Answers to the most frequently asked questions about reverse mortgages.

 1. What is a reverse mortgage?

A reverse mortgage is a special type of home loan that lets a homeowner convert the equity in his or her home into cash. The equity built up over years of mortgage payments can be paid to the homeowner: in a lump sum, in a stream of payments, or as a supplement to Social Security or other retirement funds. Unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower no longer uses the home as his or her principal residence. The United States Department of Housing and Urban Development’s (HUD) reverse mortgage provides these benefits, and it is federally insured as well.

2. Does my loved one qualify for a HUD reverse mortgage?

To be eligible for a HUD reverse mortgage, HUD’s Federal Housing Administration (FHA) requires that the borrower be 62 years of age or older; have a very low outstanding mortgage balance or own his or her home free and clear; and that he or she meets with a HUD-approved counseling agency—to make sure he or she understands what a HUD reverse mortgage will mean.

3. Can my loved one apply if he or she didn’t buy his or her present house with FHA mortgage insurance?

Yes. While your loved one’s property must meet FHA minimum standards, it doesn’t matter if he or she didn’t buy it with an FHA-insured mortgage. His or her new HUD reverse mortgage will be a new FHA-insured mortgage loan.

4. What if my loved one owns a condominium, not a single-family home?

He or she can still qualify for HUD’s reverse mortgage program. An eligible property must be his or her principal residence, but can be a single-family residence; a one- to four-unit dwelling with one unit occupied by the borrower; a manufactured home (mobile home); or a unit in FHA-approved condominiums. Your loved one’s property must meet FHA minimum property standards, but he or she can fund repairs from his or her reverse mortgage.

5. What’s the difference between a reverse mortgage and a bank home equity loan?

With a traditional second mortgage, or a home equity line of credit, your loved one must have sufficient income to qualify for the loan, and he or she is required to make monthly mortgage payments. A reverse mortgage works differently. The reverse mortgage pays your loved one, and it is available regardless of his or her current income. He or she doesn’t make payments, because the loan isn’t due as long as the house remains your loved one’s principal residence. Like all homeowners, your loved one is still required to pay real estate taxes and other conventional payments like utilities, but with an FHA-insured HUD reverse mortgage, your loved one cannot be forced to vacate his or her house because he or she missed a mortgage payment.

6. Can the lender take my loved one’s home away if he or she outlives the loan?

No. Your loved one cannot outlive the loan agreement, and no debt from a reverse mortgage will be passed along to the estate or heirs. Your loved one cannot be forced to sell his or her home to pay off the mortgage loan even if the loan balance grows to exceed the value of the property. And, HUD’s Federal Housing Administration guarantees that your loved one will receive all the payments that are owed to him or her.
 
7. Will my loved one still have an estate that he or she can leave to heirs?

When your loved one sells his or her home or no longer uses it as a primary residence, your loved one or his or her estate must repay the cash received from the reverse mortgage, plus interest and other finance charges. All proceeds beyond what he or she owes belongs to your loved one or his or her estate. This means the remaining equity in your loved one’s home can be passed on to his or her heirs. None of your loved one’s other assets will be affected by HUD’s reverse mortgage loan. No debt will ever be passed along to the estate or heirs. Your loved one retains ownership of his or her home, and may sell or move at any time.

8. How much money can my loved one get from his or her home?

A borrower who uses an FHA-insured Home Equity Conversion Mortgages (HECM) will receive a reverse mortgage amount based on a formula that includes a Maximum Claim Amount. In general, this means the maximum amount your loved one can receive will be determined by factors including his or her age and the appraised value of the property (or the maximum FHA mortgage amount for your loved one’s area, if lower). You and your loved one should discuss the formula with his or her lender and his or her HUD-approved housing counselor.

9. What if my loved one wants to take out more equity from his or her home than the FHA-insured mortgage limits for the area?

Like FHA’s home mortgage programs, HUD’s reverse mortgage is primarily intended for low- and moderate-income families. For instance, FHA maximum home mortgage amounts range from $78,660 to $155,250, depending on whether the home is in a standard housing-cost area, or an area determined by FHA to be a high-cost area. An owner with a property valued well beyond the FHA mortgage limits, and who has a large amount of equity, will not receive as much cash from a HECM as they might from another private or public agency. Reverse mortgage programs are available in most states, as well as the District of Columbia and Puerto Rico, through HUD-approved lenders or organizations like Fannie Mae. However, anyone interested in a reverse mortgage is encouraged to speak with a HUD-approved housing counseling agency first.

10. Should my loved one use an estate planning service to find a reverse mortgage? My loved one has been contacted by a firm that will refer him or her to a lender in exchange for a “small percentage” of the loan.

There really is no reason for your loved one to engage such a service. HUD provides this information without cost, and HUD-approved agencies are available for free—or at minimal cost—to provide counseling and referral to HUD-approved lenders. More information is available at your loved one’s local HUD-approved housing counseling agency.

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Adapted from Top Ten Things to Know If You’re Interested in a Reverse Mortgage, developed by the United States Department of Housing and Urban Development.