If you tell someone you’re thinking about getting a reverse mortgage loan, chances are they’ll say you’re about to get scammed. It’s sad and wildly inaccurate, but the pervasiveness of misinformation about reverse mortgage loans is staggering.
I’ve spent almost 30 years helping homeowners secure the best mortgage for their needs, and as an expert on reverse mortgage loans, the truth is reverse mortgages are invaluable for many people in a variety of situations. That is not to say they are for everyone, but they are undoubtedly a powerful financial tool.
So how can you tell if a reverse is right for you? Let’s start with the facts. Once you break through the myths and misinformation, you’ll have a better idea if learning more or reaching out to me is worth your time.
To begin, it’s important to note that there are different kinds of reverse mortgage loans. By far the most popular is the Home Equity Conversion Mortgage (HECM). It’s backed by the Federal Housing Administration (FHA) and offers a wealth of consumer protections. In fact, when most people talk about reverse mortgages, they really mean HECMs, and throughout this article, I’m referring to HECMs as well.
The Bank or Government Owns Your Home Myth:
The truth is there are no changes to home ownership status.
One of the most persistent myths I encounter is that the bank or the government takes ownership of the home with a reverse mortgage. When you obtain a HECM, you maintain full ownership of your home. The title remains in your name and you retain all the rights and privileges of homeownership. After all, a reverse mortgage is a loan, not a property transfer.
Lender’s Role Explained
As with a traditional mortgage, the lender places a lien on the property to secure the loan. And as with a traditional mortgage, you need to meet the loan requirements. For a HECM, that includes:
- Live in the home as your primary residence
- Pay property taxes and homeowner’s insurance
- Maintain the home according to FHA requirements
- Keep the home as your principal residence
FHA Insurance Protection
This insurance is part of every HECM reverse mortgage and provides crucial safeguards for to borrowers and their heirs, ensuring that:
- The sale of the home covers the loan balance
- In the event that the loan balance exceeds the value of the home, FHA insurance covers the difference—not the borrower or their heirs
- Your loan payments (i.e. the loan proceeds that go into your pocket) are guaranteed even if your lender goes under
The New Monthly Payments Myth:
The truth is there are no mandatory monthly payments for reverse mortgage loans.*
Many people believe that you’ll have to make monthly loan payments with a reverse. But unlike traditional mortgages, HECMs actually eliminate monthly mortgage payments for those who still have a balance. Here’s how it works:
HECMs Are Home Secured Loans
As stated above, it is the sale of the home that pays off the reverse mortgage loan, not the borrower or their heirs. While borrowers still have to pay property expenses, such as homeowners insurance, taxes, and maintenance, they never have to make a monthly mortgage payment again. However, many borrowers do so strategically to stack tax benefits.**
If a borrower has a balance on their forward mortgage when they get their HECM, the loan proceeds first pay off that balance—hence eliminating monthly mortgage payments—and the rest goes to the borrower. For borrowers with fully paid-off homes who get a HECM, the potential loan proceeds are simply that much greater.
The Erasing Inheritance Myth:
The truth is HECMs can help grow your legacy.**
Many folks who are interested in reverse mortgage loans shy away because they’re worried about the inheritance they can leave behind. The truth is that HECMs can offer a variety of advantages for creating a legacy. First of all, the proceeds from a HECM can be used to protect retirement savings and portfolios, particularly in light of unexpected expenses (for medical issues, for example) or in market downturns. Check out the video below; it’s geared toward financial professionals so it can be a little in the weeds, but I’m confident you’ll be able to understand the example.
Secondly, even with a HECM, the property still remains a part of the estate. Heirs have the first right of refusal to buy the property by paying off (or refinancing) the loan balance, or for 95% of the home’s appraised value—whichever is lower (which is pretty great). If they don’t want to keep the house, they aren’t responsible for the loan balance, but they do get to keep the profits if the sale of the home exceeds the loan balance.
The Myth That Reverse Mortgage Loans Are Difficult to Qualify For:
The truth is HECM qualifications are very straightforward.*
Many people believe that you need to have a paid off home and perfect credit to get a HECM. Actually, HECM requirements are in many ways much more clear than traditional mortgages.
First there is an age requirement. For a HECM, you must be 62 or older (although there are some proprietary versions that can be accessed by younger folks). If a spouse is under 62, they can be protected as a non-borrowing spouse, enabling them to stay in the home if the borrowing spouse passes away.
Second, you typically only need about 60-70% equity to qualify for a reverse, although the greater the equity means a larger relative payout. That said, for folks who want to free up cash flow, eliminating that obligation alone can be transformative.
Third—and many people find this to be very surprising—there is no minimum credit score to qualify for a HECM. Instead, most lenders are simply looking at the borrower’s ability to pay property taxes, homeowner’s insurance, and for home maintenance costs.
The Non-Borrowing Spouse Gets Kicked Out of the Home Myth:
The truth is non-borrowing spouses have robust protections.
As I mentioned above, one must be 62 or older to qualify for a HECM, but if the spouse is too young to qualify as a co-borrower, they still have a variety of protections, which I’ll explore further. The U.S. Department of Housing and Urban Development (HUD) guarantees that eligible non-borrowing spouses can live in the home after the borrowing spouse’s death.
What’s more though, HUD updated reverse mortgage rules in 2021, adding even more protections for non-borrowing spouses, including they don’t need to prove they’re on the title to keep living in the home, and that they can stay in the home if the borrowing spouse permanently moves to a healthcare facility.
The Myth That Taxes and Government Benefits Will Be Affected:
The truth is the proceeds from a HECM are considered a loan, not income.
Lastly in this long line of myths, is that the cash from a HECM will increase taxes and slash government benefits. As stated above, the money received from a reverse is considered a loan, which means it isn’t taxed as income.** Think about it, when you took out the loan to buy your house with a forward mortgage all those years ago, your income bracket didn’t change as a result. In fact, HECMs can be used strategically to lower one’s tax obligations—but that’s a pretty complicated topic worthy of its own article.
Social Security benefits are unaffected by a reverse for the same reason, the proceeds are considered a loan, not income, therefore the HECM proceeds do not impact social security payments. Medicare eligibility is not based on income or assets, so these benefits are also unaffected by HECMs.
In the spirit of full transparency, pensions and means-tested programs like Supplemental Security Income (SSI) and Medicaid can be affected by getting a HECM, although there typically are ways that financial advisors can structure disbursements to negate the impact.**
Don’t Let Myths Limit Your Options for a Better Retirement
After spending years helping homeowners understand reverse mortgages, I’ve seen how myths and misconceptions prevent many seniors from improving their lives. As you can see from my website, reverse mortgages can be used for a variety of life-changing purposes. So keeping an open mind on the subject, if nothing else, gives you another option to help accomplish your goals for retirement.
If you have additional questions or would like to know more about how a HECM could apply to you and your life, please reach out to me today. My number one goal is helping as many seniors improve their lives as I can.
When You Learn the Facts, a Reverse Mortgage Is a Powerful Tool
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*Certain conditions may lead to the loan maturing, necessitating the balance to be paid in full. The borrower remains responsible for covering property taxes, insurance, and home maintenance. Credit approval depends on age, property, and specific debt criteria. Program rates, fees, terms, and conditions are subject to change and may not be available in all states.
**Consult a tax/financial professional
