Reverse Mortgages may be the most misunderstood aspect of residential real estate. There has been a lot of bad press and negative word-of-mouth over the years which has unfairly given them a bad reputation. The fact is, if you are age 55 or above, you absolutely owe it to yourself to learn about the Reverse Mortgage, as in the right situation if can be be a life-changing event, giving you a comfortable lifestyle you didn’t think could ever have. It’s time to de-mystify the Reverse Mortgage right here, right now!
Just so you know, I am a licensed lender and real estate broker; Reverse Mortgages are one of the 3000 loan products I offer as a loan originator here in California. (NMLS# 2246767). It concerns me that when I bring up the words ‘Reverse Mortgage”, the most common reaction is a negative one. That’s very sad, because the fact is, that all Reverse Mortgages in effect give you MORE MONEY to spend, and when you pass away, HECM Reverse Mortgages, in many cases give your family FREE MONEY. Correct me if I’m wrong, but I believe most people like free money, right? Think about how your lifestyle would improve if you did not have a monthly mortgage payment! You’ve been working hard building up your equity in your home all these years, and with a Reverse Mortgage you can reward yourself for that effort by having that much more money to spend every month. So if you are a homeowner aged 62 or older, please real the following article or watch the youtube video with an open mind and decide if a Reverse Mortgage is worth considering for you and you’re family. Remember, it’s not for everyone – it got that bad press because it was sold to people who were not in the right situation for one – but it might be for you.
Benefits of the Reverse Mortgage
The most obvious benefit is the lifestyle change. The ‘perfect’ Reverse Mortgage borrower (1) Has been paying the mortgage on their current home for many years and has built up a lot of equity but has not paid off the mortgage, (2) is dreaming of a more comfortable lifestyle, with extra money for travelling & vacationing, paying for home improvements, purchasing a nicer car, and not stressing over making their monthly bills, and (3) living in the home they plan to live the rest of their life in. In my opinion, most of the problems with reverse mortgage have come from people who didn’t understand that if they moved, then they would need to pay off the mortgage, just like any mortgage. But if you’re living in your final ‘dream home’, then think of this: If you have a HECM Mortgage with, say $500,000 in equity, and you live long enough that your loan balance ism, say, $750,000 when you pass away, that extra $250,000 that makes your home “underwater” is forgiven by HUD so that your heirs will not have to pay that money back. It’s a form of Government Mortgage Insurance for your loved ones. And if you receive ‘cash out’, these payments are not taxable and won’t affect your Social Security or Medicare benefits as they are considered loan proceeds and not income.
What exactly is a “Reverse Mortgage”?
In general, a Reverse Mortgage is a home loan that allows eligible elderly homeowners to borrow against their home’s equity without the obligation of making monthly mortgage payments. This loan product offers borrowers the flexibility to receive funds as a lump sum, monthly installments, a line of credit, or a combination of these methods. Unlike a Home Equity Loan, Home Equity Line Of Credit (HELOC), or traditional mortgage, a Reverse Mortgage doesn’t require monthly payments to pay it back. Repayment occurs upon the sale of the home, if it is no longer the principal residence, if homeowners fail to meet other requirements such as paying the property taxes and insurance, or upon the homeowner’s passing. In this California Reverse Mortgage Guide, we’ll give you the real facts: the different types, what’s required to get one, borrower rights, and the application process.
The federally-backed Reverse Mortgage provides homeowners aged 62 or older with a way to borrow against the equity in their homes. Oh and by the way, there are private Reverse Mortgages for homeowners as young as 55.
Types of Reverse Mortgages Available in California
There are several varieties of reverse mortgages, so it’s important not to lump them all together. In California, qualifying homeowners can access four types of reverse mortgages:
1. Home Equity Conversion Mortgage (HECM):
The most common reverse mortgage is a federally backed loan called a “Home Equity Conversion Mortgage” or “HECM.” Also referred to as HECM loans, these are the most prevalent type of reverse mortgages provided by many lenders, including Mutual of Omaha Mortgage and NEXA Mortgage LLC. HECM reverse mortgages are supported by the Federal Housing Administration (FHA) and regulated by the U.S. Department of Housing and Urban Development (HUD). They are exclusively available to borrowers aged 62 and older. Now if you’re between 55 and 61, don’t feel left out, as there are Privately-back Reverse Mortgage products for those age 55 or older that have more flexible guidelines. This guide will focus on the federally-backed HECM reverse mortgages, which have no specific usage rules but are subject to an FHA lending limit, set at $1,149,825 for 2024.
2. Single-Purpose Reverse Mortgage:
Representing the least common variant, single-purpose reverse mortgages, also known as property tax deferral programs or deferred payment loans, are solely available to homeowners aged 62 or older. These reverse mortgages are earmarked for a specific purpose approved by the lender, typically property taxes and necessary home repairs. They provide a one-time lump-sum advance. Most single-purpose reverse mortgages are issued by state and local government agencies and nonprofit organizations to low-to- moderate-income homeowners who may have no other means of covering these crucial expenses . Because of their limited scope that focuses on the home itself, borrowers typically find these easier to obtain and at lower interest rates than other types of reverse mortgages.
3. Jumbo Reverse Mortgage:
This type of reverse mortgage caters to a fairly niche crowd: older people who own a high-priced home yet are short on cash and have no cheaper alternative means to secure it. Jumbo reverse mortgages are proprietary loans that exceed the FHA lending limit of $1,149,825 (as of 2024). Each lender labels these reverse mortgages independently, and they lack FHA backing. While jumbo reverse mortgages typically come with higher interest rates, they do not require mortgage insurance premiums. Eligibility requirements vary, although common conditions include the borrower owning more than 50% of their home equity, living in the home as a primary residence, and being at least 55 years old.
4. HECM for Purchase (“H4P”):
The Home Equity Conversion Mortgage for Purchase (HECM for Purchase) is a unique financial tool enabling homeowners to finance part of their new home with a reverse mortgage. This is done in conjunction with a substantial down payment from the proceeds of a prior home sale, allowing older homeowners to resize their living space in retirement without taking on monthly payments. The funds can come from your savings or the sale of your previous home or personal assets (e.g., stocks)—but you can’t use “gap financing” or other types of interim financing like a credit card cash advance or seller financing. HUD announced in April 2024 that ““FHA will move forward with its proposal that permits contributions by the property seller, real estate agent, builder, or developer to HECM for Purchase borrowers’ closing costs.” Like standard HECMs, the 62-and-up age restriction applies, and you don’t have to repay the loan until you sell the home, move out, pass away, or fail to meet the loan obligations (e.g., fall behind on your property taxes or homeowners insurance). Any home that you buy with an HECM for Purchase must meet FHA property standards and flood requirements. Eligible property types include:
- Single-family homes (one- to four-unit properties)
- Manufactured homes (built after June 1976)
- Townhouses and Condominiums
- Properties in planned unit developments (PUDs)
- New-construction homes with a certificate of occupancy (CO) issued by closing
Federal Reverse Mortgage Eligibility Requirements
In order to qualify for a HECM Reverse Mortgage loan in California, you must meet the following requirements:
- At least one homeowner must be at least 62 years old
- The home must be the primary residence of the homeowners
- Homeowners need to have equity in their home
- The home must be in good condition
- The homeowners must be able to continue to pay the property taxes, homeowner’s insurance, HOA fees (if applicable), and maintain the home
- The property must be eligible for a reverse mortgage: a single-family home, a two-to-four-unit property in which the homeowners occupy one of the units, an FHA-approved condominium, or an approved manufactured home
- Any prospective borrower must also complete a counseling session with a third-party counseling service that is approved by HUD
California Reverse Mortgage Safeguards
In addition to the safeguards provided by the FHA and HUD, California introduces specific regulations tailored to homeowners residing in the Golden State. Here are the rights afforded to California Reverse Mortgage borrowers:
Right to Cancel:
Upon completion of the mandatory counseling session, California homeowners enjoy a seven-day window before lenders can file the application or impose any fees.
Disclosures:
Before applicants undergo mandatory counseling, lenders must furnish homeowners with the Reverse Mortgage Worksheet Guide and the Important Notice to Reverse Mortgage Loan Applicant.
No Annuities from Lenders:
Lenders are explicitly barred from promoting annuities to homeowners or referring them to annuity sellers.
Contract Language:
Lenders are obligated to provide contracts in Chinese, Korean, Spanish, Tagalog, or Vietnamese—based on the homeowner’s primary language—before signing loan documents.
In California, reverse mortgage lenders operate under licenses granted by the Department of Financial Protection and Innovation (DFPI) through the California Residential Mortgage Lending Act. The oversight of reverse mortgages in California falls under the jurisdiction of the California Department of Real Estate (DRE).
Reverse Mortgages and Estate Planning
For purposes of estate planning, the HECM Reverse Mortgage is an idea worth exploring. It’s true that when your home is no longer used as a primary residence, the cash, interest, and other finance charges from the reverse mortgage loan must be repaid. However, all proceeds beyond such amounts owed on the reverse mortgage belong to your spouse or estate and no debt is passed along to the estate or heirs. This makes the reverse mortgage option an appealing idea for older homeowners who are having trouble making ends meet but wish to avoid passing on debt to family members.
Heirs who want to keep the home by paying off the debt must repay either the loan balance or 95% of the appraised value, whichever is less. Alternatively, they could sell the home to pay off the debt and generate cash, which is the most common option, according to the Consumer Financial Protection Bureau. If the property sells for less than the amount of debt, the heir would receive no cash from the sale, but would not be responsible for paying outstanding debt after the proceeds from the home sale are applied because FHA insurance covers the lender’s shortfall.
If you are age 55 or older and are considering making an Estate Plan (Living Trust, Power of Attorney, Health Directive, etc.) please go to StuartSimone.com to schedule a FREE LEGAL CONSULTATION.
Reverse Mortgages: Not for Everybody… but maybe for You?
Hopefully you now feel comfortable with the concept of reverse mortgages. At first it might seem counter-intuitive if not hopelessly confusing, but with just a little research, such as what we just proved you, the mysteries are solved. Maybe this video has made you reverse course in your opinion of these loan products.
If you start getting confused, just remember, at it’s most simple level, a Reverse Mortgage is a ‘negative amortization’ mortgage loan; each month that you do not pay, your loan balance goes up, not down. So if you start with $500,000, you can “miss payments” up to $500,000 before becoming “underwater.” The bad news is, if you’re under water you can’t pay off the loan in full if you decide to sell. The great news is, if it is a HCEM loan, then it is a “non-Recourse loan.” That means when you sell, or when you pass away, the sale proceeds will go toward the loan balance, and mortgage insurance will pay for any remaining balance. So if you took out a $500K loan and owed $750 when you sell or pass away, the $250K is paid off by the Government. Because reverse mortgages are non-recourse loans, you and your heirs are not responsible for the remaining balance if the sale proceeds aren’t enough. The FHA will reimburse your lender from its insurance pool, so you won’t owe more than the amount you borrowed. So like I said at the top, it can be like “free money from the Government.” When you consider how much the Government usually takes from us in taxes, that’s really saying something.
Again, “free money” or not, this loan product is not for everybody. Before you decide to take out a Reverse Mortgage, we urge you to consider all your possible future plans. Just like anything else in life, there are risks and downsides that must be considered. For a FREE CONSULTATION on Reverse and other types of Home Financing, please go to StuartSimone.com.
We hope you enjoyed this video and learned something today, and we hope you watch some of our other videos here at Rock Real estate, where we are here to maximize your most important asset, your real estate.
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