Eligible seniors age 62 and older can use a reverse mortgage to create income for retirement. Before you can get a reverse mortgage, however, you first have to complete approved reverse mortgage counseling. This counseling session is designed to ensure that you understand the responsibilities and financial implications involved. Knowing what to look for can help you find a reputable reverse mortgage counselor.
- A reverse mortgage is a financial product that allows eligible homeowners to convert their equity into income.
- HECMs (home equity conversion mortgages), the most common type of reverse mortgage, are backed by the federal government.
- Homeowners must complete reverse mortgage counseling before they can apply for a home equity conversion mortgage.
- The Department of Housing and Urban Development offers online resources to help homeowners find a trusted reverse mortgage counselor.
How a Reverse Mortgage Works
A reverse mortgage allows homeowners to withdraw their equity but it's not the same as a home equity loan or home equity line of credit (HELOC). When a homeowner takes out a reverse mortgage, they can receive a lump sum or series of installment payments that can be used for medical expenses, day-to-day living expenses, or virtually anything else. Fees and interest accrue on the reverse mortgage balance but no payment is due as long as the homeowner lives in the home. If the homeowner sells the home, moves out, or passes away, the entire reverse mortgage balance becomes payable.
A home equity conversion mortgage (HECM) is a reverse mortgage that's backed by the federal government. This type of reverse mortgage requires that homeowners:
- Be 62 or older
- Own their home outright (or have paid off most of the mortgage)
- Live in the home as a primary residence
- Have financial resources to pay certain expenses, including property taxes, homeowners' insurance, HOA fees, maintenance, repairs, and upkeep
- Not be delinquent on federal debts
- Attend HUD-approved counseling
Home equity conversion mortgages have closing costs and fees, including mortgage insurance premiums (MIPs). The amount you can borrow can depend on the amount of equity you have in the home, your age, and current interest rates.
Failing to pay property taxes and homeowners' insurance in a timely manner could result in the entire reverse mortgage balance becoming payable.
What Does Reverse Mortgage Counseling Involve?
Reverse mortgage counseling must be completed before a homeowner can apply for a home equity conversion mortgage. It's up to you to choose a lender and schedule a meeting. The Department of Housing and Urban Development encourages in-person counseling sessions whenever possible, though it does allow approved counselors to offer phone sessions when a face-to-face meeting isn't doable.
HUD requires reverse mortgage counselors to discuss certain topics with homeowners. If you're meeting with a reverse mortgage counselor, you can expect to talk about:
- Your financial needs and circumstances
- Features of a reverse mortgage and how they work
- Financial responsibilities associated with a reverse mortgage
- Reverse mortgage costs, including closing costs, fees, interest, and mortgage insurance
- Tax implications of a reverse mortgage
- Reverse mortgage alternatives
- How to spot and avoid reverse mortgage scams and financial elder abuse
Reverse mortgage counselors can charge a fee for their services. HUD allows reverse mortgage counselors to establish fees that are "reasonable and customary," though they cannot charge fees in excess of the level of services provided.
So why is this counseling necessary? Reverse mortgage counseling is designed to ensure that homeowners fully understand what they're agreeing to when taking on a reverse mortgage. For example, while the homeowner may have no obligation to repay the reverse mortgage balance while they live in the home, they could leave debt behind for their heirs when they pass away. If you'd rather not do that, you might consider another option for withdrawing equity instead.
Purchasing a life insurance policy and naming heirs as beneficiaries can ensure they have the money to pay off a reverse mortgage balance after you're gone.
How to Find a Trustworthy Reverse Mortgage Counselor
The easiest way to find a reputable reverse mortgage counselor near you is to search the reverse mortgage counselor roster of the U.S. Department of Housing and Urban Development (HUD). In order to be listed on this roster, counselors must complete certain education and training as well as a background check. An HUD reverse mortgage counselor can be located online or by phone at 1-800-569-4287.
If you're interested in connecting with a counselor that offers phone meetings you can also search HUD's list of intermediaries that provide HECM counseling nationwide. This is a shorter list than the reverse mortgage counseling roster but you can find reputable organizations to work with here if you're unable to schedule an in-person meeting.
Once you schedule a reverse mortgage counseling session, your counselor should provide you with an informational package and some other documents to help you prepare. These materials are designed to answer questions you might have about a reverse mortgage and provide an overview of the pros and cons. During the session, you'll discuss the details of reverse mortgages and your finances to help decide if getting one makes sense for you.
After the counseling session, you'll receive a certificate of completion. You'll need to have this to move forward with your HECM application. Your counselor may also follow up to see if you have any lingering questions about reverse mortgages.
A reverse mortgage counselor can withhold a counseling certificate if they believe a homeowner does not have an adequate understanding of how a reverse mortgage works.
What Is HECM Counseling?
HECM counseling is a required counseling session for homeowners who are interested in getting a home equity conversion mortgage. During this counseling session, the counselor will review the homeowner's financial situation, discuss the features of reverse mortgages and their pros and cons, explain the costs of reverse mortgages, and outline the identifying features of reverse mortgage scams.
Why Is Counseling Required for Reverse Mortgages?
Reverse mortgages can have significant financial implications for homeowners and their heirs. Reverse mortgage counseling ensures that homeowners fully understand the benefits and risks so they can make an informed decision about whether a reverse mortgage is right for them.
How Does a HECM Loan Work?
A home equity conversion mortgage works by allowing a homeowner to convert their equity into income. No payment is due toward the reverse mortgage balance while the homeowner is using the property as a primary residence. If the homeowner sells the home, moves out, or passes away, the principal balance along with accumulated fees and interest becomes payable immediately.
The Bottom Line
Reverse mortgages may be better suited to some homeowners than others. Completing reverse mortgage counseling can help you to decide if it's an option worth considering or whether something like a home equity loan or HELOC might be more appropriate. Connecting with a trusted reverse mortgage counselor is the first step, and HUD provides resources to make conducting your search easier. Once you complete counseling, you can then move on to researching the best reverse mortgage companies to find a lender to work with.