What is a Reverse Mortgage?

A reverse mortgage is a specialized loan that is available to homeowners that are 62 years or older. It allows them to convert part of the equity in their homes into cash. The loan is called a reverse mortgage because the lender makes payments to the borrower instead of making monthly payments to a lender, as with a traditional mortgage.

The borrower is not required to pay back the loan until the home is sold or otherwise vacated. As long as the borrower lives in the home, he or she is not required to make any monthly payments towards the loan balance. The borrower must remain current on property taxes, homeowners insurance, and homeowners association dues (if applicable).

What are the qualifications to obtain a reverse mortgage?

• You must own a home, be at least 62, and have enough equity in your home.
• Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976), condominiums, and townhouses.
• Lenders must conduct a financial assessment of every reverse mortgage borrower to ensure he or she has the financial capacity to continue paying mandatory obligations, such as property taxes and homeowner's insurance, as stipulated in the Loan Agreement.
• If a lender determines that a borrower may not be able to keep up with property taxes and homeowner's insurance payments, they will be authorized to set-aside a certain amount of funds from the loan to pay future charges.

What is a reverse mortgage used for?

The product was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction how reverse mortgage proceeds can be used. Whether it’s to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, cover property taxes, or prevent foreclosure, there are no restrictions.

Types of reverse mortgages

Home Equity Conversion Mortgage (HECM)

HECM (pronounced hek-uhm) is the commonly used acronym for a Home Equity Conversion Mortgage, a reverse mortgage created by and regulated by the U.S. Department of Housing and Urban Development.

A HECM is not a government loan. It is a loan issued by a mortgage lender, but insured by the Federal Housing Administration, which is part of HUD.

Currently, HECMs make up most reverse mortgages offered in America. HECMs come with rules and regulations that include a requirement that the borrower receive third-party counseling.

Proprietary Reverse Mortgage

Proprietary reverse mortgages are privately insured by the mortgage companies that offer them. They are not subject to all the same regulations as HECMs, but most companies that offer proprietary reverse mortgages emulate the same consumer protections that are found in the HECM program, including mandatory counseling, as a standard best practice.

Proprietary reverse mortgages are sometimes called “jumbo” reverse mortgages, because they are taken out on higher-valued homes. The maximum loan limit on a HECM is $1,089,300. So, if you own a home worth significantly more than this than you may be able to get more funds from a proprietary reverse mortgage.

Single-purpose Reverse Mortgage

Single-purpose reverse mortgages allow homeowners to borrow against their home equity to fund a single, lender-approved purpose, such as paying property taxes or performing maintenance on the home. Typically, this is the least expensive type of reverse mortgage, but you can only use your proceeds for one thing. This is one of the biggest differences between this type of reverse mortgage and the home equity conversion mortgage (HECM) and proprietary reverse mortgage, which both allow you to use your proceeds however you like.

Why do I need reverse mortgage counseling?

Because reverse mortgages are designed for an older audience who are often on fixed incomes and involves what is usually everyone’s most valuable asset, their home, the government and the reverse mortgage industry want to make sure that you have all the information you need to make the right decision.

A counseling session can take place face-to-face or by telephone. Counselors have been trained to effectively deliver the required information in either situation. The session should generally last 60 minutes but can take longer if necessary.

Reverse mortgage counseling is not therapeutic or psychological counseling. It is most comparable to tutoring in that it delivers extra help in understanding something that can seem complicated and overwhelming due to all the details. The counselor will go over much of the same information that is provided to you by your lender.

Prior to being counseled and depending on who you contact first, you will receive an information packet from either the counseling agency or the lender. This information packet will include the following materials:

• An informational document called "Preparing for Your Counseling Session"
• A printout of loan comparisons, so the counselor may review what you are potentially eligible to receive from the reverse mortgage
• A printout of the Total Annual Loan Cost (TALC) Disclosure required by the Federal Reserve Board on all reverse mortgage transactions. This form illustrates the cost of the loan if it is outstanding for different durations of time.
• The National Council on Aging (NCOA) booklet, Use Your Home to Stay at Home – A Guide for Homeowners Who Need Help Now.

About Cambridge's Reverse Mortgage Counseling Division

Cambridge has a large staff of highly experienced and dedicated Home Equity Conversion Mortgage (HECM) counselors available to help you understand all aspects of the Reverse Mortgage loan process, so you can make an informed decision. In fact, our reverse mortgage counseling division is one of the largest at any one agency in the country! We are approved by the U.S. Department of Housing and Urban Development (HUD) and the Massachusetts Executive Office of Elder Affairs as a Reverse Mortgage Counseling agency. We offer both face-to-face counseling for residents of MA and CT and are approved to provide phone counseling on a national level. Our counselors are available Monday through Thursday from 8am to 8pm, and Friday from 8am to 5pm, Eastern Time.