A reverse mortgage can be a helpful tool for retirees who want to tap into their equity without selling or taking on an additional monthly payment. The funds you receive can help supplement your retirement income and provide more financial flexibility.
But a common question many homeowners have is: Who actually owns the house when you take out a reverse mortgage? In this article, we’ll break down how homeownership works with a reverse mortgage and outline what happens to the property once the loan comes due.
See if you qualify for a reverse mortgage. Start here.
Who owns the home with a reverse mortgage?
When you take out a reverse mortgage, you’re still the legal owner of your home. The lender doesn’t take ownership, but they do place a lien on the property, just like with a traditional mortgage.
That lien allows the lender to recover the money they’ve lent you (plus interest and fees) when the loan comes due. But as long as you follow the loan requirements, the home stays in your name. That means you have the right to continue living in the home and make home improvements.
However, if you move out permanently, sell the home, or pass away, the reverse mortgage becomes due. At that point, either you or your heirs must repay the loan balance, typically through the sale of the home or by refinancing it into a new mortgage.
What is a reverse mortgage, and how do they work?
A reverse mortgage is a type of loan designed for homeowners aged 62 or older. Instead of making monthly payments to the lender, the lender makes payments to you. Here’s an overview of how reverse mortgages work.
How the funds are paid
A reverse mortgage not only eliminates your monthly mortgage payment, but it also provides you with a reliable stream of income in retirement. There are three different ways borrowers can receive the funds:
- Lump sum: If you choose a lump sum payment, you’ll receive your funds all at once, typically with a fixed interest rate.
- Monthly payments: You can also choose to spread out the funds at a set amount every month for a certain period or as long as you live in the home.
- Line of credit: If you choose a line of credit, you can access funds as needed, and you’ll only accrue interest on what you borrow.
See if you qualify for a reverse mortgage. Start here.
Eligibility requirements
Here are the eligibility requirements you must meet to take out a reverse mortgage:
- You’re at least 62 years old (though some jumbo reverse mortgages allow for borrowers as young as 55).
- The home is your primary residence, which means you live there the majority of the year.
- You don’t have any federal debt, like federal student loans.
- Your home meets the required property standards.
- You’re current on the property taxes, homeowners insurance, and maintenance.
- You have enough home equity to pay off the existing mortgage at closing.
Types of reverse mortgages
There are three different types of reverse mortgages you can pick from: home equity conversion mortgages (HECMs), jumbo reverse mortgages, and single-purpose reverse mortgages. A HECM is the most common type of reverse mortgage and is insured by the FHA. Because they’re federally backed, HECMs offer more borrower protections than other types of reverse mortgages.
A jumbo reverse mortgage is a private loan and is typically used for high-value homes. Depending on your lender, you may be able to take out a jumbo reverse mortgage if you’re 55 or older. A single-purpose reverse mortgage is offered for a specific need, like home repairs or property taxes. Your lender must approve the purpose of the loan before you qualify, and you can’t use the funds for anything else.
See if you qualify for a reverse mortgage. Start here.
Repayment and what happens after death
A reverse mortgage becomes due when the borrower dies, sells the home, or no longer uses it as their primary residence. If the homeowner dies before paying back the reverse mortgage, their heirs will have to take care of it. At that point, they can either sell the home to pay off the loan or refinance into a traditional mortgage.
If you owe more on the property than it’s worth, you also have the option to sign the deed over to the lender and walk away. Because reverse mortgages are non-recourse loans, heirs will never owe more than the home’s current market value, even if the loan balance is higher.
The bottom line
A reverse mortgage does allow your lender to put a lien on your property, but you remain the legal owner of the home. However, you must continue to live in the home and meet the loan requirements. The lender’s lien simply ensures they’ll be repaid when the home is sold or the borrower passes away.
Before taking out a reverse mortgage, make sure you understand the long-term financial consequences. It’s also important to explain to your heirs what their options are after you pass away. A HUD-approved housing counselor or lender can walk you through the details and help you decide if this type of loan fits your financial goals in retirement.
