New federal regulations weeded out some of the shadier lenders in the reverse mortgage business—but it still pays to be on guard as you navigate the process of turning your home equity into cash without having to make loan payments.
If you are a homeowner who is 62 or older, or you are helping someone who is, here are important questions to ask when choosing a lender for a reverse mortgage…
- Are you a member of the National Reverse Mortgage Lenders Association (NRMLA) and approved by the Federal Housing Administration (FHA)? NRMLA members must uphold a code of conduct that prioritizes consumer education and ethical behavior. FHA approval is key because only FHA-approved lenders can issue the kind of reverse mortgage guaranteed by the US government, called Home Equity Conversion Mortgages (HECM). With an HECM, you’ll never owe more than the value of your house even if that value is less than the amount of money you borrowed plus accrued interest. With other types of reverse mortgages, if your home equity drops, you may have to make up the difference. You can search for FHA-approved lenders on the website of the US Department of Housing and Urban Development.
- How will the payment structure of this loan align with my goals? Reverse mortgages can be structured in many ways, each with different benefits and trade-offs. For example, they may provide a fixed monthly payment to you or a line of credit from which you can make withdrawals at will. Be specific about what you’re trying to accomplish—do you want to cover a one-time expense, generate steady income or provide a safety net? A lender should be able to provide a clear explanation why a particular loan structure is suited to your goals. If the lender can’t, look elsewhere.
- Will you allow me to roll closing costs into my reverse mortgage loan amount if needed? To get a reverse mortgage, you’ll usually have to pay fees for an appraisal, title insurance and other items like you would for a conventional mortgage. These fees vary and can easily be $2,000 or more. You can check ranges for different line items at the NRMLA website. You will also have to pay the government an up-front insurance premium, typically 0.5% of the value of the house (up to a current cap of $636,150) plus an origination fee, which by law is capped at 2% of the initial $200,000 of the home’s value plus 1% of the remaining value, to a maximum origination fee of $6,000. While it’s often better to pay these fees upfront because folding them into the loan means you will owe more in interest when the loan is repaid, you might want the flexibility to decide which approach makes more sense for your financial situation. Also, note that your lender could also charge an ongoing service fee, which should be no more than $35 per month.
- If I opt for a higher interest rate, will you cover my upfront costs? Some lenders offer to pay closing costs in exchange for charging you a higher interest rate on the amount you borrow. But they may not mention this option if you don’t ask. This approach might make sense if you’re cash-strapped now and will have difficulty paying upfront costs to secure the mortgage. But a higher interest rate makes the loan more expensive in the long run.
- Will you confirm in writing that my surviving spouse can stay in the home? If you and your spouse are both older than 62 (the qualifying age for getting a reverse mortgage) and are named on the home’s title, you can both be listed as borrowers on the reverse mortgage—meaning the loan won’t need to be paid back until you both have died. But if one of you is younger than 62 and/or isn’t on the home’s title, some loans’ terms will not allow this person to stay in the house in the event that the other one dies. However, most lenders will now write contracts that allow a surviving spouse to defer repayment of the loan and stay in the home regardless of age and title status. If this protection is important to you, find a lender who offers it.
- Can you recommend an independent financial counselor? By law, reverse mortgage borrowers are required to go through a session of financial counseling that discusses the loan’s costs and financial implications, and other cash-generating options, before moving forward with a reverse mortgage. A reputable lender should steer you to a counselor who is approved for these sessions by an independent third-party organization such as AARP or HUD. If the lender cannot recommend a counselor approved by such an organization, consider that a red flag and shop elsewhere.
- How long after I complete my required steps can I expect to receive funds from the loan? Ask how long the lender usually takes to process a reverse mortgage once a borrower has fulfilled all obligations. A processing period of 30 to 60 days is typical. Once your loan is approved, you may still have to wait up to another month to receive your initial payment.
- What is the process for canceling the loan? By law, you have a three-day window after closing during which you can cancel a reverse mortgage without penalty. Different loan servicers have different cancellation processes. Before your loan closes, get written instructions for cancellation steps, as well as the relevant contact person’s name, phone number, email address and mailing address—because most cancellation requests must be submitted in writing—so you don’t have to waste any time during your three-day window if you decide to cancel the loan.