The decision to take out a Home Equity Conversion Mortgage is a big one, and you may be wondering how safe this government-insured loan program is. While reverse mortgages aren’t right for everyone, the HECM program has several built-in protections designed to keep borrowers safe.
Safeguard #1 – Federal guarantee
One of the program’s biggest protections is that it is insured by the FHA. (Federal Housing Administration)
You as the borrower pay an upfront mortgage insurance premium when you take out a reverse mortgage that varies depending on the loan program you choose.
You will also finance an annual mortgage insurance premium of .50% of the mortgage balance.
FHA mortgage insurance provides protections for borrowers: In the event something were to happen to your lender and they went out of business, the FHA insurance guarantees you will still have access to your loan proceeds.
Safeguard #2 – Non-recourse feature
Another borrower protection built into the reverse mortgage program is that the loan is non-recourse in nature. That means even if your reverse mortgage loan ends up exceeding the value of your home, you will never have to repay more than what your home is worth at the time of sale.
The non-recourse aspect applies to your estate as well: when you pass away, your heirs will not have to pay back the lender more than the home’s value at the time of sale if the loan balance exceeds it.
Safeguard #3 – Required Counseling
All prospective HECM borrowers are required to first undergo counseling through a Department of Housing and Urban Development-approved, third-party counseling agency.
The purpose of the counseling is to make sure you understand how the loan works and how it could apply to your particular situation. Counseling sessions also give you the opportunity to ask any questions you might have.
Counselors will assess your knowledge of the product before granting a certificate that enables you to move forward in the loan application process. Because counseling is conducted by a third-party agency, you can rest assured you are getting objective information from someone who has your interests at heart.
The counseling is meant to educate you so you can make an informed decision. (View a list of HUD approved counselors here)
Safeguard #4 – Cross-selling ban
Reverse mortgage originators are forbidden from “cross-selling” certain financial products, under the Housing and Economic Recovery Act of 2008. In other words, they’re not allowed to originate a reverse mortgage and then require you to purchase a financial product or insurance investment with them.
In addition, reverse mortgage lenders are prohibited from being associated with or participating in selling other sorts of financial or insurance products.
Although you, as a borrower, are free to do with your proceeds as you wish, this rule protects you from unscrupulous lenders who might steer you into buying a product you don’t want or need.
Are you a candidate?
Reverse mortgages are not for everyone, and there are a couple of situations where the loan might not be the best option. The goal of HECMs is to help people age in place in their homes.
If you have a health condition or any other reason that would necessitate a move out of your home in the near future, a reverse mortgage may not be the best fit. Additionally, if you want are planning on traveling extensively, a reverse mortgage may not be your best option, since you are required to maintain primary residence in the home and live there for a majority of each year.
If you’re considering using the HECM program, you can rest assured that the product is absolutely safe and contains multiple built-in safeguards to protect borrowers.
Top 5 FAQs
Is a reverse mortgage legitimate?
A reverse mortgage is insured by the federal government (FHA, a division of HUD) to ensure older homeowners an opportunity to access the equity in the homes.
What is the catch with reverse mortgage?
There is no catch with a reverse mortgage. You just are not required to make payments on the loan until you leave the home so the balance rises instead of falling each month as it would if you were making payments. All borrowers should take the time to educate themselves thoroughly before obtaining a reverse mortgage.
Can you lose your house with a reverse mortgage?
You can lose your home with a reverse mortgage just like any other loan. You must live in the property, pay the taxes and insurance on time and maintain the home in a reasonable manner. Failure to do so would cause the lender to call the loan due and payable and if you were unable to repay the loan after a default the lender could start a foreclosure.
Does a reverse mortgage have to be paid back?
The reverse mortgage is a loan program, it is not a government grant. The loan must be repaid when you no longer live in the home or when you sell the property.
Are Reverse Mortgages Safe?
Reverse mortgages are a financial instrument that is safe if you understand your requirements under the loan and can meet them. You must occupy the property, pay your taxes and insurance and maintain the home.
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