Reverse mortgages are loans in which a homeowner borrows money against the value of their home. These types of mortgages are designed for, and only available to, homeowners age 62 and older, so they involve unique requirements and risks.
Note: There is only one reverse mortgage insured by the U.S. Federal Government. A Home Equity Conversion Mortgage (HECM) is only available through a federal housing administration (FHA)-approved lender. Federal government loans are regulated by the U.S. Department of Housing and Urban Development (HUD). Be wary of scams regarding reverse mortgage loans.
Reverse Mortgage Basics Explained
A reverse mortgage is a loan in which the borrower obtains:
- A lump sum payment
- Monthly payments
- A line of credit
- Some combination of these options
Typically, the loan becomes due after an agreed-upon period or when the borrower passes away. The amount that can be borrowed is based on the appraised value of the borrower's home.
Generally, the borrower must meet all of the following criteria:
- At least one listed homeowner is aged 62 years or older
- The home must be the homeowner's primary residence
- The home loan balance must be all or mostly paid off
If a homeowner meets these requirements, they may obtain a reverse mortgage. There are three types of reverse mortgages, each with specific requirements and terms. You can read the full Reverse Mortgage Guide for Older Adult Homeowners in FindLaw's real estate section.
Features and Risks of Reverse Mortgages
Depending on the type of loan, a homeowner may be able to use the borrowed money to:
- Pay for home repairs
- Pay off traditional mortgage payments
- Pay for medication or living expenses
- Ensure a consistent monthly retirement income
- Take a long-desired vacation
- Purchase a house
For example, suppose a retiree homeowner finds that their income from savings or Social Security payments isn't enough. In that case, a reverse mortgage may be a useful way to increase monthly income.
By their nature, reverse mortgages involve unique risks. An older adult homeowner may have diminished decision-making capacity and not be unable to fully understand the terms and obligations of these loans. They can be unusually susceptible to deceptive advertising or face financial pressure to pay for things such as medication or long-term care.
Potential borrowers should be aware that:
- Foreclosure may occur due to a failure to pay property taxes or homeowners insurance, as these obligations remain the borrower's responsibility once the loan is obtained.
- Once the last surviving homeowner passes away, the loan becomes due. The heir or estate administrator typically has only 30 days for repayment. They can also sell the house or allow the home to be foreclosed.
- Reverse mortgages typically involve high fees and costs, with compounding interest rates.
For a more detailed explanation of issues to be aware of, read Findlaw's article on the features of reverse mortgages.
Changes to Reverse Mortgage Regulations
Reverse mortgage regulations continue to develop. After a lawsuit was filed, the U.S. Department of Housing and Urban Development issued new rules allowing a surviving spouse of a homeowner-borrower to continue to live in the home if the homeowner-borrower passes away.
This new rule applies to federally-insured reverse mortgages obtained on or after August 4, 2014. Previously, the loan became due if a homeowner-borrower passed away and their spouse was not listed as a borrower. The surviving spouse could have been forced to move out.
Also, effective August 4, 2014, only one spouse is required to be 62 years old or older in order for a married couple to qualify for a reverse mortgage. Previously, both spouses had to be 62 or older.
State Regulations for Reverse Mortgages
According to the Consumer Financial Protection Bureau, over half of the states have enacted their own reverse mortgage laws. In Texas, for example, a 2013 proposition created new lender disclosure rules in an effort to ensure that borrowers are aware of the conditions and consequences of reverse mortgages.
In California, a 2014 law requires lenders to provide potential borrowers with a self-evaluation questionnaire informing the borrower of the need to fully understand the mortgage terms.
Another California law, enacted in 2012, precludes insurance brokers and agents from participating in reverse mortgages unless certain stringent conditions are met.
Getting Legal Advice
Reverse mortgages are complex and can involve high fees, closing costs, and significant risks. It's vital for potential borrowers to be aware of their rights and their obligations under these loans.
If you or someone you know may be considering a reverse mortgage, it's important to seek legal advice from an experienced real estate lawyer.