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.
- A reverse mortgage allows homeowners to withdraw equity from their homes without having to make payments to a lender.
- Reverse mortgages that are backed by the federal government are called home equity conversion mortgages (HECMs).
- HECMs have several approval requirements, including attending approved reverse mortgage counseling.
- Reverse mortgage counseling typically entails a fee, which can vary by counseling agency.
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.
HECMs also require borrowers to pay both an up-front and an annual mortgage insurance premium (MIP).
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
HUD maintains an online database of reverse mortgage counselors who offer in-person and phone meetings.
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.
HUD authorizes the waiver of reverse mortgage counseling fees for homeowners who are:
- Below 200% of the federal poverty level
- In mortgage delinquency
- In default
- Or experiencing homelessness
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.
Why is counseling required for a reverse mortgage?
Reverse mortgage counseling is required to ensure that homeowners understand the financial responsibilities involved as well as the potential risks. Homeowners cannot be approved for a home equity conversion mortgage (HECM) without first attending approved reverse mortgage counseling.
What is HECM counseling?
HECM counseling is reverse mortgage counseling for homeowners who are interested in an HECM. During an HECM counseling session, the counselor will discuss the homeowner’s financial needs and situation, the costs of a reverse mortgage and how it works, and what responsibilities are conveyed to the homeowner and/or their heirs for repaying the reverse mortgage balance.
What are the requirements for a reverse mortgage?
To apply for an HECM, homeowners must be age 62 or older and either own their home outright or have paid down most of the mortgage. They cannot be delinquent on any federal debt and must have financial resources to pay for property taxes, homeowners insurance, homeowners association (HOA) fees, and other costs. And borrowers must complete approved reverse mortgage counseling.
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.