What is a Reverse Mortgage and How Does it Work?

A reverse mortgage loan is a safe and secure financial product that allows homeowners who are 62 years of age or older a way to access the equity in their homes without taking on additional monthly payments.  

The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). This is what we offer at Mutual of Omaha Mortgage.  

The HECM reverse mortgage is a loan just like a traditional mortgage, but instead of making monthly payments to a lender, it allows seniors to receive payments from the lender in the form of a lump sum, a line of credit, monthly payments, or a combination of the three. 

The variety of ways that reverse mortgage funds can be disbursed means that it can help homeowners who are in a variety of situations and have a variety of needs. It is not just a one-size-fits-all solution.  

For example, it may provide a way for seniors to afford to retire in place, but it may also simply allow seniors to have additional financial freedom in retirement by providing them with funds to pay off credit card debt or make home renovations without having to tap into savings.    

Let’s learn more about how a reverse mortgage loan works.  

How Does a Reverse Mortgage Work? 

A reverse mortgage loan converts a portion of your home’s equity into funds paid directly to you.  

The amount of money you receive is based on the age of the youngest borrower, the market value of the home, and current interest rates. The total amount that borrowers receive from a HECM reverse mortgage typically ranges from 40 percent to 60 percent of the home’s value.  

The FHA puts a lending limit each year on how much lenders can loan to reverse mortgage borrowers. The lending limit for 2023 is $1,089,300. 

The older the homeowner, the higher the value of the home, and the lower the interest rate, the more you will be able to receive. Our reverse mortgage advisors will be able to provide you with more specifics.  

The loan amount is also able to increase over time if your loan has a variable interest rate. The variable rate also gives you more options for how you may receive your money. Some of those options include: 

  • Monthly payments as long as at least one of the borrowers continues to live in the home  
  • Monthly payments for a fixed number of months 
  • A line of credit  
  • A line of credit combined with monthly payments 
  • A lump sum disbursement combined with monthly payments 
  • A lump sum disbursement combined with a line of credit 

By comparison, if you choose a fixed interest rate, you will only be able to receive your funds in a one-time lump sum payment.  

Mutual of Omaha Mortgage also offers a jumbo loan called the HomeSafe Reverse Mortgage that allows homeowners to access significantly more equity, for those who may qualify for more.   

Homeowners are still required to pay property taxes, homeowner’s insurance, any homeowners association (HOA) fees (if you have them), and any costs necessary for maintaining the home.   

How are Reverse Mortgage Funds Disbursed? 

When a borrower takes out a reverse mortgage loan, there is a three-day waiting period after the closing documents are signed before the funds can be disbursed.  

Once the waiting period is over, the reverse mortgage loan pays off the current mortgage, if there still is one. 

Then you will start receiving your funds depending on what method or methods you chose during the application process.  

If you are receiving your funds as a lump sum, the lender will give you all of your available funds right away. If you opted for monthly payments, the disbursements will begin. If you are receiving your money as a line of credit, the funds will be placed into an account you will be able to withdraw from as needed.  

The borrowers are not required to pay back the loan until they sell the home, move out of the home for more than 12 months, or pass away. 

What is a Reverse Mortgage Used For? 

There are no rules about how the funds from a reverse mortgage loan may be used. 

Reverse mortgages are used for a variety of purposes including the following:  

  • Supplement retirement income 
  • Pay for healthcare expenses 
  • Make home improvements 
  • Cover unplanned expenses 
  • Pay off credit card debt 
  • Pay for travel expenses 
  • Purchase a new home 

What are the Reverse Mortgage Loan Requirements? 

A HECM reverse mortgage comes with several very specific requirements that must be met in order to qualify, including the following:  

  • Age. At least one borrower must be at least 62 years of age to qualify. 
  • Equity. Homeowners typically need a minimum of 50 percent equity built up in their home.  
  • Residency. The home must be your primary residence to qualify. Investment properties or vacation homes do not qualify for a reverse mortgage.  
  • Property Type. Qualifying properties include single-family homes, condominiums, townhouses, and manufactured homes that were built after June 15, 1976.  
  • Counseling. In order to apply for a reverse mortgage, you are required to attend a counseling session with a third-party counselor approved by the U.S. Department of Housing and Urban Development (HUD). (The Mutual of Omaha Mortgage reverse mortgage loan advisors will provide you with a list of optional counselors to choose from.) 

If you have any questions about qualifying for a reverse mortgage, we recommend talking to one of our reverse mortgage advisors who will be able to provide answers based on your unique situation.  

What is the Reverse Mortgage Application Process? 

If you apply for a reverse mortgage loan, this is overall process that you can expect:  

  • Step 1: Meet with a Reverse Mortgage Advisor. The reverse mortgage advisors at Mutual of Omaha Mortgage will provide a free financial review of your situation and let you know if a reverse mortgage is the right product for you.   
  • Step 2: Complete a Counseling Session. Before you are able to officially apply for a reverse mortgage, you must first meet with a HUD-approved counselor who will walk you through the pros and cons of a reverse mortgage. 
  • Step 3: Submit Your Application. Once you obtain the counseling certificate of completion, you can file your application. Your reverse mortgage advisor will walk you through this process.  
  • Step 4: Process the Application. The application will be processed by underwriting and an appraisal will be obtained to determine the current market value of your home. Underwriting may request additional documentation during this time.  
  • Step 5: Closing. A closing date will be scheduled once the application is approved. Closing documents can be signed in person or from your home.  
  • Step 6: Funds Disbursement. Three business days after signing the closing documents, the funds disbursement will begin.  

Bottom Line 

In summary, a reverse mortgage is a financial product that allows seniors to access equity in their home and receive payments from the lender while still living in their home.  

It can provide financial security for seniors living on a fixed income, in need of extra cash to fund major projects, or wanting to increase the amount of cash they have available for unplanned expenses. 

It’s important for seniors to carefully consider their options before taking out a reverse mortgage. They should also seek financial advice from a professional to ensure that a reverse mortgage is the best option for their financial situation. 

Do you have more questions about a reverse mortgage? Grab our reverse mortgage guide to learn more.  

Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees. 

This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.