How does the Reverse Mortgage process work?
Education
Do your research. Read up on the process as much as you can. Talk to your local Better Business Bureau (BBB) and your local American Association of Retired Persons (AARP) about the process and the lender. The AARP Foundation Reverse Mortgage Education Project includes a national network of reverse mortgage counselors dedicated to helping seniors understand and evaluate the risks and benefits of reverse mortgage borrowing.
Counseling
Federal regulations and state law often requires that reverse mortgage borrowers receive state-certified housing counseling. And while this counseling is mandatory for HECM and Home Keeper reverse mortgage borrowers, the service is free. Counseling appointments typically take about an hour and may be handled in-person or over the telephone.
Loan Application
Your lending agent will require you to complete a loan application and determine how to receive payment.
These are you options:
1. Monthly income for a fixed term, or life
2. Line of credit
3. Lump sum
4. Any combination of the above 3
Processing
Your lender will order:
- A credit report
- A title report
- An appraisal,
- Lien payoffs
Underwriting
Once your lender has received and completed the required documentation, your loan package will be submitted to the financial organization that will be underwriting the loan, for final approval.
Closing
After your reverse mortgage loan has been approved and signed, the loan's initial interest rate will be determined. Closing costs are typically financed by the loan.
Disbursement
Once you have officially closed on the loan, you have 3 business days to change your mind and cancel the loan. Atter the 3-day period, the funds are disbursed, including any amount that will be applied to a previous lien on the property. Then you will begin receive payments according to the payment option you selected.
Repayment
You are allowed to make monthly payments in any amount, However you will not be required to make monthly payments during the term of your loan. The reverse mortgage becomes due and payable in full once: 1) the home is no longer being used as a primary residence, 2) it is sold, or 3) the borrower passes away. Upon the death of the borrower, the loan may be repaid from the sale of the home or by refinancing the existing reverse mortgage. All remaining equity belongs to the heirs/estate.
What can I expect to learn from my housing counseling appointment?
Accredited housing counselors work with seniors to help them evaluate the viability of a reverse mortgage loan by looking at the borrowers:
- Current budget
- Monthly income
- Loan risks
- Loan benefits
- Interest rates
- Associated fees
HUD-approved HECM housing counselors are required to use loan comparison and analysis software that meets the requirements established by the AARP. Certified counselors must also adhere to the AARP Foundation Reverse Mortgage Education Project counseling policies and procedures. Because it is their job to help insure that you are making a responsible financial decision, they may also review financial options with you.
The AARP Foundation Reverse Mortgage Education Project regulates a national network of HUD-approved HECM housing counseling agencies by administering the exam that certifies counselors for HUD-approved HECM housing counseling agencies. HUD's National HECM Counseling Network consists of the exam's highest scoring counselors. That means that that you can be sure that they are charged with looking out for your best interest.
What can I expect to be included in closing costs?
Typically, closing costs are financed into the reverse mortgage loan. Some of the closing costs commonly charged to a reverse mortgage borrower can include:
Credit report: Checks for any judgments or tax liens against the borrower — under $20.
Survey: Ordered to verify legal property boundaries. Assures that any adjoining property has not intruded onto the borrower's property – generally under $250. NOT normally needed.
Flood Certification: Determines whether or not the residence is built on a federally designated flood plane — under $20.
Pest Inspection: Determines whether the home is infested with any wood-destroying organisms, like termites or carpenter ants — generally under $100. NOT normally needed.
Title insurance: Protect owner and lender against any loss due to disputes over property ownership. ownership of a property – the larger the loan amount, the higher the cost of the title insurance.
Escrow, Settlement or Closing: Typically includes a title search and any other required closing services — $150-$450
Document Preparation: Preparation of all final closing documents — $75-$150
Recording: Fees associated with recording the mortgage lien with the County Recorder's Office — $50-$100
Courier: Overnight mailing of any documents between the lender and the title company or loan investor — generally under $50
How do I avoid Reverse Mortgage fraud and scams?
Talk to your counselor. Start by scheduling an appointment with a HUD-approved reverse mortgage counselor. It is their job to help you understand reverse mortgages and help you evaluate your situation. So don’t pay for information that should be free.
Look closely at the terms and conditions. Watch out for unethical terms and extraneous fees. Your HUD-approved counselor can help you look for these. Don’t be afraid to ask. And if you are concerned that a lender may be violating the law, report them to your reverse mortgage counselor.
You have 3 days to change your mind. Typically, you have three business days after closing on the loan to back out — for any reason.
REVERSE MORTGAGE — FACT OR FICTION
I would need a large income to qualify.
FALSE — There are only minor income requirements.
I would need to be debt-free to qualify.
FALSE — You can qualify with outstanding debt.
My health would disqualify me.
FALSE — There are no health requirements.
I still owe on my home, so I wouldn’t qualify.
NOT NECESSARILY — As long as the proceeds of the reverse mortgage loan can be used to pay off the home liens.
If I take out a reverse mortgage, the lender agent will own my home.
FALSE — The lender's interest is limited to the loan balance and they will NEVER take control of the title. You and your heirs/estate retain ownership of the home.
I can’t get a reverse mortgage loan without it affecting my pension, Social Security or Medicaid.
NOT NECESSARILY — A reverse mortgage will not affect most means-tested benefits.
HOWEVER, be sure to check with your local area agency on aging since programs do vary by state.
I would end up owing more in taxes.
FALSE – All proceeds associated with a reverse mortgage are tax-free because they are considered borrowed funds.
If the amount of my reverse mortgage loan ever exceeded my home’s appraised value, I’d end up owing money.
FALSE: A reverse mortgages is considered "non-recourse" loan. That means you will never owe more than the home’s value, regardless of the loan balance.
My loan terms can change if my loan is sold.
FALSE – At the closing of your loan, you will sign a legal contract assuring your loan's terms cannot be changed, regardless if the loan is sold.
Reverse mortgages are only a good idea for seniors who are cash poor.
FALSE — While some seniors may clearly have greater financial need, a reverse mortgage can be an excellent estate-planning tool for any senior that has substantial equity in their home.
A reverse mortgage would end up being a burden to my kids.
FALSE — Heirs have up to a year to pay off the reverse mortgage. The loan may be repaid by refinancing the existing reverse mortgage, using estate funds to pay it off or by selling the property. Any remaining proceeds would then belong to the heirs and/or the estate.
