5 Facts You Need to Know About Reverse Mortgage Counseling

A reverse mortgage allows eligible homeowners to leverage their home equity for retirement income, without being obligated to make monthly loan payments to a lender. To qualify, there are different approval requirements that homeowners need to meet, including—if you get a government-backed home equity conversion mortgage (HECM)—the completion of reverse mortgage counseling.

If you’re considering a reverse mortgage, it’s important to understand what this counseling involves and when it’s necessary.

What Is a Reverse Mortgage?

A reverse mortgage is a special type of financial arrangement in which a homeowner is able to take equity out of their home. But unlike a home equity loan or a home equity line of credit (HELOC), the homeowner is not required to make any monthly payments to a lender. Instead, a reverse mortgage becomes payable when the homeowner sells the home, moves out, or passes away.

The aforementioned HECMs are reverse mortgages that are insured by the Federal Housing Administration (FHA). Homeowners may be eligible for an HECM if they:

• Are age 62 or older
• Own their homes (or have paid off most of their mortgage)
• Have financial resources (i.e., income, savings, investments, etc.) to cover property taxes, homeowners insurance, and maintenance, repairs, and upkeep for the home
• Use their home as their principal residence
• Are not delinquent on any federal debt
  

Married homeowners can add their spouse as a co-borrower if they’re age 62 or older. If they’re not, a spouse can still be added as an eligible non-borrower. Homeowners who take out a reverse mortgage, including an HECM, can expect to pay closing costs and interest to the reverse mortgage company. Interest and fees can increase the reverse mortgage balance that’s eventually due.

Reverse Mortgage Counseling Facts

Reverse mortgage counseling is required for homeowners who are interested in getting an HECM. This counseling must be completed with a counselor approved by the U.S. Department of Housing and Urban Development (HUD). If you’re considering an HECM, here are some things to know about reverse mortgage counseling.

1.. Counseling Must Be Completed Before Signing a Loan Application

HUD requires homeowners to complete reverse mortgage counseling before they even apply for a reverse mortgage. This stipulation exists to ensure that homeowners fully understand how reverse mortgages work and the financial responsibilities that they convey. It’s also important to note that the homeowner, not the reverse mortgage lender or the federal government, is responsible for scheduling a session with an approved counselor.

2. Homeowners Must Receive Pre-Counseling Materials

Before you sit down with an approved reverse mortgage counselor, you must first receive an informational packet. The counselor with whom you choose to work should provide you with the following:

• A copy of “Preparing for Your Counseling Session”
• A list of loan comparisons, so you can see what different lenders are offering
• A copy of the total annual loan cost (TALC) disclosure, which is required by the Federal Reserve Board for all reverse mortgage transactions.
• A loan amortization schedule, so you can see what costs you will incur over time with a reverse mortgage
• A copy of “Use Your Home to Stay at Home,” a guide to reverse mortgages published by the National Council on Aging

If your counseling session is approaching and you haven’t yet received these materials, it’s important to reach out to the counselor to get the packet.

3. Counseling Can Be Completed in Person or by Phone

You have the right to choose either an in-person or a telephone meeting when scheduling a reverse mortgage counseling session. The material covered during the session will be the same and includes a discussion of:

• Your financial needs and situation
• Reverse mortgage features
• Your responsibilities when you have a reverse mortgage
• Reverse mortgage costs
• Financial/tax implications of a reverse mortgage
• Reverse mortgage alternatives
• Warnings about reverse mortgage/insurance scams and financial elder abuse

4. Reverse Mortgage Counseling Fees May Apply

HUD authorizes approved reverse mortgage counselors to charge fees for their services. Reverse mortgage counselors can set fees that are “reasonable and customary,” though the fee cannot exceed a level commensurate with the counseling services received. A typical reverse mortgage counseling fee may be $125 or more.

5. Completing Counseling Doesn’t Guarantee Approval for a Reverse Mortgage

Completing reverse mortgage counseling by itself doesn’t guarantee that you’ll be able to get an HECM. If your counselor believes that you don’t fully understand the financial implications of a reverse mortgage or your obligations, they can withhold your counseling certificate. You may need to attend additional counseling sessions before you can obtain the certificate.

An application for an HECM can’t be completed without this certificate. And even when you have one, a lender may still deny your application for an HECM if you lack financial resources to cover basic homeownership costs or you’re behind on federal debt.

The Bottom Line

Completing reverse mortgage counseling is a necessary step if you’re planning to use an HECM to tap into your home’s equity. Before taking out a reverse mortgage, it’s important to understand how it works and what alternatives, such as a home equity loan, may be available. It’s also helpful to compare the best reverse mortgage companies to find a borrowing option with the most favorable terms.