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Reverse mortgage: 6 questions
Reverse mortgage loans are complex and have many requirements. When you apply for a reverse mortgage loan — and even before you apply — there are a lot of questions to ask.
Here is a guide to some of the most important questions besides the ones you’ll ask about interest rates and fees. The answers will help you understand who you’re working with, how the reverse mortgage loan process works, how long it takes to get the proceeds of the reverse mortgage loan and who should be involved in the information-seeking and decision-making.
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Who am I working with?
When you shop for a reverse mortgage loan, there is an important designation that can help you decide which lender and which loan officer to choose.
“A reverse mortgage loan is a complex financial product, and you need to make sure that who you’re working with is going to really help you understand how it works, and whether it makes sense for you, and if they take a consultative approach to the process with you,” says Paul Fiore, executive vice president of sales for American Advisors Group, or AAG, a lender that does only reverse mortgage loans.
Fiore suggests asking if the lender is a member of the National Reverse Mortgage Lenders Association, or NRMLA, checking for the lender’s rating with agencies such as the Better Business Bureau and asking what the company’s values are.
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Will I still own the home?
The answer is yes, you will still own the home after you get a reverse mortgage loan. But it might ease your mind to ask the question, anyway, when you talk with a loan officer.
“Borrowers still have this perception that if you get a reverse mortgage loan the bank is going to own your home,” Fiore says. “And that’s absolutely not true. It’s no different than a traditional mortgage.”
The lender can explain how a reverse mortgage loan will affect your heirs. It’s a complex issue that is affected by whether you have a co-borrower, whether you are married to someone who is not a co-borrower, and whether the last borrower dies while living in the home or moves out permanently before then (perhaps to live in an assisted-living or memory care facility).
In most cases, says Reza Jahangiri, CEO of American Advisors Group, the borrower dies or moves out of the home while the home is worth more than the amount owed. Then the heirs can sell the house and bank the remaining equity. “Or they can refinance it and stay in the house or rent it out,” Jahangiri says.
If the home is worth less than the reverse mortgage loan balance when the last borrower dies or moves out permanently, the heirs are not on the hook for making up the difference. They can sell the property for fair market value, pay off the loan with the proceeds, and any shortfall is covered by mortgage insurance.
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Will a reverse mortgage loan solve my issues?
A good reverse mortgage loan officer will be solution-oriented, Coffin says, asking what problems the borrower wants to solve with the loan proceeds.
“You look to see what their goal is, and how financially fit they are right now,” she says. Typically, she asks prospective borrowers how their finances will change in the next couple of years. For example, do they plan to buy a car?
With these questions, the loan officer and the borrower can discuss whether it’s a good idea to get a reverse mortgage loan, and if so, if now is the time or if it would be better to wait. They can discuss whether to get a fixed-rate or variable-rate loan, and which type of payout would be best: a lump sum, a line of credit, monthly payments or a hybrid of a line of credit and monthly payments.
When you get a reverse mortgage loan, you are required to maintain the home and pay property taxes and homeowner’s insurance premiums. The lender can set up the reverse mortgage loan with a “set aside” to pay those costs. A set aside performs a similar function as escrow does in a traditional mortgage.
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What is the loan process like?
A reverse mortgage loan is more complex than a traditional mortgage because there are various ways to collect the proceeds (lump sum, line of credit, monthly payments or a hybrid of a line of credit and monthly payments). On top of that, you’re required to talk to a certified housing counselor. Plus, the lender has to conduct a financial assessment of you.
“A reverse mortgage loan is a complex financial product, and you need to make sure that who you’re working with is going to really help you understand how it works, and whether it makes sense for you, and if they take a consultative approach to the process with you,” Fiore says.
He adds: “Are they going to walk me through the reverse mortgage, how it works and whether it makes sense for me? Or are they going to just try to get me to apply? Really strong lenders should have a very specific process they follow that helps consumers understand everything step by step.”
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How long will it take?
You will want to know how much time will pass between application and funding of the reverse mortgage loan. The timing is partially under your control: You’ll have to go through loan counseling, and it is up to you to select the counseling agency and schedule the appointment. The lender will provide you a list of approved housing counseling agencies, or you can search for a counseling agency on HUD’s website.
After you have finished the counseling, you’ll receive a certificate that expires after 6 months, Coffin says. If you wait longer than that, you can get a refresher course by the same counselor or another, and get another certificate that expires after 6 months.
Undergoing the counseling and getting the certificate does not obligate you to get a reverse mortgage loan.
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Should my heirs be involved?
Should you involve your offspring (or other potential heirs) into the discussion of whether to get a reverse mortgage loan? A reputable reverse mortgage lender not only will welcome your heirs to take part, but will support their participation.
“We encourage everybody who is involved in the process to bring in everyone involved,” Fiore says.
Coffin says the heirs often get the ball rolling. About 20% to 25% of the time, she says, the adult children inquire about reverse mortgage loans on behalf of their parents.
After they learn the details of how reverse mortgage loans work, adult children seldom try to talk their parents out of getting one, Coffin says. “So often, when I engage in that conversation and start to speak with the children, they’re very much on board with the program,” she adds.