What is a Reverse Mortgage Loan?
A reverse mortgage is a type of mortgage loan that allows the borrower to defer the monthly principal and interest mortgage payments, if and when desired, for as long as they retain the home as their primary residence and adhere to the terms of the loan. It is specifically designed for senior homeowners over the age of 62 (for the HECM reverse program, or age 55 for the proprietary jumbo loans) who want to be able to utilize the equity they have built up in their homes for either a refinance or to purchase a new home.
Types of Reverse Mortgage Loans
There are various types of reverse mortgage loans available, each with its own unique features. The most common type of reverse mortgage loan is the Home Equity Conversion Mortgage, most often referred to simply by its acronym, HECM. This federally insured, FHA program is available to seniors aged 62 and older and allows them to borrow against their home's equity without having to repay the loan until they sell the property, move out, or pass away. The loan amount that can be borrowed is based on the borrower's age, the value of the home, the amount of equity available, and the current interest rate. The maximum value limit on a HECM, as of 2023, is $1,080,300.
A Jumbo reverse mortgage (sometimes just referred to as 'reverse mortgage" is a proprietary loan option designed for homeowners with higher-valued homes. It fills the void created by the lending limits of the HECM loan program. A jumbo reverse mortgage enables property owners aged 55 years and older (check your specific state for the age limit) to borrow up to $4,000,000 and can use home values as high as $10,000,000.
Who Qualifies for a Reverse Mortgage Loan?
To qualify for a reverse mortgage loan, at least one occupying borrower must be at least 55 years old for the Jumbo reverse, or 62 for the HECM. For a refinance, they must either own the home outright (no current mortgage debt) or, if there is a current mortgage debt, have enough equity available to pay the existing lien off (a borrower can also bring funds in to close if sufficient equity is not available). They also must live in and use the home as their primary residence.
For a purchase transaction, they must have enough funds to cover the required amount of down payment. These funds can either be through personal liquid assets, equity from an existing home that is being sold, or as a gift from a direct, close relative. Funds cannot be borrowed (such as pulling funds from a 401K that requires a repayment).
The home can be a single-family home, a multi-family home with up to four units, a condominium, or a manufactured home that meets certain standards. Please note that purchase loans do NOT allow manufactured homes at this time. Additionally, if the property is 2-4 units, one of the units must be used as their primary residence.
Key Features of a Reverse Mortgage Loan
One of the key features of a reverse mortgage loan is that the borrower is not required to make any regular monthly mortgage payments (although full or partial payments are allowed). Instead, the loan balance accrues over time with interest and is only due when a "life event" occurs, such as when the borrower sells the property, moves out, or passes away. The borrower retains full ownership of the home and is responsible for maintaining it in decent condition, paying property taxes, home insurance, and any other expenses related to the property, on time.
Another key feature of reverse mortgage loans is the "non-recourse" aspect, which means that the borrower or their estate cannot be personally liable for the debt. Also, they will never be responsible for more than the current value of the home when it is sold. This is because the loan is insured through private Mortgage Insurance (MI) which guarantees that the lender will be repaid even if the loan balance exceeds the home's value. The premiums for the MI are collected both at the time of closing (an up-front fee charged to the loan equal to 2% of the home's value) and monthly. *Jumbo reverse loans do not charge the MI fee; however, they are also non-recourse loans and offer the same protections.
Reverse Mortgage Loans and Home Equity Conversion Mortgages
Home Equity Conversion Mortgages (HECMs) are a popular type of reverse mortgage loan that is insured by the FHA. HECMs are the most popular type of reverse mortgage loan and account for the majority of reverse mortgages made in the United States due to their flexibility when it comes to the feature and benefit options to the borrower.
As previously mentioned, one of the key advantages of the HECM is that it offers more flexibility than a proprietary reverse mortgage. HECMs allow borrowers to choose from several different payment options, such as receiving a lump sum payment, regular monthly 'tenure" payments, a line of credit, or a combination of these options. And the borrower can flip between these options at any time during the life of the loan (once the initial statement has gone out).
HECMs and Jumbo reverse mortgages also have specific requirements that must be met to qualify for the loan. For example, all borrowers must attend a counseling session with a HUD-approved counselor to ensure they understand the terms and implications of the loan. The counselor has no affiliation with any lender and their sole purpose is to serve as an advocate for the borrower. The counseling session is fee-based, can be held live or via a remote session or phone call, and must occur prior to an official loan application being allowed to begin processing. The counseling certificate is good for a period of 6 months.
Another requirement is that the borrower must meet minimum financial assessment requirements. While this differs from a typical forward loan’s qualifying guidelines, it does provide assurance to both the borrower and lender that minimum financial requirements can be met, such as having the affordability to make property tax, home insurance, and HOA payments, as well as having the ability to maintain the home.
Jumbo reverse mortgage loans, also referred to as proprietary reverse mortgages, can be a useful financial tool for those who want to utilize the advantages of a reverse mortgage, without the limitations imposed by FHA guidelines on the HECM. For example, whereas a HECM will limit the total ‘allowed” value of a home to the current FHA limits ($1,089,300 as of 2023), a proprietary Reverse mortgage can have loan amounts as high as $4,000,000 with home values up to $10,000,000.
because a Jumbo reverse mortgage does not have the MI requirements of the HECM, which can save the borrower money at closing time. However, because this remains a non-recourse loan, the cost of this protection is built into the rate. Thus, the rates for the jumbo reverse are typically higher than the HECM loan.
Another difference between these two programs: flexibility. With the HECM, there are three interchangeable options throughout the term of the loan. The jumbo reverse requires you to make your decision at closing times, and this is typically restricted to a lump sum disbursement. LOC’s can be established; however, they are restricted to a 10-year term (whereas with the HECM the LOC remains for the entirety of the loan’s term) and does not accrue interest the way the HECM does.
Lastly, with a jumbo reverse mortgage, any available funds must be taken at closing. Any additional funds not used/taken, will not become available unless the borrower decides to refinance.
With the HECM, the borrower is allowed to access 60% of the available funds either at closing or during the first year of the loan, with the remaining funds becoming available at the beginning of the second year of the loan. this is designed to protect elderly borrowers from potential predatory relatives or other sources.
Reverse mortgage loans can be a useful financial tool for older homeowners who want to access the equity they have built up in their homes without having to sell their property or take out a traditional home equity loan.