Applying for and taking out a reverse mortgage loan is an important decision for senior homeowners, and it deserves time and research.

Reverse mortgages enable homeowners 62 or older to supplement their retirement income by converting a portion of their home’s equity into accessible cash flow.  Reverse mortgages are powerful financial tools, but they are not one-size-fits-all.

ARLO teaching the 4 Rules for Getting a Reverse Mortgage

To fully understand the ins and outs of this product, homeowners should remember and be aware of the following rules:

1.  There’s a Lending Limit for HECM Loans

As great as it would be to borrow an unlimited sum of money, the reality is, homeowners can only borrow according to Department of Housing and Urban Development rules.

As determined by the Federal Housing Administration, the Home Equity Conversion Mortgage reverse mortgage limit is currently $1,089,300.  But not everyone will be able to receive the maximum amount.

Factors that determine how much money someone can borrow through a HECM reverse mortgage include:

  • Age of the youngest borrower (or eligible non-borrowing spouse)
  • The appraised value of the home (up to $1,089,300)
  • Current interest rates

2.  Reverse Mortgage Counseling is a Must

Reverse mortgage proceeds can help immensely with retirement planning, but borrowers must first go through counseling.

During these sessions, homeowners will meet with an unbiased reverse mortgage counselor, who can ask questions about the HECM loan terms, rules, process, and more.

During the required counseling, homeowners will learn that taking out a HECM loan doesn’t exclude them from the following applicable homeowner obligations for the life of the loan, depending on the property type:

  • Property taxes
  • Homeowners Association Fees
  • Homeowner’s Insurance

Additionally, borrowers will find out to borrow a HECM loan; they can’t be delinquent on any federal debt.

Examples of federal debt are:

  • Student loans
  • Direct loans
  • HUD-insured loans
  • Small Business Administration loans

Once the counseling mandate is completed, homeowners will receive a certificate in the loan application.

3.  Only Certain Property Types Qualify

For homeowners to take out a reverse mortgage, they must meet a handful of requirements pertaining to the home.

Homeowners need to own their home outright or have a low enough mortgage balance that it can be paid off with the reverse mortgage.  A borrower must maintain the home as their primary residence.

Switching gears to home qualifications, the following rules are in place regarding homes and how they’re built:

  • A home must be classified as single-family (if the property is multi-family, one unit must be occupied by the senior homeowner)
  • Vacation homes and second homes don’t qualify for reverse mortgages
  • Manufactured homes and condominiums may be eligible for a reverse mortgage

Understanding the above property rules helps senior homeowners better position themselves to apply for a reverse mortgage successfully.

4.  Non-Borrowing Spouse Protections May Apply

A non-borrowing spouse (NBS) is not named on the home title a spouse, and they can be any age.  Thus they don’t qualify as a legal borrower on a HECM reverse mortgage.  But in 2014, HUD introduced new rules to protect non-borrowing spouses better.

A surviving non-borrowing spouse can remain in the home after the borrower has passed away if the non-borrowing spouse meets specific requirements.  It’s important to talk with your lender and reverse mortgage counselor if you plan to take a reverse mortgage and your spouse is not on the home title.

Senior homeowners taking out a reverse mortgage loan will want to ensure their spouse is included in the transaction and is a party to the reverse mortgage contract.  This will help protect a spouse if the fully qualifying spouse passes away.

5.  Homeowners Can Choose Among Several Payment Options

When taking out an adjustable interest rate reverse mortgage, homeowners will need to choose from five payment options:

  • Line of credit (installments or unscheduled payments delivered at homeowner’s choosing)
  • Modified tenure (combination of line of credit and scheduled monthly payments)
  • Modified Term (combination of line of credit and scheduled monthly payments for a fixed number of months)
  • Tenure (monthly payments delivered if one borrower maintains a residence in primary property)
  • Term (monthly payments for a set number of months)

When taking out a fixed-interest rate loan, homeowners receive payouts in one lump sum.  Line of credit and tenure are popular options among homeowners, but the payment option is ultimately up to each homeowner.

Senior homeowners looking to supplement retirement spending should consider applying for a reverse mortgage.  Before and during the application process, however, homeowners should review important rules to fully understand the ins and outs of a reverse mortgage to make the most of the loan.

Breaking these 3 Rules Have Consequences 

There are a few specifications the borrower must maintain on an ongoing basis to keep the reverse mortgage loan in good standing.

They are straightforward but essential.

2.  Occupancy

The borrower must occupy the home as their primary residence.  Once the borrower moves or leaves home “permanently” or for over a year, the loan becomes due and payable.  The loan must be repaid if the borrower moves to an assisted living facility or nursing home.

2.  Tax and insurance

Under the reverse mortgage terms, the borrower must pay annual property tax and maintain a homeowner’s insurance policy.  These requirements accompany almost all home loans, so anyone who has held a forward mortgage will be accustomed to these ongoing property charges.  Failure to pay property tax or maintain homeowner’s insurance will make the loan due and payable.

3.  Maintaining the home

The final requirement of an FHA-insured reverse mortgage is maintaining the home’s condition.  The home must remain in good repair throughout the loan, as determined by the loan servicer.  Upkeep the house, paying property tax and insurance, and remaining in the home will ensure the borrower is in good standing on the reverse mortgage and can age in place if they choose.

Top FAQs

Q.

What are the basic rules of a reverse mortgage?

HUD has financial assessment guidelines that all borrowers must meet, including income and credit qualification standards.   The borrower must be 62 or over, and the home must meet HUD eligibility requirements.  e income is not difficult to meet, and the credit requirements do not use credit scores.  The Credit requirements depend a lot on the borrower’s payment of debts in the past 24 months, with scrutiny on the payment of property-related charges (mortgages, rents, taxes, insurance, HOA dues, etc.).
Q.

What are the rules when someone dies with a reverse mortgage?

When the last original borrower or eligible non-borrowing spouse permanently leaves home due to incapacity or death (or any other reason), the loan becomes due and payable.  Borrowers or their heirs then have the right to repay the loan with funds available to them, or by refinancing the loan, they can sell the property and repay the loan with the sale proceeds, or they can walk away and owe nothing.  If the borrower(s) die and heirs wish to keep the home, but the mortgage balance is greater than the value of the home, the heirs can repay the loan in full for an amount equal to the amount owed or 95% of the current value of the home, whichever is less.
Q.

What are some specific rules for reverse mortgages in California?

California is one of the few states that imposes an additional time on the front end like the right of rescission that borrowers have on the back meant to give borrowers a “cooling off” period after counseling.  Lenders cannot begin processing a loan for a borrower for at least 7 days after borrowers have completed their counseling.  Regardless of whether HUD will allow a returning borrower to waive counseling within 5 years, the state of California will not, and all borrowers must attend counseling for each new loan.  Spouses and non-borrowing spouses must attend counseling.  In the state of California, the water heater must be double strapped.
Q.

What are some specific rules for reverse mortgages in Texas?

In Texas, you cannot do a loan for a non-borrowing spouse, whether eligible or non-eligible.  The reverse mortgage loan must close within 180 days of counseling, or the borrower(s) must be re-counseled.  The Preliminary Title Report is valid for 90 days per Texas state law.  The lender must order a new, updated report if the loan does not close within that period.  Texas loans cannot close with a Life Estate interest in the property.  The loans in Texas also cannot close in the name of a trust.  Transactions must use an attorney to review the title and closing package, which is in the state of Texas.
Q.

What are some specific rules for reverse mortgages in Florida?

Florida requires the charges of transactions that can add considerably to the loan costs in that state.  The state of Florida requires that each loan gets a copy of the survey or a signed survey affidavit.   Florida charges additional taxes such as Intangible Taxes and Documentary Stamp Taxes.  Although these are not lender fees, they are moving costs and getting new loans in Florida and must be considered.