How a Reverse Mortgage Works

A reverse mortgage is a loan that converts a portion of the equity in one’s home into cash. To qualify for a reverse mortgage, borrowers must be at least 62 years of age, own an approved property, and have little to no remaining mortgage balance. Borrowers who fit this profile might be able to use some of their equity to pay off their existing mortgage loan, cover unexpected expenses, or simply increase their quality of life. Getting a reverse mortgage is a huge decision. Before taking action, borrowers should take the time to understand exactly how a reverse mortgage works. Consumers who know how the loan process works will be more equipped to make an informed decision. rnHow a Reverse Mortgage Works: Understanding the Loan Process To understand how a reverse mortgage works, consumers must understand the loan process. Taking a reverse mortgage is not as simple as filling out an application. While this is part of the process, there is more to it than just that. The first step in taking a reverse mortgage is contacting a lender. A loan officer will provide the consumer with information and help determine whether a loan might be beneficial. After speaking with a loan officer, borrowers who are interested in beginning the loan process will need to meet with a counselor approved by the U.S. Department of Housing and Urban Development (HUD). This meeting can be done either over the phone or in person and typically lasts around one hour. The purpose of counseling is to ensure that borrowers understand exactly how a reverse mortgage works, the costs associated with a loan, and the long-term implications. After counseling, borrowers will fill out an application with their lender. Borrowers will also select their preferred payment method and provide their lender with the documentation needed to proceed. The lender will outline the costs of the loan and provide borrowers with the necessary disclosures. The next step is to order a home appraisal. This will help borrowers determine the value of their home and ensure that the property meets the guidelines set by the Federal Housing Administration (FHA). Once borrowers know what their home is worth, their loan officer will be able to tell them how much they are eligible to receive through a reverse mortgage. The loan officer will also discuss the specific terms of the loan and submit the loan for underwriting. After the loan has been approved, closing can be scheduled. To close the loan, the borrower will meet with their lender or title company and sign the final documents. rnHow a Reverse Mortgage Works After Closing Once the loan has closed, borrowers have three business days to cancel their loan. After the three-day period, the borrower’s payment will be sent. Payment will be received according to the option the borrower has selected. Borrowers may choose to receive their funds as a line of credit, lump sum, or monthly payments. If a borrower owes money on an existing mortgage loan, the balance will be repaid at this time. The last step in understanding how a reverse mortgage works is understanding when the loan must be repaid. A reverse mortgage must be repaid once a borrower dies, sells the home, or has not been living in the home for one year. Regardless of how long it takes to repay the loan, the amount owed can typically not exceed the value of the home. The exception to this would be if a borrower’s heirs decide to repay the loan and keep the home. In this case, the total balance must usually be paid. Once the lender is repaid, the loan will be fulfilled and any remaining equity will be the property of the borrower or borrower’s heirs.