Many loan officers understand reverse mortgages are a growing business opportunity. For our country’s aging population, reverse mortgages can be solutions for homeowners who are house-rich and cash-poor when planning their retirement objectives.
Loan officers who become knowledgeable in this product can provide unique financing solutions beyond a traditional mortgage, positioning themselves as go-to resources for clients’ evolving needs.
Here is a look at some of the top questions loan officers will need to be prepared to answer when presenting reverse mortgages.
How do reverse mortgages work?
Reverse mortgages are financial products designed for older homeowners. It allows them to convert part of the equity in their home into cash without having to sell the property or make monthly mortgage payments. The right of the borrower to remain in the home is contingent on the borrower living in the property as their primary residence, paying property taxes and homeowner’s insurance, maintaining the home and complying with the loan terms.
With a reverse mortgage, eligible homeowners can access a portion of their home’s equity as cash, a line of credit, tenure payments or a combination of these, depending on the product selected. The amount borrowers receive depends on their age, current interest rates and the equity in the home.
What are the main products available?
There are two primary types of reverse mortgages: HECM and Proprietary Reverse Mortgages.
HECM, insured by the Federal Housing Administration (FHA), is the most common. It offers several payment options, including a lump sum, monthly tenure or term payouts, a line of credit, and combinations thereof.
“Regardless of economic standing older clients may find reverse mortgages provide necessary financial flexibility during retirement.”
Proprietary Reverse Mortgages are private loans offered by individual lending companies and may allow for larger loan amounts compared to HECMs. Payout options for these may include a lump sum or a line of credit. These are not available in all states.
To be eligible for a reverse mortgage, at a minimum, borrowers must be 62 years old or older for FHA’s Home Equity Conversion Mortgages (HECM). For proprietary products, in general, they can be 55 or older, subject to individual state regulations. They must be living in their home as their primary residence, demonstrate the ability to pay their taxes, insurance and property maintenance, and attend a Housing and Urban Development (HUD)-approved reverse mortgage counseling session.
For clients seeking to optimize their retirement assets, supplement cash flow during retirement or maintain affordable living in their current homes, a reverse mortgage may be appropriate. Regardless of economic standing, older clients may find reverse mortgages provide necessary financial flexibility during retirement.
How do you explain the loans to clients who are unfamiliar?
Highlight the consumer safeguards that are built into reverse mortgage to help dispel misconceptions and safety concerns. These safeguards include mandatory U.S. Department of Housing and Urban Development (HUD) approved counseling to ensure understanding of costs, risks and alternatives; non-recourse factors ensure that borrowers or heirs do not owe more than the property’s market value upon the sale of the home; and borrowers retain title and equity if they meet all loan terms.
How to answer common borrower objections
Loan officers hear four common complaints or misperceptions:
1. “Reverse mortgages are expensive.” Closing costs for HECM products are higher than traditional loans, due to a 2% FHA insurance premium collected at closing. However, this upfront cost can be financed as part of the loan. Additionally, the borrower will pay a 0.5% annual premium on the outstanding mortgage balance. Proprietary products do not have mortgage insurance, so their closing costs tend to be more in line with traditional mortgage financing products.
2. “The risk of foreclosure is high.” There is no required monthly principal or interest payment with a reverse mortgage. The borrower is still required, however, to comply with all loan terms, including paying their property taxes, paying insurance, maintaining the property and residing in the property as their primary residence. Failure to comply could result in foreclosure.
3. “My heirs will receive a smaller inheritance.” A reverse mortgage will likely decrease the equity position in the home as unpaid interest accrues on the unpaid loan balance against the property. However, when evaluating the true impact on an inheritance, the entire financial picture needs to be considered. For example, does a reverse mortgage allow the borrower to retain other assets and investments that they might have otherwise spent down? A financial advisor should be consulted to help evaluate inheritance concerns.
4. “Reverse mortgages are confusing.” The biggest difference between a traditional mortgage and a reverse is how it is paid back. Traditional mortgages require monthly principal and interest payments, reverse mortgages do not. Repayment is only required when the borrowers die, permanently move out of their home, or fail to comply with all loan terms including paying their property taxes, insurance and maintaining the property.
What happens when the borrower dies?
Heirs have several options, such as selling the home to pay off the reverse mortgage, refinancing the balance into a new mortgage if there is remaining equity or paying off the reverse mortgage balance using other funds to keep the home. If the mortgage balance exceeds the home’s value, a non-recourse clause ensures the heirs will not be liable for any outstanding balance if the home is sold.
Is the licensing different?
Licensed or registered Mortgage Loan Originators (MLOs) through the Nationwide Multistate Licensing Systems (NMLS) can legally originate reverse mortgages. States may have additional requirements. The National Reverse Mortgage Lenders Association (NRMLA) offers the Certified Reverse Mortgage Professional (CRMP) designation requiring three years of experience or 50 closed loans, alongside passing an exam and background check.
What are the biggest compliance concerns?
Independent HUD-approved counseling does not excuse lenders from substantiating all marketing claims. Misleading statements about lifelong home retention without conditions are prohibited. Reverse loans are subject to regulatory compliance acts such as the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).
How do I get paid?
The amount paid is determined by the compensation agreement between the broker and lender.
HUD regulates the compensation for HECM reverse mortgages, with origination fees being capped as follows: 2% of the first $200,000 of home value; 1% of the amount over $200,000; and a maximum origination fee of $6,000.
Loan officers will generally get a portion of this fee, but the actual amount is determined by the compensation agreement with the broker or lender.
Is there a real market for this?
According to recent data from the National Reverse Mortgage Lender’s Association (NRMLA), senior-held home equity in the United States reached $14 trillion in the second quarter of 2024. With a growing share of elder population needing to plan for longer lives, incorporating this equity into a financial plan may contribute to safeguarding and enhancing retirement.
Despite the long-standing perception that reverse mortgages are loans of last resort, these financial products may be regarded as a strategic component of sophisticated retirement planning. This shift is due to stricter regulations, enhanced consumer safeguards and a more comprehensive understanding of their strategic advantages.
Loan officers who offer reverse mortgages and understand their nuance can expand their market reach and revenue potential while positioning themselves as trusted advisors.
