What Is A Reverse Mortgage?

Out of all the questions I receive and answer about reverse mortgage loans, the top question really comes down to one thing, what is a reverse mortgage?  There are so many rumors and false statements made about reverse mortgage loans and what they are that I thought it was time to answer this question head on.  I want to get into the real facts about the HECM reverse mortgage program insured by FHA, and the different loan types available through this program.  Finally, I will address how these impacts reverse mortgage lenders and how they make money on a reverse mortgage.

To start with let’s examine the reason various loan programs evolve and become.  Every loan program made by every lender is designed to assist a segment of the population in various ways.  A wise consumer as a result will spend time examining what types of loans give them the best solution considering their current circumstance and needs that they have.  The mortgage loan tops the list as the most important loan most consumers will ever have, enabling many who could not otherwise live the American dream of owning their home.

When looking at needs of seniors and their unique circumstance, lenders saw a need for programs with features and benefits that would benefit those who were retired, thus emerged the reverse mortgage.  Many real estate professionals saw a need as seniors were often left without the means to have a good retirement, and many times lost their homes and equity because of mortgage payments.  With time the reverse mortgage was backed by the FHA HECM program and has become a powerful tool for seniors in today’s market.

In order to better answer the question- what is a reverse mortgage, let’s look at the main distinguishing features below:

• There is no mortgage payment due on the mortgage as long as the borrower lives in the home.
• The mortgage is a non recourse loan- meaning the homeowner will never owe more than the value of the home or the loan size, whichever is less (see HUD Handbook 4235.1 Rev-1 Paragraph 1-3C), and no assets other than the home may be used to repay the loan. (this protection ensures seniors will not lose other assets if they need to move, even if the loan balance is higher than the value of the home)
• There is no credit requirements- a reverse mortgage can even be used to pay off a delinquent mortgage.
• There are no income requirements other than proving the homeowner can pay property taxes and homeowners insurance once the loan is complete.
• The money borrowed is non taxable and does not impact social security and Medicare benefits.
• The money borrowed can be received in lump sum upfront, monthly payments from the lender to the borrower similar to an annuity payout, or on a line of credit that can be used as a credit card without any payments ever due.

These features of course were designed specifically for seniors who are retired, designed to enable them to keep their homes and live a better retirement.  The question many ask is very simply this: what does the reverse mortgage lender get?  This stems from many believing the promises a reverse mortgage carries are simply too good to be true.  The fact is however that the loan program is a win for lenders who are looking for long term secure investments.  How?  Well the lender only lends a percentage of the value of the home.  This percentage is calculated by using the homeowners age and looking at the FHA lending limit in the area.  The interest rate attached to the mortgage also has a big impact on determining what percentage of the value of the home will be lent.

As a result the lender will give a loan knowing that they will receive no payments for many years.  However, the interest on the loan will accrue, and when the homeowner sells the home or passes away they will collect the money lent along with the interest accrued.  To make the lenders risk even lower, FHA guarantees to the lender that they will not take a loss due to reduced home values, or due to the loan size growing larger than the home value as long as all the FHA HECM polices are followed. 

So what is the catch?  Well FHA charges an insurance fee for this protection.  This fee is charged to the borrower at closing and makes the closing costs a bit higher than that of a conventional forward mortgage.  The closing costs are not significantly higher however, and some of the newer SAVERS programs carry closing costs no higher than any other mortgage, but offers reduced loan sizes. 

So the  summarize of the question, what is a reverse mortgage, the answer  is it is simply a mortgage loan placed against the home that has no payment requirements, is designed for senior citizens, and offers payouts in formats that fit the needs of senior citizens.  It also offers protection other mortgages do not to enable the borrower to leave the home and its remaining equity to their heirs, without the risk of ever owing more on the home than its value.