Reverse Mortgage FAQ

By Liz Clinger Updated on 7/27/2017

The FHA’s reverse mortgage program allows equity to be taken out of a borrower’s home upon retirement. This particular mortgage program gives many qualifying senior citizens additional retirement income. However, there are pros, cons, and considerations to keep in mind. 

We have compiled a list of frequently asked questions from our advice portal.

What is a reverse mortgage?

A reverse mortgage is a particular category of home loan that lets borrowers convert portions of their home equity into cash. Those who receive a reverse mortgage don’t have to repay the reverse mortgage loan until they no longer use the home as their primary residence.

More general information on reverse mortgages can be found here.

How does it differ from other types of mortgages?

Rather than making monthly payments to accumulate equity, borrowers receive reverse mortgage payment while equity diminishes. Also, reverse mortgage debt does not have to be paid off as long as the borrower lives in the home and keeps current on property taxes and homeowners insurance payments.

Who qualifies for reverse mortgages?

Those who qualify for reverse mortgages are homeowners over the age of 62 who own their homes or have such a low mortgage balance that it can be paid off with the proceeds from a reverse home loan.  Also, homeowners must currently live in the home. 

Before receiving the loan, potential applicants are required to receive consumer information from a reverse mortgage counselor. There are no income qualifications to get a reverse mortgage.

What types of houses are eligible for reverse mortgages?

Single family homes or 2-4 unit homes with at least one unit occupied by the borrower are eligible.  Manufactured homes that meet FHA requirements and HUD-approved condos are also eligible. 

How much money will I be able to receive from my home?

This amount depends on: the youngest borrower’s age, the interest rate at the time, the initial mortgage insurance premium (either HECM Saver or HECM Standard), and the sales price. 

The more valuable the home, the older the borrower, and the lower the interest rate, the more money can be borrowed. The money from reverse mortgages is typically tax-free, whether you receive it as fixed income or in a lump sum.

Can I borrow more than the HUD limit?

Borrowers who secure HECM reverse mortgages cannot borrow more than the HUD maximum loan limit. However, the loan cap for these mortgages has been raised temporarily from $417,000 to $625,000 for borrowers who need to extract more funds. 

Additionally, senior homeowners may obtain proprietary reverse mortgages, which include much higher loan limits but involve more risk and a higher cost.

Does the lender assume ownership of the property?

Although borrowers sell their equity to the lender in the process of a reverse mortgage, the lender never assumes ownership of the property, even if the borrower passes away. Instead, the property passes to the borrower’s heirs.

After a reverse mortgage, will an estate remain that can be left to heirs?

When the home is no longer a primary residence or is sold, the HECM balance and interest must be repaid.  

Any remaining equity will transfer to the heirs, who can then decide whether to sell the property to pay off the balance or secure a new mortgage loan to pay for the home. 

Will my heirs inherit my reverse mortgage debt?

As a non-recourse loan, borrower heirs cannot be held responsible for any reverse mortgage debt beyond the value of the property. For instance, if the home value decreases to the extent that the reverse mortgage balance exceeds the sales price, borrower heirs will not be responsible for this deficiency.

What are the differences between home equity loans and reverse mortgages?

Home equity loans require borrowers to have sufficient income and make monthly payments on the interest and principal to qualify.  

A reverse mortgage pays the borrower, and there are no monthly principal and interest payments. The payments associated are hazard and flood insurance premiums, utilities, and real estate taxes. 

How will I receive payments?

There are five payment plans:

• Modified term: Monthly payments plus a line of credit for a fixed amount of months, selected by the borrower.
• Modified tenure: Scheduled monthly payments and line of credit for as long as the borrower stays in the home.
• A line of credit: Payments that are in installments or are unscheduled in an amount of the borrower’s choosing until the line of credit is exhausted.
• Term: A fixed period of equal monthly payments.
• Tenure: Equal monthly payments as long as the borrower is continuing to occupy the property as a primary residence.

What are the disadvantages of reverse mortgages?

Although reverse mortgages can be tremendously beneficial to borrowers under the right circumstances, borrowers who do not fully understand the program or misuse it will find it particularly disadvantageous. 

For an in-depth examination of the disadvantages of reverse mortgages, visit our Reverse Mortgage Disadvantages page.

How does bankruptcy affect a reverse mortgage?

Although a bankruptcy can complicate matters, borrowers can continue to live in their reverse-mortgaged home in many situations. For more information, visit our Reverse Mortgage and Bankruptcy page.