Reverse mortgages can help owners or heirs access home equity during a legal settlement* without forcing a sale. Key discovery considerations for eligibility include occupants’ ages, property condition, liens, costs, and ongoing obligations.
The following is intended to help attorneys, advisors, and families ensure they have accounted for the variables that affect proceeds available from a reverse mortgage when structuring legal settlements.
Loan proceeds may be used for any purpose, providing a cost-effective avenue to divide assets.
Qualifying for a Reverse Mortgage
Age: Age requirements vary by loan and by state. The minimum age is 55 for private investor loan products and 62 for the most familiar option, the FHA-insured Home Equity Conversion Mortgage (HECM).
Occupancy: The property must be the primary residence for those named on the loan for at least 6 months each year.
Income: Borrowers must show income to cover all current debts and property charges in qualifying. Savings and investments can be counted toward qualifying income. An unaffordable debt structure may require paying some debts before closing or from loan proceeds, depending on the loan terms.
Credit, Payment History & Set-Asides: Non-payment of property charges – taxes, insurance, and HOA dues in the borrower’s recent history – may require a portion of available proceeds to be “set aside” to cover taxes and insurance charges on behalf of the homeowner over their expected lifetime. A set-aside will reduce loan proceeds available for other uses.
Property Valuation
A licensed appraiser will provide the most accurate estimates. Comparative Market Analyses (CMAs) from an experienced agent are great guides, but ultimately valuation must be verified with an inspection from a licensed appraiser.
Property Liens
Most reverse mortgages must be in the first-lien position. Any existing debt against the property must be paid before closing, or loan proceeds must be sufficient to clear it. Property charges owed, including taxes, insurance, and HOA dues, must all be current or brought current at closing.
If loan proceeds are insufficient to clear liens and outstanding property charges, the borrower/estate must provide additional funds to close the loan.
Deferred Maintenance
If the home has significant deferred maintenance, the appraiser may require health and safety repairs to be funded before (or shortly after) closing on a reverse mortgage.
Loan Costs
Loan costs wrap into the opening balance on a reverse mortgage. The mandatory counseling call and appraiser-required repairs are the exception and may need to be paid before closing. Some contractors will accept payment at closing.
Equity Available
Proceeds available with a reverse mortgage are calculated based on:
- Appraised home value
- The age of the youngest borrower or non-borrowing spouse
- Current interest rate of the loan product chosen
A homeowner in their 60s can typically expect proceeds ranging from 30 to 40% of the home value. Equity access increases with age. A borrower in their 80s can typically expect proceeds ranging from 45 to 60%. Percentages are estimates based on current rates and today’s loan products; actual proceeds depend on the factors above and terms of the loan.
Once the home loan closes, the borrower may use the proceeds for any purpose.
Interest Rates
Interest rates play a role: lower-rate reverse mortgage loans net lower proceeds than higher-rate options, which, paired with varying loan terms, creates the range in proceeds noted above.
- Line of credit loans carry variable rates and flexibility in proceeds draw
- Fixed-rate loans are a single one-time draw at closing
Ongoing Obligations
Mortgage payments are deferred (optional) during occupancy. The borrower must pay homeowners insurance, property taxes, HOA dues, and maintain the property.
Reverse Mortgage Summary
- The FHA-insured Home Equity Conversion Mortgage is one option in a line-up of reverse mortgage loans
- Loan terms vary and new products/terms enter the market to reflect consumer needs
- All reverse mortgages have age and occupancy restrictions
- Look for the term “non-recourse” when evaluating choices
- Understand the payment and occupancy requirements
Next Steps
Evaluating the fit of a reverse mortgage with the above considerations factored in minimizes unknowns. I encourage attorneys, advisors, and families involved in a settlement to work with a licensed loan advisor who specializes in reverse mortgages to review the options, confirm eligibility, and provide an accurate estimate of the funds available.
I’ve personally been involved in numerous scenarios alongside attorneys and families, and I welcome questions and strategy sessions.
This information provided is for educational purposes only and does not constitute legal, tax, or financial advice. Please consult a qualified legal, tax, or financial professional regarding your specific circumstances.
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These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. The youngest borrower must be at least 62 years old. Monthly reverse mortgage advances may affect eligibility for some other programs. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity. Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act, License No 41DBO-78367. Licensed by the Department of Financial Protection and Innovation under the California Financing Law, NMLS #2289. Loans made or arranged pursuant to a California Residential Mortgage Lending Act License.
Written by Sheila Landis for The Landis Group
