Questions to ask a prospective reverse mortgage lender
Obtaining a reverse mortgage requires people to take a big step and borrow against the equity they’ve built in their homes over the years, and in many cases agree to sell the home once they die instead of passing it on to heirs. It’s a transaction that should not be entered into lightly.
As you research your options, here are several questions to ask prospective lenders before signing a contract.
Is the lender FHA approved?
Lenders approved by the Federal Housing Administration (FHA) can offer government-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs). These type of reverse mortgages typically offer more options than non-insured reverse mortgages. Also, the insurance provided on an HECM protects the borrower from the lender going out of business by guaranteeing that loaned funds will continue. You can search the list of approved lenders at the U.S. Department of Housing and Urban Development (HUD).
What is the expected interest rate and what is it based on?
As its name implies, the expected interest rate is what the lender anticipates the loan rate averaging over the life of the reverse mortgage. It’s one of three factors, in addition to your age and the value of the home, that helps determine how much of your home’s equity you can borrow.
The lender will arrive at that rate based on the average yield for U.S. Treasury securities adjusted to a constant maturity of 10 years, or the 10-year rate on the London Interbank Offered Rate (LIBOR) Index. The expected rate is just a projection. The actual interest you pay when the loan becomes due will be based on actual interest rate movements during the loan.
How much are the closing costs and fees?
Reverse mortgage borrowers will have one-time fees to pay at closing as well as ongoing expenses for the life of the loan. In most cases, you will have the option of including the upfront costs into the loan amount, but you should verify with the lender that you have that option. If so, you won’t have to pay these expenses until you sell the home and pay off the entire loan.
You should always shop around and compare the fees and costs of several lenders, as origination fees, interest rates, closing costs and servicing fees will vary among lenders. The lender should be willing to provide the Total Annual Loan Costs (TALC) that show the estimated annual cost of the loan.
Once you’ve selected a lender, ask them to itemize the costs and show how these fees will impact the loan if you decide to include them in the loaned amount. A reputable lender should have no problem explaining the costs, benefits, and drawbacks of reverse mortgages. If a lending professional focuses too much on the benefits and not enough on the costs, it could be a sign that he or she is not considering your best interests.
How much can I qualify for?
In any reverse mortgage, the amount available to the borrower is based on three factors:
- The borrower’s age—the older you are, the more you can borrow.
- The amount of equity in the home—the greater the value, the more you can borrow.
- The expected interest rate—the lower market rates are, the more you can borrow.
The way lenders calculate these factors will differ so that some lenders may offer a greater principal limit than others.
Also, lenders offering proprietary reverse mortgages, which are not federally insured, are not bound by the same lending limits as those that offer HECMs.
What are my payment options?
HECMs offer some payment options, including lump sums, monthly payment and a line of credit. Proprietary reverse mortgages may not offer all the options available on an HECM. Discuss payment options with the lender and ask if you can switch options during the life of the loan.
Will there be set-asides attached to the loan and if so how much?
When homeowners obtain a reverse mortgage, they maintain title and property ownership, and thus responsibility for maintenance, taxes, insurance, utilities, and other expenses.
Falling behind on property taxes or failing to maintain adequate homeowners insurance can lead to a default on the loan. If this occurs, the lender will require immediate repayment, which typically means selling the property.
To minimize the possibility of defaults due to failing to pay taxes and insurance, lenders will often establish set aside accounts. Set asides in a reverse mortgage are similar to escrow accounts in a standard mortgage. They hold funds needed to pay for costs beyond the principal and interest of the loan. In the case of a set-aside, the amount needed to fund the account is deducted from the principal limit on your reverse mortgage.
Ask the lender if money will need to be set aside for taxes, insurance, or other costs and, if so, the impact they will have on your loan.
What is the loan’s projected amortization?
A reverse mortgage amortization schedule will show how the loan balance increases over time. The longer you have the reverse mortgage, the more money you’re borrowing and/or the more interest is accruing.
A reverse mortgage amortization schedule can help potential borrowers estimate how much they will eventually owe once the loan is due, which occurs when the homeowner(s) passes away or moves out of the home. At that point, the home is typically sold, and the proceeds are used to repay the loan.
A potential reverse mortgage borrower should study the amortization schedule provided by the lender before committing to the loan.
What happens when the loan becomes due?
Reverse mortgages typically end when the borrower(s) dies or permanently moves out of the residence. You should discuss with the lender the process of repaying the loan.
Have an understanding of how much time following your death or relocation that the lender will provide before asking for repayment. Ask if your heirs can ask for extensions if the house doesn’t get sold by the lender’s deadline.
Verify with the lender what happens if the home is appraised for and/or sells for more than what is owed, as well as what happens if its value drops below the loaned amount.