Reverse mortgage FAQs

Nearly thirty years in lending taught me which questions repeat. My Top 10 page covers the basics. The fifteen below come up once a client gets serious, and a few of the answers will surprise you.

Eligibility and the home

Can we qualify if my spouse is under 62?

You can, thanks to a rule change in August 2014 that plenty of older articles still miss. FHA now allows an eligible non-borrowing spouse on the file. The lender will base the payout on the younger person’s age, which lowers it, sometimes by a lot. In exchange, your husband or wife can remain in the home after you die, provided taxes and insurance stay current. The property must continue as their principal residence. One hard limit comes with the deferral. A spouse who never signed the note cannot draw the remaining credit line.

I still owe on my mortgage. Will that disqualify me?

Not by itself, and more than half the borrowers I meet still carry a balance. The HECM must hold first position, so the new loan will retire your current mortgage at closing. Whatever you owed comes out of your total. The remainder will fund a credit line or monthly draws. A large balance leaves less behind, and when the payoff exceeds the principal limit, you would have to bring cash to closing.

Will a condo qualify?

Sometimes, because FHA must approve the condominium project before any unit inside it can carry a HECM. Since October 2019, a single unit can also qualify on its own when the project as a whole never applied. Townhouses in a planned development usually clear without that review. About half the condo files I see fail the check, so I look the project up before ordering an appraisal.

Will a credit problem from years ago count against me?

It will probably count for less than you fear. Since April 2015, every HECM application has included a credit and residual income review, which FHA calls the financial assessment. Old late payments rarely block an approval by themselves. Lenders look for a record of paid property charges and enough income left each month to keep covering the bills. A weak review will not always end in denial. The common outcome is a set aside, called a LESA, that pays your taxes and insurance from the proceeds across your expected lifetime.

Costs and proceeds

How much can I draw in the first year?

Roughly 60 percent of the principal limit, under a cap FHA adopted in 2013. An exception applies when your mandatory obligations exceed that share. Pay off a large mortgage at closing and the cap rises to that payoff plus 10 percent of the limit. Whatever stays untouched will become available after the first anniversary, and on the adjustable version the unused credit will have grown in the meantime.

Who provides the counseling, and what will it cost?

A counselor from HUD’s national roster, and the lender stays out of the choice. Plan on $125-$200, payable to the agency, and a few of them waive it when money is tight. Phone or in person, most of my clients end up choosing the phone. The certificate lasts 180 days, so the appraisal can follow weeks later. Bring your latest mortgage statement and a question list. A decent counselor would rather tackle a hard question than recite a script.

Should I pick the fixed rate or the adjustable?

Most of my files close on the adjustable version, and the structure explains why. A fixed-rate HECM pays a single lump sum at closing, with nothing more available later. The adjustable comes with four formats. You can hold a credit line, take a monthly check for life or for a set term, or blend the three. Borrowers can rearrange the mix at any point for a small servicing fee. Few clients need every dollar on day one, so I write far more credit lines than lump sums.

Will the proceeds affect Social Security, Medicare, or Medicaid?

Social Security and Medicare pay no attention to loan advances. A draw is borrowed money, no different from a HELOC check, and borrowed money was never income. Medicaid and SSI apply asset tests, so timing controls the outcome. Spend a draw inside the month you receive it and those programs will ignore it. Leave the money in the bank past month end and it turns into a countable resource. Anyone on needs-based benefits should size each draw around that rule.

Is the interest deductible?

Eventually, and almost never year by year. Interest on a HECM accrues unpaid. The IRS allows a deduction only in the year somebody pays that interest, usually at payoff or sale. A 2018 tax law change also narrowed which home loans qualify, so the answer now depends on how you spend the proceeds. Hand this one to your CPA with the closing statement attached.

Living with the loan

What will I still pay each year?

The loan removes your mortgage payment and nothing else. Four bills remain yours:

• Property taxes. Both county installments continue on the usual schedule.
• Homeowners insurance. The dwelling policy must stay active with the lender named on it.
• HOA dues. Condominium and planned development fees count as property charges.
• Upkeep. FHA expects the home in sound, livable repair.

Once a year the servicer will also mail an occupancy certificate. Sign it and send it back, because a missed certificate triggers the same default process as a missed tax bill. Unpaid charges end more reverse mortgages than anything else I see, so put the taxes on autopay the week you close.

What happens if I move into assisted living?

The twelve-month rule decides this one. FHA treats an absence beyond a year as a permanent move, even for medical care, and the loan will come due. Shorter rehab visits cause no problem while the home remains your principal residence. Couples get the better outcome here, since the loan stays open while either borrower occupies the house. Call the servicer ahead of any long absence, because an unexplained one looks like abandonment in their records.

Can I rent the house out?

A boarder will not cause trouble while you live there, because FHA tracks your occupancy, and a rented room changes nothing. Lease the entire house and move out, and the balance will become payable. Clients with second homes raise this question every year, and FHA reads the answer from items like your tax filings and your driver’s license.

Payoff and heirs

Can I sell or pay the loan off early?

Yes, on any day you choose, and no prepayment penalty exists on a HECM. A sale or a plain payoff from savings will close the account at the recorded balance. The same holds for a refinance into a conventional loan. Partial prepayments count as well, and on the adjustable version a voluntary payment will return that amount to the credit line for later use.

How long will my heirs have?

Heirs will have six months from the due-and-payable notice. The servicer can add two 90-day extensions when HUD signs off and the family shows progress toward a sale or a refinance. From there the estate chooses:

• Keep the home. Pay the lesser of the loan balance or 95 percent of appraised value.
• Sell it. Anything above the payoff belongs to the estate.
• Sign it over. A deed in lieu satisfies the debt with no claim against other assets.

That 95 percent figure protects families when prices decline. No heir will inherit a shortfall on an FHA-insured loan.

Can my adult children join the loan?

Only as borrowers, and every borrower must reach 62 first. The spousal deferral from 2014 covers husbands and wives alone; FHA extends nothing comparable to children. An adult son or daughter who shares title must either qualify by age or come off the deed before closing. Families should weigh that change with an estate attorney, since a deed amendment carries tax and inheritance consequences of its own.

Most clients bring a sixteenth question, one tied to their own deed or their own family. Call my Torrance office at (310) 753-1924 and ask it.

Karen Pryor, Broker and Owner, NMLS #167985

NMLS#: 167985

NMLS Consumer Access