What Laws and Regulations Affect Reverse Mortgages?

The ultimate goal is to protect borrowers

A couple looks at a contract.
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A reverse mortgage is a type of loan for homeowners age 62 and above that lets them tap into their home equity to obtain cash for things such as health care expenses and supplemental income. A borrower isn’t required to sell their home or pay more bills to take advantage of a reverse mortgage, and the loan doesn’t need to be repaid until the homeowner dies, moves, or sells their house. Drawbacks to a reverse mortgage include fees and other costs, as well as the potential that the interest rate will change over time.

A patchwork of requirements exist around reverse mortgages, including state and federal laws designed to protect borrowers. Learn more about how such rules and regulations may affect your ability to apply for a reverse mortgage.

Key Takeaways

  • A number of federal laws and regulations govern the reverse mortgage process with requirements for qualification, as well as specific obligations to keep the loan in good standing.
  • Many states also regulate reverse mortgages, including the oversight of fees a lender can collect from a borrower before a loan closes.
  • Federal law mandates that a reverse mortgage borrower can face a loan default or foreclosure if they fail to keep their home in good condition.

Qualifying for a Reverse Mortgage

A variety of rules and regulations govern how someone qualifies for a reverse mortgage. For the most common kind of reverse mortgage, known as a home equity conversion mortgage (HECM), you must:

  • Be at least 62 years old
  • Own the home outright or owe very little money on it
  • Use the home as your primary residence
  • Not be delinquent on any federal debt (i.e., federal student loans or income taxes)
  • Prove you have the financial resources to make ongoing payments for expenses such as property taxes, homeowners insurance, and homeowners association fees

Other types of reverse mortgages have specific eligibility requirements as well. Proceeds from a single-purpose reverse mortgage, for instance, must be used for only one lender-specified purpose (such as home repairs).

Is Counseling Required To Get a Reverse Mortgage?

In addition to meeting the age requirement and other conditions for a reverse mortgage, if you’re applying for a home equity conversion loan, you must visit with a counselor endorsed by the U.S. Department of Housing and Urban Development (HUD).

HUD recommends face-to-face meetings between a counselor and a homeowner, while some states require in-person sessions. Your counselor will review the eligibility requirements and financial implications of a reverse mortgage, as well as lending alternatives. You will be charged an upfront fee for this service.

What Types of Homes Qualify for a Reverse Mortgage?

Properties eligible for a home equity conversion mortgage include:

  • Single-family home or two- to four-unit home, with one unit occupied by the borrower
  • HUD-approved condo project
  • Single condo unit approved by the Federal Housing Administration (FHA)
  • Manufactured home that meets FHA requirements

Regardless of type, the home must be in good condition. If it falls short of property standards, the lender will mandate repairs before a reverse mortgage can be completed.

What Are the Reverse Mortgage Rules for Lenders?

In addition to borrowers meeting various requirements for a reverse mortgage, lenders must adhere to certain rules as well. With most reverse mortgages, a lender must give you at least three business days to cancel the loan for any reason without a financial penalty. The cancellation request must be made in writing, and the lender must refund any money you’ve paid within 20 days after the loan is canceled.

Some states, including California and Massachusetts, require lenders to abide by a seven-day “cooling-off period” for a reverse mortgage. This means you will be given seven days after signing a reverse mortgage commitment letter to decide whether or not to proceed with the loan.

In some cases, a lender must provide certain types of information to a homeowner seeking a reverse mortgage. For example, Minnesota law dictates that a lender must provide a potential borrower with a list of at least three independent agencies that offer reverse mortgage counseling. The lender also must obtain proof that the potential borrower completed counseling.

How To Maintain a Reverse Mortgage

Once a homeowner has taken out a home equity conversion mortgage, they must follow three basic rules to keep the loan in good standing:

  1. The home must serve as your primary residence. Each year, your lender or loan servicer will ask you to certify your home’s status.
  2. All home-related payments, such as homeowners insurance and property taxes, must be up-to-date.
  3. The home must be in good condition.

Advertising Rules for Reverse Mortgages

The Consumer Financial Protection Bureau and various state regulators enforce advertising rules for reverse mortgage lenders. For instance, laws and regulations at the federal level prohibit misleading claims in mortgage advertising and require accurate disclosure of the terms and costs of the loans. In Oregon, for example, any lending ad, solicitation, or communication for reverse mortgages must contain a “clear and conspicuous” summary of a loan’s terms.

Rules for Using a Reverse Mortgage To Purchase a Home

There is such a thing as a Home Equity Conversion Mortgage (HECM) for Purchase loan, which can be used toward the purchase of a new home as long as the following conditions are met:

  • The borrower must be at least 62 years old.
  • The new home must be your primary residence, and it must be kept in good condition.
  • A down payment must be made.
  • You must cover the difference between proceeds from the HECM and the sale price, as well as all closing costs.
  • Property taxes, homeowners insurance, and similar housing-related costs must be paid on time.

Some properties, such as cooperative units and manufactured homes, might not qualify for an HECM that is intended for use toward the purchase of a new home.

Frequently Asked Questions (FAQs)

What happens if I don’t keep up with repairs on a reverse mortgage home?

Typically, a borrower must start repairs ordered by their reverse mortgage lender or loan servicer within 60 days of being notified. If the repairs aren’t started during that window of time, the borrower may face a loan default or a foreclosure.

What are the rules on how I spend money from my reverse mortgage?

A typical reverse mortgage comes with no restrictions regarding how you can spend the proceeds. For instance, you might put the money toward medical expenses, long-term care, home upgrades, or a grandchild’s college tuition. You can receive money from a reverse mortgage as a line of credit, a lump sum of cash, or monthly payouts.

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Article Sources

  1. U.S. Department of Housing and Urban Development. “How the HECM Program Works.”

  2. Consumer Financial Protection Bureau. “Are There Different Types of Reverse Mortgages?

  3. U.S. Department of Housing and Urban Development. “Chapter 1. Introduction to Reverse Mortgage Counseling,” Pages 11, 14.

  4. Federal Trade Commission. “Reverse Mortgages.”

  5. Commonwealth of Massachusetts. “Reverse Mortgage Information for Consumers.”

  6. Land Home Financial Services Inc. “California 7-Day Cooling-Off Period Requirements Update.”

  7. Minnesota Commerce Department. “Considering a Reverse Mortgage?

  8. Consumer Financial Protection Bureau. “You Have a Reverse Mortgage: Know Your Rights and Responsibilities.”

  9. Consumer Financial Protection Bureau. “CFPB Takes Action Against Reverse Mortgage Lender for Deceptive Advertising.”

  10. Oregon Legislature. “​​Oregon Laws,Chapter 161.”

  11. Consumer Financial Protection Bureau. “Can I Use a Reverse Mortgage Loan To Buy a Home?