How Does a Reverse Mortgage Work?

Step One: Is It Right for You?

Don’t get caught in the question mark! As with any decision, the first step in getting a reverse mortgage is to decide whether it’s going to work for you. A homeowner who will most benefit from a reverse mortgage is 62 years or older, owns their property outright or has very little left on the loan, and has a very low interest rate.




Since you’ll also receive mandatory loan counseling by a U.S. Department of Housing and Urban Development-approved counselor before obtaining a reverse mortgage, you’ll have another chance to get the thumbs-up on your decision before moving forward.

Step Two: Make Sure You’ll Qualify

Qualifying for a reverse mortgage is actually more simple than getting a traditional loan, since there are no income, asset, employment or credit requirements. However, you must be 62 years or older, own your home outright or have a very low balance on the mortgage, and be prepared to live in it throughout the life of the loan.

Once you’ve got the loan, you’ll also have to agree to keep the home in good condition, continue to pay property taxes and homeowners’ insurance, and retain title and ownership of the home. Not so difficult, now is it?

Step Three: Do Your Homework

Before applying for a reverse mortgage, take the time to understand all your options. You’ll get a great overview of the process in the video below.

Your first step is to find a responsible lender who will put your best interests first. The National Association of Reverse Mortgage Lenders hosts a consumer website where you can search amongst a database of approved lenders.

Once you’ve found a lender, it’s time to choose the right type of mortgage for you. There are three types of reverse mortgages:

  1. A single-purpose reverse mortgage offered by some nonprofit agencies as well as state and government agencies. Though these loans carry low costs, they are not as widely available as other options. In order to qualify, you must be lower- to middle-income and have a specific purpose for the funds, such as health expenses or property improvements.
  2. Home Equity Conversion Mortgages, or HECMs. The most typical brand of reverse mortgage, these loans are backed by HUD and require counseling before you are approved. Beware: If you plan on shorter-term residency in your home, the HECM fees can be very expensive.
  3. Proprietary reverse mortgages, which are backed by the private companies, which developed them. As with other reverse mortgages, these loans are tax-free.

Step Four: Get Approved

From here, it’s time to go through the application process. Before filling out an application, you’ll have to go through reverse-mortgage counseling. When applying, you’ll select a payment option from the following choices: fixed monthly payments, lump-sum payment, line of credit, or a combination of these.

At this point your lender will tell you how much you’re eligible to receive, and an appraisal will be done on your home. Any structural defects must be fixed before the loan closes.

Then the good news – you’re approved! You have three days after signing the paperwork to cancel the loan, after which time you’ll receive your funds. Your home’s existing debt is canceled, and a new lien is placed on the house. From here, you can settle back and enjoy having a low-risk loan that provides income throughout your time in your house.