Reverse mortgages are complex, often confusing financial products. If you or an elderly relative are even considering one, it’s important to know all of the risks and pitfalls beforehand. With that in mind, we’ve created this list of facts to help you understand what can really happen if you take out one of these loans.
Top Ten Reverse Mortgage Facts
- You must be 62 or older to qualify. If there are multiple borrowers, the youngest borrower must be at least 62.
- You must have significant equity in your home. As a rule of thumb, you need about 40% equity.
- You must live in the house. The loan can only be taken on a home that is your primary residence. If you stop living in your house for 12 months, the loan will become due.
- There’s a financial assessment. Before you receive your HECM, you must take a financial assessment, which will look at your income and credit history. Based on the results of this assessment, some of the loan’s proceeds may be set aside to pay for property taxes and insurance.
- There are five payout options. These are: lump sum, tenure, term, line of credit, modified tenure, and modified term. Lump sum and line of credit are fairly straight forward. Tenure, term, and the modified versions refer to monthly payments. See this page for more information.
- You must pay off your mortgage. You must use the proceeds of your reverse mortgage to pay off the balance of your conventional mortgage.
- You can access to some but not all of your equity. You will not receive all your home equity from this loan. Instead, you will receive a percentage that is calculated based on prevailing interest rates, borrower age, and the value of your home.
- The US government does not originate reverse mortgages. The government insures HECMs, which protects you and the lender, but it is not a lender. You will be working with a private company.
- Your lender probably won’t be a big bank. Most reverse lenders are smaller companies that specialize in this type of loan. Big banks like Wells Fargo and Bank of America exited the industry back in 2012.
- A reverse mortgage may not be your best option. For some, a HECM is a great option that serves a need. For others, there are better alternatives, like a home equity loan.
- In 1961, Deering Savings & Loan in Portland, Maine originated the first reverse mortgage.
- In the 1970’s, multiple private lenders offered some type of this loan.
- In 1983, the United States Senate Special Committee on Aging made a proposal for an Federal Housing Administration (FHA)-backed program.
- In 1984, American Homestead created a program that allowed borrowers to stay in their homes.
- In 1987, the HECM began as a pilot program as part of the Housing and Community Development Act.
- In 1988, President Ronald Reagan signed the act that allows HECM to insure these loans.
- In 1998, the HECM program, still operating as a pilot, becomes permanent. The FHA gains the authority to insure 150,000 loans per year. Previously, HECM origination was capped at relatively low numbers.
- Originations pick up throughout the 2000s, rising from under 10,000 per year in the 90s to a peak of over 114,000 in 2009.
- In 2011, the FHA is given the authority to insure up to 275,000 HECMs per year, though annual demand has never approached this level.
- As of 2012, the market is primarily non-depository institutions originating HECM loans. It remains this way.
By the Numbers
- In 2009, half of homeowners eligible for the HECM program had 50% or more of their net worth in their home’s equity.
- The baby boomer generation contains 32 million homeowners who may need this product.
- As of February 2012, 10% of seniors with a HECM were in default or foreclosure and at very serious risk of losing their homes. This is known as a tax and insurance (T&I) default because it results from the failure to keep up with property taxes and homeowner’s insurance.
- In 2011, 73% of borrowers opted for a lump sum payment. Borrowers who take lump sum payment are more likely to face foreclosure due to falling behind on taxes / insurance.
- As of 2012, only 2-3% of those eligible for reverse mortgages had one.
- As of 2013, there are over 700,000 reverse mortgage outstanding, and 90% are HECM loans.
- To date, the FHA has insured over $160 billion in maximum claim amounts (the total of the values of the homes at origination), of which more than $130 billion is outstanding.
- Even at the peak of the real estate bubble, non-HECM insured reverse mortgages only made up 5-10% of total volume.
- The HECM program insures around 70K new loans per year.
- HECM loan limits:
- Until 2007, limited varied by county, from $200,160 to $362,790.
- Housing and Economic Recovery Act (HERA) of 2008: single national limit of $417,000
- American Recovery and Reinvestment Act (ARRA) of 2009, single national limit of $625,500. This is a temporary change, and the limit is set to revert back to $417,000 in December 2013. However, the limit was extended a few times.
- In December 2016, the limit increased to $636,150.
- As of 2012, less than 10% of eligible homeowners owned a home valued at more than the new FHA limit of $625,500.
- As of June 2013, adjustable rate mortgages made up 95% of the market because the FHA discontinued its standard fixed-rate option. Prior to this change, fixed-rate reverse mortgages made up over 75% of all orginations.
- Through the middle of 2016, more than 20,000 homeowners had taken advantage of HUD’s HECM to HECM Refinancing Program
- According to the Consumer Finance Protection Bureau (CFPB), many borrowers do not understand the reverse mortgages they take out.
- The earlier a borrower takes out a HECM, the riskier the decision can become. This problem arises primarily from borrowers who take out a large lump sum at closing and find themselves without any equity remaining later in life.
- When it becomes due, the borrower has 6 months to repay. This fact can affect individuals living in a home that are not named on the loan. HECMs have made the news because spouses who were not named on the loan were forced to move when the borrowing spouse passed away.
- The 10% delinquency rate is far higher than the rate of delinquency on standard home loans. That said, it is unclear how many borrowers have faced foreclosure.
The CFPB’s report is now a few years old, and recent changes to the HECM program have helped to reduce the frequency and severity of these problems.