A reverse mortgage is a type of home loan that allows eligible homeowners to access a portion of the equity in their home. The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA).
HECMs are generally available to eligible homeowners age 62 or older who use the property as their primary residence and meet applicable program requirements. Unlike a traditional mortgage, borrowers are not required to make monthly mortgage payments while they continue to meet the terms of the loan. Borrowers remain responsible for property taxes, homeowners insurance, maintaining the home, and other applicable property charges.
Depending on the type of HECM and the borrower's circumstances, available proceeds may be received through options such as a line of credit, monthly payments, a lump-sum disbursement, or certain combinations of these options. The amount available depends on several factors, including the borrower's age, current interest rates and the value of the home.
A reverse mortgage is not appropriate for every homeowner. Understanding the costs, borrower responsibilities, available proceeds and long-term implications is important before deciding whether a HECM fits your financial goals.
With a HECM reverse mortgage, eligible homeowners can access a portion of their home equity without making monthly mortgage payments. Interest and applicable fees are added to the loan balance over time, which means the amount owed generally increases as proceeds are received and interest accrues.
The homeowner retains ownership of the home and remains responsible for property taxes, homeowners insurance, maintaining the property, and other applicable property charges. The loan generally becomes due and payable when the last borrower sells the home, permanently moves out, dies, or otherwise fails to meet the requirements of the loan.
Homeowners consider reverse mortgages for a variety of reasons. Depending on their circumstances, HECM proceeds may be used to supplement other financial resources, pay for home improvements or expenses, establish a line of credit, or support other financial goals.
A reverse mortgage is a long-term financial decision that can affect the homeowner's equity and the amount ultimately available to heirs. Costs, available proceeds, plans for remaining in the home, and other financial resources should all be considered when evaluating whether a HECM is appropriate.
To qualify for an FHA-insured Home Equity Conversion Mortgage (HECM), the youngest borrower generally must be at least 62 years old, and the home must generally be the borrower's principal residence. Borrowers must also meet applicable FHA requirements and have sufficient equity in the property.
As part of the process, the lender evaluates the borrower's financial situation, including the ability to meet ongoing property obligations such as property taxes, homeowners insurance and other applicable property charges.
The property must also meet FHA eligibility and property standards. Eligible properties may include certain single-family homes, 2- to 4-unit properties with one unit occupied by the borrower, and certain condominium and manufactured-home properties that meet FHA requirements.
Before obtaining a HECM, prospective borrowers are generally required to complete counseling with a HUD-approved HECM housing counseling agency. Counseling is designed to help homeowners understand how the loan works, the costs and responsibilities involved, and available alternatives.
Step 1 – Explore Your Reverse Mortgage Options
Speak with a mortgage professional to learn how a HECM works, discuss your goals, and review whether a reverse mortgage may be appropriate for your situation.
Step 2 – Complete HECM Counseling
Before obtaining a HECM, borrowers are required to participate in counseling with a HUD-certified HECM counselor. The counseling session provides independent information about how reverse mortgages work, borrower responsibilities, costs, alternatives, and other important considerations.
Step 3 – Complete the Loan Application
If you decide to proceed, you will complete a reverse mortgage application and provide the documentation needed to evaluate your eligibility and financial situation.
Step 4 – Financial Assessment and Property Appraisal
The lender reviews your financial information to evaluate your ability to meet ongoing property obligations. An FHA appraisal is also used to determine the property's value and evaluate whether the property meets applicable FHA requirements.
Step 5 – Underwriting and Loan Approval
The loan is reviewed to determine whether the borrower, property and transaction meet applicable HECM and lender requirements. Additional documentation or conditions may be required before the loan can proceed to closing.
Step 6 – Closing
At closing, you will review and sign the final loan documents. Closing costs, loan terms, borrower responsibilities and available proceeds should be carefully reviewed before signing.
Step 7 – Receive Available HECM Proceeds
After closing and any applicable waiting or rescission period, available proceeds are disbursed according to the payment option selected and the terms of the HECM. Available disbursement options and timing can vary based on the type of HECM and program requirements.
A HECM reverse mortgage does not typically require monthly mortgage payments while the borrower continues to live in the home as a principal residence and meets the requirements of the loan. Over time, interest and applicable charges are added to the loan balance.
A HECM generally becomes due and payable when:
• The last surviving borrower dies, subject to certain protections that may apply to an eligible non-borrowing spouse
• The home is sold or ownership is transferred
• The property is no longer the borrower's principal residence
• The last surviving borrower is away from the home for more than 12 consecutive months because of physical or mental illness
• The borrower fails to meet obligations of the mortgage, such as paying required property taxes and homeowners insurance or maintaining the property
When the HECM becomes due and payable, the loan balance generally includes the amount borrowed plus accrued interest, mortgage insurance premiums and other applicable financed charges. Depending on the circumstances, the loan may be satisfied by selling the home, paying off the balance using other funds, or refinancing the debt.
If the borrower dies, the estate or heirs have options for addressing the HECM. Because individual circumstances and HUD requirements can vary, heirs should contact the loan servicer promptly to understand the available options and applicable timeframes.
Like other mortgage loans, a HECM reverse mortgage includes costs that should be carefully considered before proceeding. Some costs may be paid at closing or financed as part of the HECM, which reduces the amount of home equity available to the borrower.
Origination Fee
The lender may charge an origination fee for processing and originating the HECM. FHA establishes limits on the origination fee that may be charged for a HECM.
Appraisal and Other Third-Party Costs
An FHA appraisal is generally required to establish the property's value and evaluate whether the property meets applicable FHA requirements. Other third-party costs may include items such as title services, recording charges, credit-related fees and other settlement expenses. The specific charges vary by transaction.
FHA Mortgage Insurance Premiums
HECMs are insured by the Federal Housing Administration and include FHA mortgage insurance premiums. These include an initial mortgage insurance premium as well as an ongoing mortgage insurance premium that accrues over the life of the loan.
Interest and Other Loan Charges
Interest accrues on the outstanding HECM loan balance. Depending on the loan and circumstances, other applicable charges may also be added to the balance over time.
Before closing, borrowers receive disclosures explaining the costs and terms of the HECM. It is important to review both the upfront costs and the potential long-term cost of the loan when deciding whether a reverse mortgage is appropriate.
Homeowners in Annapolis, Anne Arundel County and throughout Maryland may consider a reverse mortgage as one way to access a portion of their home equity while continuing to live in their home.
At Redwood Mortgage Services, we help Maryland homeowners understand how HECM reverse mortgages work, including eligibility requirements, available proceeds, costs and ongoing homeowner responsibilities. Because a reverse mortgage can have long-term financial implications, we believe it is important to understand both the potential benefits and the responsibilities before deciding whether it fits your circumstances.
If you are considering a reverse mortgage in Maryland, we can help you review the available options and answer your questions.
These materials are not from HUD or FHA and were not approved by HUD or a government agency. This information is provided for educational purposes only and is not a commitment to lend. Borrowers must meet applicable loan program and qualification requirements.