ShareWhen considering options for home financing, some people might shy away from reverse mortgages initially, thinking it's a trick or a last-ditch financial option for homeowners in great need. But a reverse mortgage can be a game-changer for clients who meet the rigorous eligibility requirements.
As a REALTOR®, a member of the National Association of REALTORS ®, you may come across clients in their golden years looking to cash in on their home's equity. That's where reverse mortgages come into play. With the correct information, you may be able to educate your clients so they can make a suitable financial decision.
According to the Consumer Financial Protection Bureau, there are several types of reverse mortgages, including:
- Home Equity Conversion Mortgage (HECM) - Regulated by the government
- Proprietary Reverse Mortgage - Privately insured
- Single-Purpose Reverse Mortgage - Used for a specific purpose
Here we’ll focus on the most common type, which offers more stringent consumer protections—HECMs:
What Is a HECM Reverse Mortgage?
A HECM reverse mortgage is insured by the Federal Housing Administration (FHA). It allows homeowners to convert their home equity into cash without selling or making monthly payments like a traditional mortgage. As stated by The U.S. Department of Housing and Urban Development, "A HECM reverse mortgage allows a homeowner to withdraw a portion of their home's equity to use for home maintenance, repairs, or general living expenses. HECM borrowers may live in their homes indefinitely as long as their property taxes and homeowner's insurance are kept current."
It’s called a reverse mortgage because instead of borrowing money from a lender and repaying it over time, as in a conventional mortgage, the lender pays the borrower the total sum of the loan against the value of the property.
The borrower can choose how to withdraw the funds, whether in a monthly fixed amount, a lump sum, or a line of credit. They may even have the option for a combination.
How Does a Reverse Mortgage Work?
With a reverse mortgage, the amount of money homeowners can borrow is based on how much equity they have in their home. The lender will evaluate the homeowner’s finances and make sure they can both pay back the loan and keep the house. In addition, the lender may also require the homeowner to set aside money for expenses like property taxes, homeowners insurance, and flood insurance.
Borrowers won't have to repay their reverse mortgage loan as long as they live in the home. However, homeowners must repay the loan if they sell, move, pass away, or no longer live in the home as their primary residence. So, for seniors who plan to spend the rest of their lives in their primary residence, the loan may never come due in their lifetime.
But, if or when the loan does come due, it could be paid back with the money from the home sale.
To qualify, borrowers need to meet requirements, including:
- Be 62 years of age or older
- Own the property outright or have a small mortgage balance
- Occupy the property as their principal residence
- Have no delinquencies on any federal debt
- Maintain the home in good condition
- Be able to pay ongoing property charges such as property taxes and homeowners insurance
- Participate in a consumer information session given by an approved HECM counselor
There are also property eligibility requirements, including:
- Single-family home or two-to-four-unit home with one unit occupied by the borrower
- A condominium unit in a U.S. Department of Housing and Urban Development (HUD) approved condominium or a single condominium unit approved by HUD in a non-HUD-approved condominium project
- Manufactured home that meets FHA requirements
The amount homeowners can take varies based on factors such as:
- Age of the youngest borrower or eligible nonborrowing spouse
- Current interest rate
- Lowest of the appraised value, the HECM FHA mortgage limit, or the sales price
Reverse Mortgage Features: Considerations for Real Estate Professionals
If you're currently working on a transaction involving a reverse mortgage or you want to be prepared if it comes up with a client, review these considerations to stay in the know as a real estate professional:
1. Various Parties Involved
When dealing with a reverse mortgage, it's helpful to know that several parties are involved in the process, including:
- The lender
- The borrower
- The loan servicer
- The appraiser
It’s a good practice to check that all parties are licensed and registered with the appropriate state and federal agencies.
As the real estate professional, you may need to explain the roles and responsibilities of each party to your clients so everyone is on the same page and can work toward a common goal.
2. Permissions and Authority
HECMs have strict rules, including rules about permissions and authority. Generally, the surviving spouse or designated heir will have the authority to sell the property and pay off the mortgage if the borrower is deceased. The benefactor may be able to keep the home by paying off the loan balance. If you’re working in such a situation, the benefactor may be required to provide written consent to allow you as the real estate agent to communicate directly with the mortgage lender or other agencies involved in the transaction.
Real estate agents who know about these possible scenarios can provide clients with accurate and reliable information. It can also be helpful for you to refer your client to a financial adviser or legal professional.
3. Prompt Timelines
Reverse mortgages follow a punctual process, so it's essential to educate your clients about requirements and the timeline.
There are several steps involved in a reverse mortgage, including:
- Counseling
- Appraisal
- Lender underwriting process
- Closing
Some of these steps have strict timeframes that borrowers must adhere to for the loan to proceed.
One example of a procedural timelines relates to the death of the borrower. If the borrower dies and the loan becomes due, the heir typically has 30 days from receiving notice to decide whether to buy, sell, or turn the home over to the lender as repayment.
4. Appraisal Values
The property's appraisal value is an important consideration in reverse mortgages. The lender will consider the property's appraised value and the homeowner’s age to determine the loan amount. The appraised value will also determine whether the borrower can cover the loan cost if they should have to repay it.
It's helpful to work with your clients to align on a realistic expectation of the property's appraised value. You can also advise them on steps to increase the value of their home, like making repairs or improvements.
5. FHA Loan Qualifications Usually Apply
HECMs are backed by the FHA, so specific rules about which properties qualify apply. To set your clients up for success, it's wise for real estate agents to familiarize themselves with which properties may qualify and to set reasonable expectations.
6. Knowing the Market
A well-prepared real estate agent should be informed about current market conditions and property stipulations before suggesting reverse mortgages. This is especially true since there are some risks associated with reverse mortgages (aside from accumulation of interest), like its impact on home equity, financial complexity, market fluctuations, and limited access to funds.
If property values are decreasing or interest rates are rising, it may not be the right time for a client to take out a reverse mortgage. Conversely, if property values are rising and interest rates are low, it may be a worthwhile time to consider a reverse mortgage to tap into home equity while preserving the home's value.
As a real estate professional, you can share what you know about local property values and current market trends to give your clients a more accurate estimation of how much money they could receive from a reverse mortgage.
Reverse Mortgage vs. Conventional Mortgage
One significant difference between a reverse mortgage and a conventional mortgage is how borrowers repay the loan balance. With a conventional mortgage, the borrower makes monthly payments toward the loan balance to pay it off over time. With a reverse mortgage, however, the loan balance grows over time as interest accrues and is added to the loan amount.
Another critical difference between the two is the impact on inheritance. With a reverse mortgage, the home serves as collateral for the loan. So, if the borrower passes away, the heir could likely need to repay the loan using the proceeds from the home sale. If the home is sold for more than the loan balance, the excess proceeds go to either the borrower or their estate. If the sale price is less than the loan balance, the FHA mortgage insurance pays the lender the difference.
Reverse Mortgage: Considerations for Real Estate Agents
You may work with mature clients looking to cash in on their home's equity. A HECM reverse mortgage could be the right option. HECMs are tax-free loans that don't require monthly payments but are due when the borrower moves, sells the property, or passes away.
Many factors must be considered before making a reverse mortgage commitment, and real estate professionals can serve as advisers for either buyers or sellers to ensure a smooth transaction involving a HECM. Knowing who and what is involved in the process, being familiar with the timeline, and having a clear handle on appraisal values can go a long way to ensuring clients understand the transaction terms.
Education and awareness are key. It’s important for real estate professionals to be familiar with HECM requirements to educate clients properly and professionally on these complex financial tools.