Learn how a reverse mortgage works, who qualifies, and the pros and cons. Help your clients unlock home equity for retirement with this essential guide
Mortgage professionals across the United States often deal with older homeowners who want more financial freedom in retirement. As more people look for ways to use the value of their homes, reverse mortgages are becoming a common option. If you’re working as a mortgage broker or aspiring to be one, knowing how a reverse mortgage works can help you serve clients better.
In this article, Mortgage Professional America will talk about what a reverse mortgage is. We will discuss who this mortgage type is right for and how you can use it to support your clients. Want to learn more about how it works and when it makes sense? Keep reading below.
A reverse mortgage is a home loan that allows homeowners to convert part of their home equity into cash. Your clients can take out this mortgage while they still use the property as their primary residence.
This kind of property loan is different from other types of mortgages because only clients who are 62 or older can qualify for it. Unlike a traditional mortgage, your clients don’t have to make monthly mortgage payments. Instead, the home loan is repaid when your clients:
Watch this video to learn more about how reverse mortgages work in the US:
Reverse mortgages shouldn’t be treated as your clients' last resort. Find out why in this article.
When the loan is due for repayment, the usual route is to sell the home to cover the loan balance. If the loan amount is higher than the home’s value, that’s where the 95% rule comes in.
With a reverse mortgage like the Home Equity Conversion Mortgage (HECM), your clients’ heirs won’t owe more than the home’s current market value. They won’t have to pay more than 95% of the home’s appraised value. The remaining balance will be covered by mortgage insurance.
In other words, the 95% rule helps families avoid paying extra if the home’s value has gone down.
Here’s a quick look at three types of reverse mortgages for your clients:
Let's take an in-depth look at each:
This is the most common form of reverse mortgage. An HECM is insured by the Federal Housing Administration (FHA) and often comes with higher up-front costs. On a positive note, the money that your clients will receive can be used for anything and they can decide how to withdraw the funds. For instance, it can be via:
While they are widely available, HECMs are offered solely through FHA-approved mortgage lenders.
This type of reverse mortgage is not federally insured. If your clients’ property has high value, they can get a bigger loan advance from a proprietary reverse mortgage.
This type of reverse mortgage is less common than the previous two mentioned. It is offered by local and state government agencies and non-profit organizations. However, it is also the least expensive.
The catch is that your clients can only use a single-purpose reverse mortgage to cover one specific expense. For instance, it can only be used for home renovation or repairs, property taxes, and other purposes specified by the mortgage lender.
Whether your clients choose an HECM, a proprietary reverse mortgage, or a single-purpose reverse mortgage will depend on their financial situation.
Help them understand both the advantages and disadvantages of these three options. If you wish to become as successful as those listed on our Best in Mortgage page, build good relationships with your clients. Discussing the pros and cons of reverse mortgages is a good place to start.
Here are the main advantages for your clients who want to get a reverse mortgage:
Your clients aren’t required to make monthly payments toward the home loan. This can help reduce financial stress, especially for those living on a fixed income.
The money that your clients will receive from a reverse mortgage is not considered taxable income, since it’s treated as a loan advance. This means they can use the funds freely without worrying about additional tax burdens.
With a federally insured HECM, your clients and their heirs are protected if the loan balance ends up being more than the home’s market value. When the home is sold to repay the home loan, neither the borrower nor their heirs will have to pay the difference. The FHA insurance covers any shortfall, making it a safer option for families.
A reverse mortgage can be helpful for older homeowners, but it’s not the right choice for everyone. Before offering this option to your clients, it’s vital to understand the potential risks:
Since your clients won’t make monthly mortgage payments, the interest and fees get added to the home loan every month. This means that the total amount owed becomes larger over time.
As the loan balance increases, the amount of equity left in your clients' home goes down. In turn, there may be less value left in the property for the homeowner’s children or heirs.
If leaving the home to their family is a priority, this might be a concern. Make sure to inform your clients about this from the get-go.
Reverse mortgages don’t get rid of all home-related expenses. To avoid default, your clients will still be responsible for paying property taxes and keeping up with homeowners' insurance.
They should also make sure that the house stays in good condition. If these responsibilities aren’t met, the mortgage lender can call the home loan due and possibly start foreclosure.
Watch this video to understand why reverse mortgages might not always be the best option for your clients:
Want to recommend other choices to your clients? Here are five alternatives to a reverse mortgage.
A reverse mortgage can be a smart option for seniors who own their home and need extra income during retirement. It’s often used by homeowners to:
Your senior clients will also have the option to choose how they receive the money. This can be through:
This will allow them to manage their finances in a way that fits their needs. As a mortgage broker, it’s important to remind your clients that a reverse mortgage is a big financial decision. Encourage them to get advice from a housing counselor through an HUD-approved agency. You can also ask them to consider what their family thinks before moving forward.
If you want to help your clients who want to make the most of their home equity, start by building your knowledge of reverse mortgages. By understanding how it works along with the benefits and risks, you’ll be better equipped to guide your clients with confidence. You can also focus on this niche market by becoming a go-to mortgage broker for senior homeowners looking for flexible options.
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