Are you over making your mortgage payments?

If so, you’re not alone.

That is why a lot of homeowners turn to a reverse mortgage instead.

These mortgages may seem too good to be true which is why many people either immediately write them off as a scam or don’t take the time to learn about this legitimate benefit that qualified homeowners can receive.

They also have a negative reputation due to the fact that scammers hide under falsified reverse mortgages to scam unsuspecting homeowners.

Reverse mortgages may seem complex but they are actually super simple!

Reverse Mortgages Mean Payments Coming In

A reverse mortgage is basically a typical mortgage but the roles are flipped.

Instead of the borrower making payments to the lender, the lender will make payments to the borrower.

This flip happens because the borrower already owns the home, and when they borrow against it, they get a loan from a lender that has special repayment terms.

When the borrower moves or dies, the family of the borrower will sell the property to pay off the loan.

The borrower (or family members) will receive any difference leftover from the sale.

A majority of these mortgages are provided through government-insured programs.

When they are government-insured, they are able to impose stricter rules and lending guidelines.

There are also other types of reverse mortgages that get issued by private, non bank, lenders.

Unfortunately, reverse mortgages with these types of lenders have less regulation and can result in being scammed.

How Does a Reverse Mortgage Work?

First, there is a borrower who owns 100% of their home.

This means the borrower has a decent amount of accessible equity.

Generally borrowers have at least 50% of the property’s value if it is not paid off completely.

The borrower has the choice of tapping into their equity, which is when they should turn to a reverse mortgage counselor to get help finding a program for their situation.

Once a borrower figures out the program they want, they need to submit an application.

The lender will verify their credit, property details, etc.

If approved, the lender will provide the funds in the structure that is specified in the contract.

Once a lender funds a reverse mortgage, borrowers can use the funds for what was arranged in their loan agreement.

You may encounter restrictions on how the funds can be used, but it depends on the type of reverse mortgage because there are some that are unrestricted.

The loans will last until the borrower moves or dies.

Once the borrower moves or dies, they (or their family) repay the loan, or choose to sell the property to repay the lender.

The borrower, or their family, gets any difference left over after the loan is repaid.

So, simply put, reverse mortgages are a type of loan on your property that taps into your accessible equity.

The lender will provide you the payments in the way that you choose.

Once the borrower moves or dies then they (or their family) will need to repay the loan.

When either of those things happen, the loan can be repaid or the house can be sold to pay off the loan.

Any remaining difference goes to the borrower (or their family).

Different Types of Reverse Mortgages for Different Needs

A majority of reverse mortgages are government-insured (like FHA loans or USDA loans).

This means that they have more regulation in the underwriting process, qualification requirements, funding opportunities, and limits.

There are also non government-insured reverse mortgages offered by private lenders.

These private reverse-mortgages do not have strict regulations like government-insured mortgages.

Different types of reverse mortgages include:

• Single-Purpose Reverse Mortgages
• Home Equity Conversion Mortgages
• Proprietary Reverse Mortgages

Single-Purpose Reverse Mortgages

This is generally the cheapest reverse mortgage option.

The loans are provided at a local or state level through non-profits for specific reasons.

The lender will be the one who sets those reasons.

These may only be available in certain areas and designated for certain projects like home repairs or home improvements.

Home Equity Conversion Mortgages (HECM)

HECMs are a government-backed reverse mortgage option.

It is backed by the United States Department of Housing and Urban Development (HUD).

These can be a little bit more expensive versus other reverse mortgage options.

However, there are less limitations and the funds can go towards basically anything.

Borrowers have the option to choose how they receive the funds.

People can opt for a lump sum, fixed monthly payment, a line of credit, or a combination of regular payments and a line of credit!

Proprietary Reverse Mortgages

These reverse mortgages are not backed by the government.

The lenders set the qualification requirements, terms, fees, underwriting process, etc.

Even though this option provides funds quickly and is easy to qualify for, this is the one that has higher scam rates than the others.

Overall

Reverse mortgages allow homeowners to receive payments from a lender, with repayment happening when the borrower moves or passes away.

There are different types of reverse mortgages, with government-backed options generally offering more protections and stricter regulations.

Private reverse mortgages, while easier to qualify for, come with more risks, including a higher chance of scams.

That’s why it’s important to research your options and work with reputable lenders.

If you are considering a reverse mortgage, take the time to understand the terms and conditions.

Speaking with a trusted financial professional can help you determine if it’s the right choice for your financial situation.