What Is a Reverse Mortgage?

If you're a homeowner aged 62 or older, you may want to look into a reverse mortgage. This type of loan is available to homeowners who have equity in their homes, and it can give you access to additional funds during retirement.

Here’s a rundown on this popular alternative loan for seniors to help you understand if it's right for your financial needs and goals.

A reverse mortgage is a type of loan that lets a senior homeowner with a substantial amount of home equity borrow against that value and receive the money without an immediate repayment requirement. Reverse mortgages can be a source of cash for a senior with limited income who finds that the bulk of their net worth is tied up in their home.

How Does a Reverse Mortgage Work?

Unlike a conventional mortgage, where a homeowner makes payments to a bank or other lender, a reverse mortgage involves the lender making payments to the homeowner. The homeowner can elect to receive the proceeds from a reverse mortgage as a single lump sum, monthly payments or a line of credit. 

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Who Qualifies for a Reverse Mortgage?

Not everyone qualifies for a reverse mortgage. Consumers who are eligible to take out this special type of mortgage loan must meet certain requirements. In addition to being a minimum of 62 years of age, you (and your home) must also meet these criteria:

• The home in question must be the borrower’s primary home, where they spend most of their time each year. It can’t be a rental home or vacation property.
• The homeowner must either own the home outright or have a very low balance on their existing mortgage. If the homeowner still owes on the mortgage, they must be able to use the proceeds of the reverse mortgage to pay off the existing mortgage or otherwise pay it off during closing.
• Homeowners must not be delinquent on debts to the federal government, including federal student loans or tax debt. Homeowners may be able to use proceeds from the reverse mortgage to pay off federal debt to meet this qualification.
• Homeowners must be willing to set aside some of the proceeds from the reverse mortgage to pay ongoing costs of owning the home, such as repairs and maintenance costs, insurance and property taxes.
• The home in question must be in good condition. For homes that are not in the best shape, the lender may tell the homeowner what repairs are necessary to bring the home into compliance with property standards prior to writing the reverse mortgage loan.
• Consumers must undertake reverse mortgage counseling from a Department of Housing and Urban Development-approved agency. This counseling helps homeowners better understand the financial repercussions of this type of loan, eligibility concerns and alternatives to consider.

How — and When — Do You Pay Back a Reverse Mortgage Loan?

A reverse mortgage is usually only repaid when the last surviving reverse mortgage borrower either dies, sells or moves out of the home. If the home is sold, the proceeds must be used to first pay off the reverse mortgage before any profits can be used for other purposes.

If the family wants to keep the home, they would have to get a new mortgage to buy it and pay off the reverse mortgage. (For that reason, reverse mortgages may not be the best option if you want a family member to inherit your home.) In some cases, the title to the home may be signed over to the lender, who then sells it to recoup the investment. 

Repayment may also be expected by the lender early if the homeowner allows the home to fall into a state of disrepair or if the homeowner fails to pay homeowners insurance or property taxes on the home.