The Reverse Mortgage Process

The Reverse Mortgage Process

Homeowners over the age of 62 can often find themselves in need of significant funds to cover expenses like monthly mortgage payments, healthcare expenses, home modifications and improvements, or to supplement their income during retirement. If you can relate and you own your home, you have the option to tap into your home’s equity without having to sell it. This can be achieved through a reverse mortgage loan.

The reverse mortgage process involves several key steps that homeowners need to follow to access the equity in their home. Below, we’ll walk you through those steps and outline important details you should consider.

What is a Reverse Mortgage?

A reverse mortgage is a specialized loan designed for senior homeowners, allowing them to access a portion of their home’s equity. Also referred to as Home Equity Conversion Mortgages (HECMs), reverse mortgages provide homeowners with tax-free² cash that can be used for various purposes, such as lifestyle enhancements or medical expenses.

Some people might confuse a reverse mortgage with a traditional home equity line of credit, but there are key differences. A reverse mortgage does not require borrowers to make monthly mortgage payments.* Instead, it allows the borrower to defer repayment, thereby increasing their cash flow.

Just like with a traditional mortgage, the home serves as collateral, but unlike a traditional mortgage, the borrower is not required to make monthly payments. The borrower is, however, still responsible for paying property taxes, insurance, HOA fees and maintaining the home. The reverse mortgage remains in place as long as the borrower continues to live in the home as their primary residence and complies with loan terms.

How Does a Reverse Mortgage Work?

A reverse mortgage works just like the name suggests. With a typical mortgage, borrowers are required to make monthly payments to the mortgage lender. With a reverse mortgage loan, the lender lends you money from the equity in your home, and those loan proceeds, plus interest, aren’t paid back until a qualifying event occurs; typically moving out of the home or passing away.*

When you get a reverse mortgage, you will receive an advance on your house’s equity. You can remain living in the home and retain the title to your residence. Many seniors who consider taking out a reverse mortgage receive Medicare or Social Security benefits, so they might be hesitant to take out a loan. Luckily, the loan proceeds are not taxable², so they shouldn’t affect any federal benefits you receive.

3 Types of Reverse Mortgage Loans?

If you would like to explore reverse mortgages, you have several options to consider. Depending on your needs, you may find one type of reverse mortgage more suitable than another. Our experienced loan officers will be sure to present you with all viable loan options.

Proprietary Reverse Mortgage

Proprietary reverse mortgages work by converting some of your home’s equity into non-taxable² cash. These are private loans from the lender, rather than by federal or local government agencies. Because they are not federally insured, proprietary reverse mortgages do not adhere to the limits and requirements set by the Federal Housing Administration (FHA). However, third-party counseling is still required for these privately funded loans. This is to ensure that you fully understand the loan's costs and financial implications, helping you make an informed decision.

One of the key advantages of a proprietary reverse mortgage is the potential to borrow more money than with a federally insured reverse mortgage. This is particularly beneficial if your home has a high appraised value and a low mortgage balance. In such cases, you could receive a larger loan advance through a proprietary reverse mortgage.

Single-Purpose Reverse Mortgage

The most economical option for homeowners is the single-purpose reverse mortgage. These loans are typically offered by state and local government agencies, as well as non-profit organizations, to homeowners with low or moderate incomes. However, they are not as widely available as other reverse mortgage options.

As the name implies, a single-purpose reverse mortgage can only be used for one specific purpose, unlike other reverse mortgage types that offer more flexibility in how the funds are used. The lender will specify how the funds must be spent, such as for home improvements, property taxes, or essential home repairs.

Home Equity Conversion Reverse Mortgage (HECM)

The most popular reverse mortgage option is the Home Equity Conversion Mortgage (HECM). HECMs are federally insured reverse mortgages, insured by the Department of Housing and Urban Development (HUD). Unlike a single-purpose reverse mortgage, a HECM offers more flexibility, allowing you to use the funds for almost any purpose.

Before pursuing a HECM, there are several factors that will determine how much you can borrow based on your home’s equity, including:

• Loan interest rates
• The appraised value of your home or max claim amount, which is $1,209,750 (as of January 1, 2025)
• The age of the youngest borrower or non-borrowing spouse

Additionally, obtaining a HECM requires reverse mortgage counseling. This is to ensure that you fully understand the loan's costs and financial implications, helping you make an informed decision.

There are several disbursement options available with a HECM:

• Fixed monthly cash payments for a set period
• Fixed monthly cash payments for as long as you live in the home
• A line of credit, allowing you to withdraw funds as needed for any purpose
• A single lump sum cash disbursement
• A line of credit with scheduled payments

There are limits on how much you can borrow during the first year, known as the initial principal limit. In most cases, you can access up to 60% of your initial principal limit within the first 12 months.

Considerations About Reverse Mortgage Loans

Although reverse mortgages may seem straightforward when you look at their basic definition, the process can be more complex due to the requirements set by reverse mortgage lenders, the Housing and Urban Development Agency (HUD), and the Federal Housing Administration (FHA).

Before pursuing a reverse mortgage, eligible homeowners should consider the following:

• Interest Rates May Vary: Most reverse mortgages have adjustable interest rates, meaning they fluctuate with the market. While you can obtain a Home Equity Conversion Mortgage (HECM) with a fixed rate, it typically requires you to take the loan as a lump sum, which may result in a smaller payout than if you chose a variable rate loan.
• Upfront Costs: Lenders often charge origination fees and closing costs. In addition, reverse mortgages require counseling, which is an upfront cost and may require a mortgage insurance premium, which adds to the loan’s expenses.
• Ongoing Home Expenses: While you won't have monthly mortgage payments with a reverse mortgage, you’ll still be responsible for other financial obligations, such as property taxes, homeowners insurance, and utilities.* If you neglect these obligations, the lender may place the loan in default and require immediate repayment. Some lenders may also require a financial assessment to set aside funds for taxes and insurance.
• Loan Balance Will Grow: Just like other loans, a reverse mortgage accrues interest. Each month, the interest increases the loan balance, but you have the option of making voluntary payments at any time to reduce the amount owed.
• Impact on Home Equity: Since a reverse mortgage uses your home’s equity, it may reduce the amount of assets you can pass on to your heirs. However, with a HECM, your heirs can repay the loan to keep the home, and they may end up paying less than its appraised value.

The Reverse Mortgage Loan Process

Step 1: Research

Congratulations! You’ve already taken the first step to better understand your options for a reverse mortgage by reading this article. It's important to take the time to educate yourself about the reverse mortgage process. To enhance your research, you can also refer to trusted resources such as the Department of Housing and Urban Development (HUD) and the National Reverse Mortgage Lenders Association (NRMLA). Additionally, consulting with a reverse mortgage specialist can help you navigate your options. At Smartfi Home Loans, we offer valuable resources and experienced mortgage specialists to assist you in exploring the best options for your situation. To speak to a mortgage specialist today, contact us at (866) 944-0743.

Step 2: Initial Inquiry

After selecting a lender, the next step is to reach out to them directly or submit an initial online inquiry with details about your property and any existing loan (if applicable). This will start the process with a licensed loan officer who will review your financial situation and goals. They will help you explore the loan options that best suit your needs.

Step 3: Complete Reverse Mortgage Counseling (Required)

To ensure you have the knowledge and tools to make an informed decision, you’ll be required to complete a 1–2-hour counseling session with an independent HUD-approved counselor. The counseling session can be completed either in person or by phone, depending on your preference.

While you could complete the counseling after starting your loan paperwork or choosing a lender, it’s best to wait until you have a reverse mortgage lender to work with. A reverse mortgage specialist can help prepare you for the session and provide a list of counselors who can assist you.

Step 4: Submit Completed Application

Once you have your counseling certification and required documentation together, you will submit everything to your lender.

Completing the loan application package legally authorizes the lender to initiate the reverse mortgage loan process. Until the company receives the finished loan documents, they cannot begin the loan process, including working with the title company and scheduling an appraisal for the house.

Step 5: Coordination of the Appraisal

As part of the loan process, your home will need to be appraised by a third-party, HUD-certified appraiser. After submitting your loan documents, including the counseling certificate, the lender will arrange for an appraiser to assess your home's value. Appraisal companies follow specific guidelines to determine this value. Once the appraisal is complete, the loan documents will be reviewed and finalized for closing.

Step 6: Underwriting

The lender will review all preliminary reports and the loan package. If everything is accurate and complete, they will forward the documents to the underwriter for approval of the reverse mortgage. The underwriter will carefully review the documents and may request additional paperwork if needed to finalize the approval.

Step 7: Loan Closing

Upon underwriting approval, your final loan documents will be delivered to a notary for signing. At that time, you can make sure the origination fee, interest rate, and loan amounts are correct.

Once your closing documents are signed (and, if applicable, your three-day rescission period is over), the funds will be released to you. A recission period is a time when you can cancel the loan with no penalty.

Step 8: Disbursement of Loan Proceeds

Your lender will typically offer several options for disbursing the proceeds from your reverse mortgage, such as:

• A lump sum payment, where you receive the entire amount of your home equity at once
• A line of credit that allows you to withdraw funds as needed
• Monthly payments for a specific period or for as long as you remain in the home
• A combination of the above options, offering maximum flexibility. For instance, you could take a small lump sum upfront, receive monthly payments, and keep a line of credit available for unexpected expenses.

If you decide to proceed with the loan, you will receive your reverse mortgage proceeds. The lender will wire the funds to a settlement agent at the title company, who will conduct a final check to ensure that the property is free of any liens.

Summary

A reverse mortgage should be used responsibly and is not the right choice for everyone, but it may be a good option for those who are near or in retirement wanting more financial freedom and stability. Before making this decision, it is recommended that you talk to your family members and/or financial advisor.

If you are ready to get the process started, contact us today at (858) 389-4214.

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