How Reverse Mortgages Finally Became Safe

April 15, 2022

The decision to take out a Home Equity Conversion Mortgage is big, and you may wonder how safe this government-insured loan program is. While reverse mortgages aren’t suitable for everyone, the HECM program has several built-in protections to keep borrowers safe.

Safeguard #1 – Federal guarantee

One of the program’s most significant protections is that the FHA insures it. (Federal Housing Administration). As the borrower, you pay an upfront mortgage insurance premium when you take out a reverse mortgage, which 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 exceeds your home’s value, you will never have to repay more than your home is worth at the time of sale.

The non-recourse aspect also applies to your estate: 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 must first undergo counseling through a Department of Housing and Urban Development-approved, third-party counseling agency.

The counseling aims to ensure you understand how the loan works and how it could apply to your situation. Counseling sessions also allow you to ask any questions you might have.

Counselors will assess your knowledge of the product before granting a certificate that enables you to proceed with the loan application process. Because a third-party agency conducts counseling, you can rest assured that you are getting objective information from someone with your interests at heart.

The counseling is meant to educate you to 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 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, suppose you are planning on traveling extensively. In that case, a reverse mortgage may not be your best option since you must maintain a primary residence in the home and live there for most of each year.

If you’re considering using the HECM program, you can rest assured that the product is safe and contains multiple built-in safeguards to protect borrowers.

Top FAQs

Is a reverse mortgage legitimate?

Reverse Mortgage loans are legitimate loan products. The Home Equity Conversion Mortgage (HECM) is insured by the federal government (FHA, a division of HUD) to ensure older homeowners can access home equity. The HECM program has been government-insured since 1988, so the reverse mortgage has been a legitimate and viable product for over 3 decades. Prior versions of reverse mortgages existed before 1988, which were not advantageous for homeowners.

What is the catch with a reverse mortgage?

There is no catch with a reverse mortgage. You are not required to pay on the loan until you leave 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 like any other loan. You must live on 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 could not repay the loan after default, the lender could start a foreclosure.

Does a reverse mortgage have to be paid back?

The reverse mortgage is a loan program, not a government grant. The loan must be repaid when you no longer live or sell the home.

Are Reverse Mortgages Safe?

Reverse mortgages are a safe financial instrument 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.

ARLO recommends these helpful resources:

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Have a Question About Reverse Mortgages?

Look no further. Michael G. Branson, our CEO, brings a wealth of knowledge directly to you. With a robust 45-year tenure in mortgage banking and 19 years dedicated solely to reverse mortgages, he's the expert you want on your side.

Post your question in the comments below and anticipate a personalized response from Mr. Branson himself, typically within one business day. He's here to illuminate all angles of reverse mortgages, ensuring you're equipped with the knowledge to make informed decisions. Take this opportunity to gain insights from a seasoned professional.

6 Comments on this Article

Eve S.
December 22nd, 2022

Hi Arlo,

My Reverse Mortgage LLC recently filed for Chapter 11. Is this going to cause problems for me?
Reply to Eve
- Michael Branson
  December 22nd, 2022
  
  Hello Eve,
  
  Your loan is backed by HUD, and you still have your Mortgage Insurance on which you can rely. The loan is an asset your lender can still sell, and it will either be sold to a new lender/servicer as part of the Bankruptcy settlement or will be assigned to HUD. Either way, you should see no discernable disruption in your loan or the servicing of the loan.
  I wish I could tell you that you will not even know that it happened but while there is always the possibility of a hiccup during the transition, there should be no cause for concern of any long-term issues. Chances are that the plans are already completed and in place for the orderly transition from one servicer to another (and it's entirely possible that your new lender uses the same servicing company which would make the move all but seamless).
  Reply to Michael
Brenda K.
April 4th, 2022

What happens if one takes out a reverse mortgage or a safety nut, but never uses it? What kind of fees would a crew after a couple years?
Reply to Brenda
- Michael Branson
  April 15th, 2022
  
  Hello Brenda,
  
  Assuming you never borrow any more than the costs to establish the loan, the interest that accrues on that little amount in just a few years would be very minimal. When you apply, the lender will give you some key documents to review and one will be an amortization schedule. That schedule will allow you to see what the outstanding balance would be year by year based on the amount you borrowed at closing.
  Unfortunately, most lender's software will not allow you to factor in multiple draws and changing interest rates though so the initial amortization will only show whatever initial draw you choose and usually at the expected rate which is actually higher than the interest you will be accruing in the beginning. No one can tell you for certain what future rates will do.
  After 45 years in mortgage banking, the only thing I can tell you for certain is that they will go up, go down, stay relatively the same or some of any or all of these options but I cannot tell you for sure which. I could have retired a wealthy man long ago if I always knew what rates would do in advance but I don't and neither does anyone else.
  
  We have a custom calculator available that allows borrowers to insert their own parameters though so you can take the information on your HECM documents and insert them into an excel friendly sheet and see what you would owe if rates rise, decline, if you borrow more money or if you want to pay the balance down at any point.
  If you are considering a HECM loan but want to see how it would look in the future at various times, I would encourage you to visit our reverse mortgage calculator and then ask your loan officer to send you the loan calculator loaded with your specific information so you can run your own scenarios after that with different rates, draws and payments if you so choose.
  Reply to Michael
Nikita
October 17th, 2021

Hi ARLO,

Can a non-US citizens do RM? what are some banks that I can trust to do it? I read there are 3 ways to do RM-(1), get a sum of cash all at once. (2), get monthly payment. (3) combine both. I would like to do (1) and I'll live in my house till I die and give my house to the bank. If I sell the house/not live there anymore, of course I should pay back the amount of cash I got from the bank.
Reply to Nikita
- Michael Branson
  October 27th, 2021
  
  Hello Nikita,
  Borrowers for the HUD HECM program must be a U.S. Citizen or a lawful resident alien. Permanent resident aliens must be able to supply a copy of their unexpired resident alien card.
  A non-permanent resident alien must also occupy the property as their primary residence, must possess a social security card and if working must be eligible to work in the U.S. as demonstrated by providing an Employment Authorization Document (EAD) issued by the U.S. Citizenship and Immigration services.
  Reply to Michael

A SAFER REVERSE MORTGAGE.

ARLO™

In your current area 100 homeowners are currently utilizing reverse mortgages to better enhance their retirement years, with 500,000 nationwide!

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The minimum qualifying age for a reverse mortgage is 55

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