Does the Government Steal Your House When You Get a Reverse Mortgage?
A reverse mortgage is a loan that enables homeowners aged 62 or older to borrow against the equity in their home without having to sell the home, give up title, or take on a monthly mortgage payment.
These loans are very popular but are often misunderstood. A common reverse mortgage misconception has to do with the role the government plays in the loan program.
Here we explore 9 things the government does and does NOT do for reverse mortgages.
1. The Government Sets the Rules and Regulations for the HECM Reverse Mortgage
The government is heavily involved in the most popular type of reverse mortgage — the Home Equity Conversion Mortgage (HECM). The government agency that regulates these loans is the Department of Housing and Urban Development (HUD). They are part of the Federal Housing Administration (FHA).
Sometimes these loans are referred to as the FHA reverse mortgage, the HUD reverse mortgage or government reverse mortgages.
There are other kinds of reverse mortgages issued by private banks, but only HECM loans come with the protections and regulations afforded by HUD.
2. The Government Does Not Issue the HECM Reverse Mortgage — Only Approves Banks
The government does not ever issue a reverse mortgage. Borrowers do not get the loan from HUD, the FHA or any other government agency. (So the terms FHA reverse mortgage and HUD reverse mortgage are not accurate terms.)
The government does approve banks to make the HECM reverse mortgage loans. Banks must be licensed by HUD to be able to make HECM reverse mortgage loans.
3. The Government Insures These Loans for the Borrower
With government insurance, borrowers can rest assured that they will receive their loan advances or payments on time and as agreed upon under the terms of the loan. If your lender goes out of business, for example, that insurance protects the borrower from any missed payments.
4. The Government Insures These Loans for the Lender
The government also assumes the loan when it meets a certain threshold based on the amount of proceeds that have been received by the borrower. At that point, the government’s contracted servicer will become the servicer for the loan, rather than the servicer contracted by the lender.
5. The Government Pays for Any Losses on the Loan
If the reverse mortgage borrower owes more on the reverse mortgage than the home is valued at the point the loan comes due, then the government pays the difference.
The federally-insured HECM loan is a non-recourse loan, meaning the Federal Housing Administration (FHA) covers the remaining balance of the loan if the sale of the home does not cover the balance of the loan.
6. The Government Determines How Much You Can Borrow
The borrower’s loan amount is based on a formula developed by the FHA and HUD that accounts for the borrower’s age, his or her spouse’s age, the home’s value, existing mortgage debt and current interest rates.
7. The Government Manages the Reverse Mortgage Counseling Process
An important part of the reverse mortgage application process is a mandated counseling session.
These sessions are designed to make sure the borrower understands all aspects of a reverse mortgage. You are also required to explore alternatives to the loan during the counseling.
These sessions can be very useful to borrowers. You can learn about the process in this post: Reverse Mortgage Counseling. The government manages and approves the counseling agencies. They are not associated with the banks in any way.
8. The Government Creates Other Rules and Regulations Related to Reverse Mortgages
Perhaps because they will ultimately have to pay for bad loans, HUD creates and administers the rules and regulations that govern the reverse mortgage program.
In addition to determining how much you can borrow and mandating counseling, other rules set by HUD include:
- Requirements like maintaining home insurance and staying current with taxes.
- Determining some of the fee and interest structures banks can use for the loans.
- Mandate of a financial assessment to determine if you can afford to maintain your home after you secure a reverse mortgage. (A new set of rules implemented a financial assessment to help ensure borrowers will be able to remain current on the loan’s taxes and insurance upkeep, to avoid running the risk of default and subsequent foreclosure.)
- Definition of how spouses are protected by the loan.
The government is constantly monitoring reverse mortgage usage and often evolves the rules related to the loans. They also respond to feedback from agencies like the Consumer Financial Protection Bureau (CFPB) and AARP. Recent changes to the reverse mortgage program have made the financial product even safer for borrowers.
“Although these new requirements are more extensive than past requirements, they will ultimately serve to protect countless reverse mortgage borrowers from default as well as further contribute to making the federally-insured HECM one of the nation’s safest loan products in the market to date,” says reverse mortgage lender American Advisors Group, in a statement.
9. The Government Does NOT Ever Take Ownership of Your Home
Many people believe that the government ultimately gets the house when someone does a reverse mortgage. However, this is not true.
“There are a lot of myths,” Dan Larkin, divisional sales manager with Chicago-based PERL Mortgage, says about reverse mortgages. “Some people think the lender is going to be on the home’s title and will be able to take ownership of the home at some point, and that’s not true.”
Indeed, when taking out a reverse mortgage, the title of the home belongs to the borrower. The Consumer Financial Protection Bureau (CFPB) explains what happens when the borrower passes away or moves from the home:
“If you move out, sell the home, or the last surviving borrower dies, you or your estate will need to repay the loan,” the CFPB says in a statement. “The loan balance will include the amount you have received in cash, plus the interest and fees that have been added to the loan balance each month. To repay the loan, you or your heirs will probably have to sell the house. If there is money left over from the sale after repaying the loan, you or your heirs can keep the difference.”
Additionally, if your family wants to keep the home they can refinance with a regular mortgage and keep the home if they want and it makes financial sense for them.
How to Determine if a Reverse Mortgage is a Good Financial Move
When considering whether a reverse mortgage is right for you, it’s always best to consult with a financial planner or reverse mortgage expert. Additionally, there are online reverse mortgage calculators and reverse mortgage suitability quizzes that can help you assess whether or not a reverse mortgage is a good move for you.
“People often have a lot of questions, and it’s important to speak with someone who understands reverse mortgages and how they will impact the borrower’s financial situation,” Tutak says.