HUD. Preparing for Your Counseling Session
The decision to get a reverse mortgage is an important one. The Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) want to ensure you are able to make an informed decision and that you are able to choose a course of action that will meet your needs.
For this reason, housing counseling for HUD’s Home Equity Conversion Mortgage (HECM) is required. The purpose of this overview is to provide introductory information on counseling and the HECM program, to help you prepare for your counseling session. After your counseling session, you will have a better understanding of the features of a reverse mortgage; the impact a reverse mortgage will have on your particular circumstances; and whether services or programs other than a reverse mortgage might better meet your needs.
What You Can Expect from Your Reverse Mortgage Counselor
Understanding what to expect from reverse mortgage counselors is an important first step in setting your expectations for your counseling session. Remember, only you can decide if a reverse mortgage is right for your situation. The counselor provides information to assist you in making that decision. The counselor is responsible for helping you understand reverse mortgages and the appropriateness of a reverse mortgage to meet your particular need as well as alternatives to a reverse mortgage. Reverse mortgage counselors will discuss your financial and other needs for remaining in your home, the features of a reverse mortgage and how it works, your responsibilities with a reverse mortgage, the impact of a reverse mortgage on you and your heirs, and the availability of other assistance you may need.
The job of the counselor is not to “steer” or direct you towards a specific solution, a specific product, or a specific lender. Counselors will help you understand your options and their impacts. Reverse mortgage counselors are required to follow specific practices, which are designed to ensure you receive quality counseling services and are protected against fraud and abuse. HUD requires that HECM counselors do the following:
- Send you required materials ( i.e., this packet) prior to you counseling session,
- Follow established protocols when conducting the counseling session, and
- Follow up with you after the session has concluded.
What You Can Expect from the Reverse Mortgage Counseling Process
Step 1. Schedule an appointment: The counseling process begins when you schedule your appointment for a counseling session. You must schedule an appointment directly with the counseling agency. Your lender cannot initiate or participate in the counseling session. This session is conducted in person or over the telephone; however, HUD advises that, if possible, you meet with your counselor face-to-face to gain greater benefit from your session.
Step 2. Counselor will contact you and send information: Once you have set up an appointment, the agency sends you a packet of information so that you can prepare for your session. Before you begin, you should also know that some agencies charge a fee for counseling; if you cannot afford to pay this fee, you should discuss your inability to pay with the agency at the outset of your session to understand your options.
Step 3. The counselor will collect from you: Your name, contact and other key information, including your interest in obtaining a reverse mortgage, for the counseling session.
Step 4. Counseling session: The counselor will discuss with you your needs and circumstances; provide information about reverse mortgages and other alternative types and sources of assistance that might be available to you. During the session, you will work with the counselor to develop an assessment of your current financial situation using the Financial Interview Tool, which will assist you in determining the best course of action. You should be prepared to discuss your income, debts and expanses. You will also be offered the opportunity to obtain a Benefits Checkup which may provide information on funds and services in your area for which you may qualify.
Step 5. Certificate of Completion: Once you complete your session and you and your counselor are comfortable that you understand the essentials of a reverse mortgage, the counselor will issue a certificate which verifies for a lender that you have successfully completed counseling.
Step 6. Follow up: Your counselors will follow up with you to learn if you need further assistance and to understand the outcome of your counseling session. You may also call your counselor to seek further assistance after your session.
How a Reverse Mortgage Works
Before you begin your counseling session, it is helpful if you understand a few basics about a reverse mortgage. Reverse mortgages enable homeowners age 62 or older to convert their home’s equity into available cash – a lender advances you money (the loan) based upon the equity in your home. The amount of money you are eligible to receive generally depends upon the amount of equity in your home and your age at the time you get the loan.
With a reverse mortgage, you remain the owner of your home. You must continue to pay property taxes and homeowner’s insurance. You are also responsible for maintaining your home in good condition. You will not have to repay your loan balance for as long as you live in your home. You can choose to pay off the loan through the sale of the property or prepayment of the loan at any time without penalty. Your estate may retain ownership of the property and must pay off the loan in full or the property can be sold to an unrelated party for the lesser of the unpaid mortgage balance or 95% of appraised value.
Types of Reverse Mortgages
There are three types of reverse mortgages shown in the chart below.
- Single purpose reverse mortgage: Typically offered by state and local government agencies to be used in only one specific way, for example, home repairs
- Proprietary reverse mortgage: Can be used for any purpose and may be suitable for borrowers with high cost homes
- Home Equity Conversion Mortgage (HECM): Can be used for any purpose and is insured by the Federal Housing Administration.
Payment Plan Options
There are several types of HECM loan plans available, including monthly and annually adjusting interest rate loansas well as fixed interest rate loans. Borrowers can decide to take a line of credit with flexible draw down options, a term loan with fixed monthly payments for a specified number of years, or a tenure plan with guaranteed payments for life or a combination of these options.
Choosing a Reverse Mortgage to Meet your Needs
HECM payment plans are flexible. The best payment plan for you will depend on your current and future financial needs and circumstances.
For example: If you have a small balance on your existing mortgage and would like to pay it off with the reverse mortgage, a line of credit plan would allow you to draw all the funds at loan closing and pay off the current mortgage.
If you need a set amount of money every month to supplement your income to help meet monthly expenses, then a tenure or term payment plan might be a suitable option for you.
If you know you will have some large health care expenses in the near future and want to have the funds available when needed, a line of credit may also meet your needs.
Your reverse mortgage counselor will discuss your goals for a reverse mortgage with you and will explain the different options available to help meet your needs.
Costs to Obtain a HECM
Costs associated with HECMs are the same as those for “forward” mortgages used to purchase a home. These costs include lender fees to originate the mortgage, servicing fees for ongoing administration of the loan and interest on the money you use from the loan. There are also closing costs, which include all the usual and customary expenses associated with obtaining a mortgage, for example, the appraisal, title searches and insurance. HECMs also include a fee for FHA mortgage insurance.
Impact on Tax/Social Service Benefits
Reverse mortgage loan advances are not taxable and do not affect Social Security or Medicare benefits. However, you must be careful that any loan proceeds you retain do not exceed the monthly liquid resource limits for Supplemental Security Income (SSI) and Medicaid.
Alternatives to a Reverse Mortgage
Your HECM counselor will also help you consider options available to meet your needs other than a reverse mortgage. These options include: selling your home and moving to a more suitable residence, renting as well as other financial options, and support services and public benefits that may be available to you in your community.
HUD encourages you to learn as much as possible about your options, before you decide on a reverse mortgage. Listed below are resources you can access to learn more about reverse mortgages and elder care.
- AARP’s web site: AARP provides more information on reverse mortgages and calculators that will provide general estimates of the amount of money you might receive from a reverse mortgage. You may also contact AARP at 1 (800) 424-3410.
- The National Reverse Mortgage Lenders Association provides consumer information on their website at http://nrmlaonline.org/nrmla/default.aspx and can be reached by calling (866) 264-4466.