to pay your real estate taxes, homeowner's insurance, condo fees, HOA fees, and flood insurance (if any).

(b) Unlike an equity loan, you make no monthly mortgage payments.

(c)  With an Equity loan, you would have to refinance to increase your line of credit and get more proceeds. With a Reverse Mortgage, your unused line of credit increases year after year, thereby giving you access to more funds without the need to refinance. 

d) A HECM Reverse Mortgage offers a growing line of credit based on the current interest rate on the loan plus 1/2%.  HELOC's and Equity Lines do not offer this. 

e) HECM lines of credit remain open for your use.  There are times a traditional line of credit can be closed at will by your lender. They may also contain a balloon, not so with the HECM line of credit.