If you decide to take out a reverse mortgage, you will experience different aspects of the loan as the process evolves. To help borrowers and potential borrowers know what to expect, here are the main stages of a reverse mortgage and what borrowers and potential borrowers expect from each.
Stage One: Counseling
Anyone who wants to take out a reverse mortgage must meet with an independent, third-party counselor approved by the U.S. Department of Housing and Urban Development (HUD). The borrower is responsible for setting up this appointment and looking for an approved home equity conversion mortgage (HECM) counselor. The lender can provide a list of counselors for you, but they cannot make the appointment on your behalf.
You’re expected to pay the counseling session fee, which can be no more than $125. The objectives of reverse mortgage counseling, according to HUD, are as follows:
- Explain how reverse mortgages work and their implications for the borrower.
- Assess whether this loan is appropriate for a borrower’s personal and financial needs.
- Explore possible financial alternatives to reverse mortgages.
Here is what happens during reverse mortgage counseling:
- A conversation about borrower responsibilities. The counselor will discuss the responsibilities of being a reverse mortgage borrower, like maintaining the home, paying property taxes and homeowner’s insurance, and living in the home as your primary residence.
- A review of financial documents. You will have to submit your current income, debts, and expenses so that the counselor can understand and speak to your individual situation.
- A discussion of general topics. Some subjects discussed during the session will include factors determining loan amounts, repayment information, nonrecourse limitations, and what, if any, impact reverse mortgage payments may have on your government benefits.
Once you have completed the counseling session, you will be required to answer specific questions about reverse mortgages to receive your certificate of completion. Once you receive a copy of your counseling certificate and you can begin the application process. The certificate is valid for 180 days.
Stage Two: The Loan Application Process
The reverse mortgage application process is like applying for a traditional mortgage loan. The lender will require you to provide basic documentation like your date of birth, proof of income, Social Security number, and, if necessary, a mortgage statement and payoff amount. The lender will review the documentation and determine if other paperwork, like credit history, is required. Fees and disclosures will be discussed during the application time. During this time, the borrower decides whether they want to receive proceeds as a lump sum, monthly payments, line of credit, or a combination of these options.
The application process generally involves the completion of four phases:
- Appraisal. The lender will order an appraisal of your home (from a Federal Housing Administration (FHA) approved appraiser) to determine the value and ensure your home meets HUD’s property standards. Expect the appraiser to examine your attic, conduct a walkthrough, and check your home’s heat, water, and stove. Depending on the availability of an appraiser, the appraisal process may take a few weeks.
- Underwriting. After the application and appraisal are complete, an underwriter reviews these documents. The underwriter decides whether your loan is approved, approved with conditions, or denied for a specific reason. If there is conditional approval, you may need additional documentation. This process may take several weeks, depending on the area.
- Closure. After the loan application is approved and the underwriter issues final approval, your loan is deemed clear for closing. The closing loan documents will be given and require your signature. A closing agent or attorney will come to you (at your home or your chosen location) for your signatures. There will be closing costs, but these are usually financed as a part of the loan. This process may take a few days, and you still reserve the right to cancel your loan. The documents must be signed on the same day as the date printed on the closing documents. You will also receive documents for your records.
- Funding. After you sign your reverse mortgage loan, you have three business days to cancel your loan. Once those days have passed, you will receive funds in the form you chose—lump sum, monthly payment, line of credit, or a combination of these options. The way you receive funds can be changed at any time, but a request must be made to your loan servicer.
Stage Three: Reverse Mortgage Maintenance
To continue receiving distributions from their reverse mortgage and to keep their loan in good standing, a borrower must meet certain requirements. Those general requirements include maintaining and living in the home, paying property taxes and homeowner’s insurance, and any home-related dues.
On the anniversary of their closing date each year, borrowers must submit a home occupancy certificate. This certificate validates for the lender and the FHA that the borrower still resides in the home and it is their primary residence. The lender mails the certificate to the borrower, who must return it to the address specified within 30 days of receipt to the address specified.
Any questions during the life of the loan should be directed to the servicing team at the institution handling your loan.
Stage Four: The Reverse Mortgage Comes Due
There are several ways a reverse mortgage comes due, and what happens next will depend on the specific circumstance and that loan. The following are four potential scenarios.
The Borrower Sells the Home
If the borrower decides to sell the house for any reason, the proceeds from the sale can be used to satisfy the reverse mortgage loan. Once all liens and the reverse mortgage amount are satisfied, the remaining amount is for the borrower to keep.
The Borrower Fails to Meet the Terms of the Loan
Failure to meet the loan terms will result in the loan coming due. Though there are no monthly mortgage payments, failure to pay property taxes, home insurance and dues, or to maintain the home can result in the loan defaulting. Likewise, a borrower who moves out of the home for any reason for a longer term than a year risks going into default
The Borrower Moves Into an Assisted Living Facility
Sometimes borrowers are forced to leave their home for health or other reasons. If the move is for an extended period, the loan may come due. In cases where the co-borrower stays in the home, the co-borrower will continue receiving disbursements as long the terms of the reverse mortgage are maintained.
Alternatively, the loan will not become due and payable if an eligible non-borrowing spouse still resides in the home. The non-borrowing spouse can stay in the house without paying off the loan but will no longer receive disbursements.
The Last Borrower on the Loan Passes Away
The most common way a reverse mortgage comes due is for the last remaining borrower on the loan to pass away. Heirs have several options for settling the loan. No matter which option they choose, they will never take on debt as a result of the reverse mortgage.
The following are options that heirs have to settle a reverse mortgage:
- Keep the home. To keep the home, heirs pay the mortgage balance or 95% of the property’s appraised value, whichever is lower. The heirs can refinance the loan if they choose.
- Sell the home. Proceeds of the sale will satisfy the loan’s outstanding balance, and all additional proceeds will go to the heirs.
- Sign over the title and complete a deed in lieu of foreclosure. Instead of foreclosure, the heirs can give the property to the lender by signing over the home’s title to the lender accompanied by a deed. The debt is then considered satisfied. This is generally done in cases when the home value is lower than the value of the reverse mortgage, and the heirs do not stand to recoup any money from the sale of the home.
- Do nothing. If the heirs do not make any attempts to settle the mortgage, the bank will foreclose on the home. While this is an option, it is not a recommended course of action.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.