A private reverse mortgage has become a popular way for older homeowners to borrow money against the value of their home. Unlike traditional mortgages, borrowers do not make monthly payments. Instead, the loan balance increases over time and is repaid when the homeowner sells or no longer lives in the home. The owner is still responsible for taxes and insurance and must keep the residence in good condition.
Unlike an insured reverse mortgage, proprietary reverse mortgage loans are private loans that aren’t federally insured by the Federal Housing Administration through FHA insurance.
Even though they are not required to make monthly payments to keep their reverse mortgage loans “current,” homeowners still have to take care of their home and keep up to date with taxes and insurance. If the owner calls behind on one of the required criteria, the lender can hold the borrower in default and require that they sell the home and pay off the loan, repay the loan balance in full and keep the home, sign the property over the lender, or let the foreclosure process begin.
That’s a long way of saying that, yes, you can lose your home with a reverse mortgage, but for different reasons than you might think. The home’s condition and resale value are of utmost importance for reverse mortgage lenders, and allowing the property to fall into disrepair is one of the main reasons borrowers default.
What is a Private Reverse Mortgage?
Reverse mortgages are financial products that allow homeowners to borrow money against the value of their homes. The title stays in the homeowner’s name, but there are no monthly payments like with a traditional mortgage or home equity line of credit. Loan balances continue to increase during the term of the loan, and the amount is repaid when the homeowner leaves the residence, which could include passing away, moving, or relocating to an assisted living facility. The payoff proceeds generally come from the sale of the home, though the mortgage can be repaid in cash or through other measures.
Reverse mortgage holders must continue to make tax and other payments while living in the residence, and most lenders have a strict set of requirements that homeowners must follow to keep the property in top condition and to maintain payments for taxes.
Smart Financial Alternatives to Reverse Mortgages:
- If you’re looking for a loan to make a purchase, top-rated personal loan companies are a great alternative.
- On the other hand, if you plan to use the funds for everyday essential purchases, like groceries and gas, cash-back cards are the way to go.
- However, if your goal is to consolidate debt and save money, consider exploring top-rated debt consolidation companies.
What’s an HECM?
Home equity conversion mortgages, also known as HECMs, are among the most common types of proprietary reverse mortgages. They are only available to homeowners who are 62 or older and allow them to stay in their homes. HECMs can have lower interest rates than regular single-purpose reverse mortgages, but other product types might offer higher borrowing limits and lower fees.
Many people think of HECMs like home equity loans, though there are no regular monthly payments. In 2023, HECMs had a borrowing limit of just under $1.1 million, up from $970,800 in 2022. Typical requirements for HECM borrowers include:
- Must be at least 62 years old
- Must have paid a considerable amount toward the existing mortgage and have equity in their home
- The property must be the borrower’s primary residence
- There cannot be any federal debt, and the loan must be in good standing
- The borrower must be able to maintain the property and make timely payments toward taxes, insurance, and HOA fees if there are any
- HECM borrowers must attend a consumer information session held by a Department of Housing and Urban Development, or HUD-approved counselor
Reverse Mortgage Terminology
Like with any financial product or private loan, reverse mortgages come with many terms and definitions that you’ll need to know before getting started. These are some of the most common terms and what they might mean for you and your reverse mortgage.
- HECM: Home Equity Conversion Mortgage- Available to borrowers 62 years old or older
- Appraisal: A document that shows the home’s value and compares it to comparable properties in the area
- Deed-in-lieu of foreclosure: An agreement between the lender and borrower in which the borrower signs over the deed to halt the foreclosure process
- Default: Default refers to a borrower’s inability to stay in compliance with the loan terms and requirements, which for a reverse mortgage includes staying current with taxes and insurance, maintaining the property’s condition, and using the home as a primary residence
- Equity: Equity is the home’s current value minus any amount owed on a mortgage or loan. It is generally viewed as the owner’s value in the property or how much they would receive after a sale and mortgage payoff
Foreclosure: A foreclosure happens when the lender takes ownership of a property after the owner can no longer meet the loan requirements.
Private Reverse Mortgage Pros and Cons
Pros
- You can stay in your home
- You are not taxed on reverse mortgage income
- You won’t have to pay more if the loan balance exceeds your home’s value
- Heirs have a few options to pay off the loan balance
Cons
- Many reverse mortgages come with expensive fees
- Reverse mortgages may impact eligibility for other programs, like social security
- You still have to keep up with home expenses like repairs and insurance
Things to Know About a Private Reverse Mortgage
Reverse mortgages can be a great option for some homeowners to gain access to their home’s value, but they’re not for everyone. There are minimum age requirements that could limit reverse mortgages to borrowers age 55 in some cases, but usually 62 years old. While there are often expensive fees and origination costs, reverse mortgages don’t require monthly payments like traditional mortgages, and they allow the homeowner to stay at the property until they die or move out for other reasons.
Because they are often marketed to older buyers who might not be as tech-savvy as others, some people find themselves caught up in a scam. That could cause them to pay much more in fees or, in the worst case scenarios, lose their homes. For that reason, it’s important to do research on private reverse mortgage lenders and make sure that you start the process armed with as much information as possible.
Reverse Mortgage Home Maintenance Requirements
Some loans may have looser or more intense requirements, but in general, borrowers must maintain the home and stay up to date with repairs. The rules may include:
- Maintain the foundation and structural integrity of the home
- Prevent or repair insect damage, such as from termites
- Remove or repair mold and mold damage
- Maintain the home’s interior and fix safety concerns
Reverse Mortgage Example Problems
According to the Consumer Financial Protection Bureau, private reverse mortgages don’t come without risks, and some of the more common problems for borrowers come from property taxes, insurance, and maintenance requirements. If the borrower can’t pay taxes or other required expenses, they could be at risk of default or foreclosure in the worst cases. Reverse mortgages can also make selling the home more difficult, and paying back the loan can take a huge chunk of the sales proceeds due to the constantly increasing balance.
Once the borrower dies or moves, the loan is due, which can put pressure on surviving family members. While some lenders offer a 30-day grace period to allow the heirs time to decide on the best path forward, that’s still an incredibly short time to make such an impactful and significant financial decision.
Can You Lose Your House With a Reverse Mortgage?
In short, yes, you can lose your home with a reverse mortgage. The lender can hold you in default if you fail to maintain the home or keep up with regular expenses like taxes and insurance. Lenders can also pursue foreclosure if the homeowner does not use the residence as their primary home, but the most common reason for borrowers losing their homes is related to falling behind on taxes and insurance costs.
Private Reverse Mortgage Alternatives
Reverse mortgage requirements and fees can put them out of reach for many borrowers, especially if they fall below the age limits. For these people, there are several solid alternatives that offer similar benefits with more approachable requirements. Home equity lines of credit or loans are great options for people who don’t meet the age requirement, and some homeowners are eligible for cash-out refinancing. That type of loan lets borrowers take advantage of their home’s equity but requires monthly payments to stay current.
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