The image of a smiling 70-year-old woman fixing lunch in her kitchen flashes across the television screen.
An announcer with a baritone voice says the woman is happily living off tax-free income, with no mortgage and the luxury of staying in her home for the rest of her life.
“And, you could do the same,” the announcer says, his voice rising with enthusiasm, “with a reverse mortgage.”
The claims are appealing:
“It’s safe” (if done right)
“It’s inexpensive” (in some cases)
“It’s simple” (not at all)
“You can leave the house to your heirs” (yes, but …)
Questions and Answers
Lenders and senior advocacy groups agree that a federally insured reverse mortgage, known as a Home Equity Conversion Mortgage (HECM), can be a advantageous for some seniors.
New rules imposed by the Federal Housing Administration earlier this year mean more protection for seniors, but the onus remains on the borrower to work with a reputable lender and counselor.
Both the FHA and the National Council on Aging have detailed information about reverse mortgages.
Locally, Nova Home Loans reverse mortgage manager Glen Smart is one of only 104 certified reverse mortgage professionals in the country and one of four in Arizona.
Richard Hunter is a HUD-certified reverse mortgage counselor with Old Pueblo Housing Development Inc., the only reverse-mortgage counseling agency in Tucson approved by HUD.
The following Q&A is based on research and interviews with those sources.
While there are other Internet-based financial lenders who offer a different type of reverse mortgage, the following information refers only to the federally insured loan.
Q. What is a reverse mortgage?
A. The federal program known as Home Equity Conversion Mortgage is for homeowners ages 62 and older. It allows borrowers to access the equity in their homes without making a monthly mortgage payment.
Q. What if one spouse is younger than 62?
A. The loan will be based on the age of the youngest person in the home. He or she may continue to live in the home if the other spouse dies but will no longer receive payments from the reverse mortgage.
Q. Who owns the home if there’s a reverse mortgage taken out?
A. As with traditional financing, the homeowner is the owner. The home is pledged as collateral on the loan.
A. How much can be borrowed?
Q. The loan amount will be based on the age of the youngest borrower and the value of the home, minus finance and insurance fees and a set-aside equity reserve.
Q. Who is charging the fees?
A. Third-party fees include appraiser, escrows, title company, legal fees and county recorder. The federal government receives the insurance fees, which are pooled by HUD and make up the pot of money used to insure the loan in the event that there is more owed than value of the home at the time of the loan’s termination.
Q. How will the homeowner be paid?
A. Payment options include a lump sum, a line of credit, a monthly disbursement or combination of those.
Q. How may the money be spent?
A. There are no restrictions on how the money may be spent.
Q. Does the income from the program affect other benefits?
A. Reverse mortgage loan advances are not taxable and do not affect Social Security or Medicare benefits; however, the borrower must be careful that any retained loan proceeds do not exceed the monthly liquid resource limits for SSI and Medicaid.
Q. What is the homeowner’s obligation under a reverse mortgage?
A. Homeowners retain title to the house and must pay the property taxes and homeowner’s insurance and association dues. As with traditional financing, the property must also be maintained in “reasonably good condition,” which is not defined in exact terms.
Q. What if the home value falls below the value of the loan?
A. The borrower will never owe more than the value of the home if it’s sold to repay the loan, even if the value of the home has declined.
Q. When does the loan become due?
A. When the last remaining homeowner no longer lives in the home or dies, the reverse mortgage becomes due.
Q. Can the home be left to heirs?
A. Yes. Heirs can pay off the reverse mortgage, including the accrued interest, and keep the home; or give up ownership and receive the difference between the net sale proceeds and the loan balance. If there is a shortfall in the sales proceeds, there is no liability because of the federal insurance.
Q. What is required to apply?
A. Prospective borrowers must complete a reverse mortgage counseling session and receive a certificate of counseling indicating they understand the program costs and obligations. There are seven items contained in the certificate required by the government.
Q. What are the seven items that will be reviewed?
A. 1. Options other than a Home Equity Conversion Mortgage, including other housing, social service, health and financial options.
2. Other home equity conversion options that are or may become available, such as other reverse mortgages, HECM for purchase, sale-leaseback financing deferred payment loans, and property tax deferral.
3. The financial implications of entering into an HECM.
4. A disclosure that an HECM may have tax consequences, affect eligibility for assistance under federal and state programs, and have an impact on borrower’s estate and heirs.
5. Whether the homeowner has signed a contract or agreement with an estate planning service firm that requires, or purports to require, the mortgagor to pay a fee on or after closing that may exceed amounts permitted by federal regulations.
6. If such a contract has been signed, the extent to which services under the contract may not be needed or may be available at nominal or no cost from other sources.
7. The HECM will be due and payable when no remaining borrower and if applicable, nonborrower spouse lives in the mortgaged property, or when any other covenants of the mortgage have been violated. The nonborrower spouse is advised of implications and consequences of requirements to adhere to all items of the HECM loan if the surviving nonborrower spouse chooses to remain in the property encumbered by a HECM mortgage.
Q. Where can I get more information?
A. The National Council on Aging recommends the following sources for more information on using and protecting the value in your home:
- Home Equity Advisor, www.homeequityadvisor.org
- BenefitsCheckUp, www.benefitscheckup.org
- Consumer Financial Protection Bureau, www.consumerfinance.gov
- The National Reverse Mortgage Lenders Association, www.reversemortgage.org
- U.S. Department of Housing and Urban Development, www.hud.gov (type reverse mortgage into the search bar at the top of the page)