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Reverse Mortgage Overview

A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, enables seniors to access a portion of their home’s equity without making monthly mortgage payments—as long as they live in the home as their primary residence, continue to pay required property taxes and homeowners insurance, and maintain the home according to FHA requirements.

Eligibility for a Reverse Mortgage Loan

To be eligible for a HECM reverse mortgage loan, the youngest borrower on title must typically be at least 62+ years old and meet financial eligibility criteria as established by HUD. Some products may allow for younger homeowners. The home must be owned free and clear, or all existing liens and mandatory obligations must be satisfied through the reverse mortgage proceeds.

Eligible Home Types

Many home types qualify, including:

• Single-family residences

• 2-to-4 unit owner-occupied dwellings

• FHA-approved condominiums

• Manufactured homes that meet FHA requirements

Difference Between a Reverse Mortgage and a Home Equity Loan

With a HECM, the borrower does not make monthly mortgage payments. In contrast, borrowers with a Home Equity Line of Credit (HELOC) must repay any borrowed funds plus interest within the repayment period, in addition to any standard monthly mortgage payments.

Interest rates for HECMs and HELOCs are generally comparable. However, upfront costs for a HECM are significantly higher. Unlike a HELOC, a HECM has no draw or utilization fees, no set draw period, and no limit on the number of draws after the initial 12-month payout period.

A HECM allows homeowners to use the line of credit at any time and in any amount until it is exhausted. With a HELOC, the lender may reduce or cancel the line of credit under certain conditions.

When the Loan Becomes Due

A HECM loan typically becomes due when the last surviving homeowner on title permanently moves out or passes away. At that point, the estate can repay the loan balance and keep the home or sell the home to pay off the balance. The loan may also become due if the borrower fails to pay property taxes or homeowners insurance, or fails to maintain the home according to FHA standards.

Estate Inheritance

If the home’s equity exceeds the loan balance when the property is sold, the remaining equity belongs to the heirs or estate.

The estate is not personally liable if the home sells for less than the reverse mortgage balance. Other assets—such as investments, second homes, vehicles, and valuables—are not affected by the reverse mortgage.

Available Loan Proceeds

The amount of funds available depends on several factors:

• Age of the youngest borrower

• Current interest rate

• Appraised value of the home, sale price, or FHA maximum lending limit

Funds may be restricted during the first 12 months after loan closing due to HECM guidelines. Borrowers may also need to set aside additional funds from the loan proceeds for taxes and insurance. Generally, the higher the home’s value, the higher the loan amount—up to FHA’s maximum lending limits. Use a reverse mortgage calculator to estimate how much you could receive.

Distribution of Reverse Mortgage Funds

Borrowers can choose from several disbursement options:

• Lump Sum – Cash at closing (available only for fixed-rate loans)

• Tenure – Equal monthly payments for as long as the homeowner lives in the home

• Term – Equal monthly payments for a fixed number of months

• Line of Credit – Withdraw any amount at any time until the credit is exhausted

• Combination – Mix of the above options

Borrowers may access the greater of 60% of the principal limit or all mandatory obligations (as defined by reverse mortgage guidelines), plus an additional 10% during the first 12 months for adjustable-rate loans. For fixed-rate loans, the additional 10% may only be taken at closing. The total of mandatory obligations plus 10% cannot exceed the principal limit established at closing. The principal limit is the total amount available to the borrower through the reverse mortgage.

Footnotes:

1. Borrowers must live in the home as their primary residence, continue paying property taxes and homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these obligations may result in loan default and foreclosure.

2. The reverse mortgage loan balance grows at the same rate as the available line of credit. Growth only occurs when part of the line of credit remains unused, allowing more funds to become available over time.