Welcome to “Ask the Pros” – where your questions meet the wisdom of those who understand the ins and outs of reverse mortgages! If you have questions about unlocking the power of your home equity, navigating the ins and outs of reverse mortgages, or making informed decisions about your financial future, you’re in the right place.
In this exclusive series, we tap into insights and expertise directly from our wonderful team members at Longbridge Financial who are helping to shape the reverse mortgage industry each day. Our team of seasoned professionals will field common questions, unravel complexities, and provide invaluable insights to empower you on your financial journey.
Whether you’re a homeowner considering a reverse mortgage, a financial advisor seeking new perspectives, or are simply curious about the unique retirement tool, “Ask the Pros” is your go-to source for reliable insider information. Join us as we explore the nuances of reverse mortgages, debunk myths, and uncover strategies to make the most of your home equity and make informed decisions.
Our next pro in this series is Shea Erlandson, Senior Reverse Mortgage Consultant here at Longbridge Financial. Shea is part of an amazing team of loan officers who help older homeowners find greater financial peace of mind by using the power of their home equity to their advantage. We sat down with Shea to discuss reverse mortgage borrower protections and, beyond borrowers themselves, the specific protections in place for heirs and non-borrowing spouses.
Q: Are reverse mortgages safe? What are my consumer protections?
A: I firmly believe that today’s reverse mortgages are safe, specifically thanks to the consumer protections in place. However, like any financial product, they come with inherent risks to consider. To help mitigate these risks, there are various safeguards in place designed to help ensure borrowers are well-informed and good candidates for the program before proceeding with the loan.
Home Equity Conversion Mortgage (HECM) loans, commonly called reverse mortgages, are insured by the Federal Housing Administration (FHA). An FHA-insured loan includes a built-in cost called Mortgage Insurance Premium (MIP), which is usually included in the loan balance. This premium covers various loan features, and I’ll explain some of them in detail.
A major feature of FHA-insured reverse mortgages is that they are non-recourse loans. Many people aren’t familiar with this terminology, but it essentially means that you (or your heirs) will not have to pay the lender more than the value of your home at the time of repayment when the home is sold. Under this protection, if your loan balance grows greater than the value of your home, the FHA will pay the difference at the time of repayment. In addition, the lender can’t seek any assets other than your home to repay the loan and home maintenance costs. It’s a pretty cool feature and one that adds an important layer of safety for borrowers and heirs alike.
Another element of this protection specifically applies to the HECM reverse mortgage line of credit (LOC) disbursement option.1 For example, if you have a $300,000 reverse mortgage line of credit, it’s guaranteed for as long as you meet the terms of your loan, like paying your property taxes, insurance, maintaining the home, and living there as your primary residence. And regardless of what may happen to your lender, the real estate market, or the stock market, your HECM loan can’t be canceled. This is an important protection because if you look back at times in history where financial institutions have tightened lending guidelines, that’s usually when traditional lines of credit were frozen or canceled.
Even in recent years, amidst economic crises like the real estate downturn of 2008 and the challenges posed by the COVID-19 pandemic, many consumers found themselves navigating turbulent financial waters. These crises were particularly challenging for homeowners reliant on Home Equity Lines of Credit (HELOCs) as many major financial institutions swiftly withdrew their support, causing a domino effect of HELOC cancellations. This left countless homeowners stranded, unable to access the credit they desperately needed to keep themselves afloat amidst the economic slowdown. History gives us a clear picture of how a reverse mortgage line of credit can be a safer alternative to a traditional HELOC.
Q: Are there any consumer protections that come into play prior to obtaining a reverse mortgage?
A: Yes, two main pre-closing protections built into the loan process are the third-party Counseling session and the Financial Assessment, both requirements with all reverse mortgages. Let’s start with counseling – before applying for a reverse mortgage, potential borrowers are required to undergo counseling sessions with independent, third-party, HUD-approved counselors. These counselors provide unbiased information about the intricacies of reverse mortgages, their potential implications, and alternative options available.
I’m a big fan of counseling, but many of my clients often call me the second they complete their counseling to say, “The counselor just reiterated everything you already told me.” I’m always happy to hear how well-informed they were going in and that tells me I’ve done my job well and equipped them with the information they need to make a decision about their financial future. But at the end of the day, the counseling process ensures there’s an unbiased third-party available to address questions and set the record straight if there are any miscommunications or misunderstandings between myself and my clients.
Next is the Financial Assessment; introduced in 2015 as part of an effort to better protect borrowers, this assessment aims to ensure that borrowers have the financial capacity to maintain the obligations associated with a reverse mortgage. Unlike in the past, where eligibility was primarily based on age and home equity, lenders now assess a borrower’s overall financial situation more closely to ensure they are set up for success before making a major financial commitment. They evaluate factors such as credit history, income, liabilities, property taxes, homeowners insurance, and estimated utility expenses.
The purpose of the financial assessment is to ensure that the loan is sustainable for the long term. By analyzing a borrower’s financial capabilities, lenders can determine whether they can afford to meet the terms of the loan without depleting their reverse mortgage funds prematurely. This prevents situations where homeowners might face foreclosure due to an inability to meet their financial obligations.
While these elements of the loan process may seem tedious or a little overkill to some, they were implemented as a direct result of challenges many borrowers faced with early iterations of reverse mortgages, which offered few consumer protections by comparison. Today, by requiring counseling and conducting thorough financial assessments, the risk of homeowners entering into unsustainable loan agreements is minimized, reducing the likelihood of default or foreclosure down the line.
Q: What about protections for non-borrowing spouses?
A: To be a borrower on a HECM reverse mortgage, you need to be at least 62 years or older. An eligible non-borrowing spouse is considered to be somebody who is under 62 (or who doesn’t otherwise qualify), so they can’t be on the actual loan. However, they do get what’s called “spousal protection” which includes survivorship rights. This means that if the older spouse, who is statistically more likely to pass away first, does so, the younger spouse can continue living in the home for the remainder of their life, just as if they were on the loan from the beginning, as long as they continue to meet the terms of the loan.2
This protection sadly wasn’t always in place. In the past, some couples opted to take out the loan solely in the name of the older spouse to access a larger sum of money. (With reverse mortgages, generally the older you are, the more money you can access.) This decision seemed logical at the time since the amount one could access from the home’s equity increased with age. However, what wasn’t adequately considered was the fate of the younger spouse once the older one passed away.
In those unfortunate instances, the surviving spouse, not being on the loan, faced limited options. Refinancing was often not feasible due to age and eligibility constraints, paying off the loan in full was financially challenging, and selling the house wasn’t desirable. Consequently, many found themselves at risk of losing their homes, facing the looming threat of foreclosure.
Scenarios like that highlight the importance of the consumer protections built into modern reverse mortgages. Today, thanks to regulatory changes and increased awareness, non-borrowing spouses are afforded the necessary safeguards to prevent such dire outcomes. Regardless of what happens to either spouse, the protection remains intact, offering peace of mind and security for all parties.
All of the consumer protections we’ve touched on serve as vital safeguards for older homeowners seeking to leverage their home equity in retirement. Mandatory counseling, financial assessments, non-recourse protection, and non-borrowing spouse protections all work together to empower reverse mortgage borrowers to make sound financial decisions that support their long-term well-being.
Thank you, Shea, for sharing your insights and providing a deeper look at the numerous consumer protections offered by reverse mortgages!
If you’re interested in learning more about reverse mortgages and to find out if you qualify, contact our team today. Our reverse mortgage consultants will get to know you and your financial situation to help you determine whether a reverse mortgage is the right fit for you. Empower your financial journey – reach out to Longbridge Financial now to make informed decisions about unlocking The Power of Home®️.
