Shopping for a reverse mortgage is a bit different from shopping for a regular mortgage. While it is fairly easy to qualify for a reverse mortgage, this is a complex loan, so it is crucial that you find a reputable and reliable lender to guide you through the loan process.
The first step before you even begin searching for a reverse mortgage is to complete a reverse mortgage counseling session with a counselor approved by the U.S. Department of Housing and Urban Development (HUD). The federal government requires that all homeowners who apply for a Home Equity Conversion Mortgage (HECM) — which is a loan backed by the government and the most popular type of reverse mortgage — receive counseling from a HUD-approved counselor. The counseling session can be done over the phone, in person or online.
Once the counseling is done, you'll obtain a completion certificate and you'll be eligible to apply for a HECM. Reverse mortgage counseling costs about $125. The service is free to low-income applicants who earn less than twice the poverty level.
How to Find Reverse Mortgage Lenders
Finding reverse mortgage lenders can be challenging because many traditional mortgage lenders do not offer this product, so there is less competition for your business. Some of the companies that offer reverse mortgages include investment and insurance companies.
If you're looking for a larger mortgage, known as a jumbo reverse mortgage, it may be even more challenging to find a lender. The government does not back jumbo loans. Unlike those of government-backed loans, the fees on jumbo loans are not restricted by law, so comparing quotes from competing lenders is even more important for jumbos. However, jumbo lenders have to issue the same disclosures required for HECM lenders, which makes it easier for borrowers to compare loan offers.
Make sure any lender you deal with is licensed to do business in your state. You can verify the license of any mortgage lender by checking the National Mortgage Licensing System (NMLS) lender search page.
To compare quotes from competing lenders effectively, you'll need to get them quickly — loan rates change all the time, so a quote from Lender A on Monday can't be reliably compared to one from Lender B on Friday. Requesting quotes online can help you get several offers quickly. Then, go through them slowly, comparing their Total Annual Loan Costs (TALC), and narrow down your selection to a couple of lenders — those are the ones you'll call.
TALC Disclosure Shows a Reverse Mortgage's True Cost
If you've ever shopped for a traditional "forward" mortgage, you may be familiar with the Good Faith Estimate (GFE) and Truth-in-Lending (TIL) disclosure forms. Both disclosures provide information about the projected costs of a mortgage. For instance, the TIL disclosure contains the Annual Percentage Rate (APR), which takes into account the loan's financing costs.
Unless you have applied for a reverse mortgage before, you probably haven't heard of the TALC form. TALC is the main disclosure that takes into account all projected costs of the loan.
Here's a sample TALC from the Consumer Financial Protection Bureau (CFPB). It includes 12 scenarios, which is three more than the required nine.
Use TALC to Compare Reverse Mortgage Offers
The TALC is an additional requirement to the standard set of mortgage disclosures. It would be difficult to discern a reverse loan's true cost and compare offers from competing lenders without the TALC.
Reverse mortgage lenders must provide this written projection of the total cost of a reverse mortgage at least three business days before you close on your loan, but you should request this form earlier in the process. The sooner you can compare the TALCs from prospective lenders, the sooner you can choose a lender and a loan offer.
Example of 9 Scenarios Presented on a TALC
Annual Home Appreciation
2 years loan term
10 years loan term
14 years loan term
TALC Disclosure Isn't APR
The distinct use of the term "total annual loan cost rate" for reverse mortgage costs emphasizes its stark difference from the more familiar APR. The TALC captures the true cost of a reverse mortgage as time goes by. The APR calculation is incompatible with most reverse mortgage loan cases because you don't know how much you'll end up borrowing. The exact amount you borrow depends on numerous variables, including your payout distribution method, the timing of the disbursements, the fluctuation in interest rates, the rise or fall of home values in your neighborhood and the loan term. Additionally, because you don't make monthly mortgage payments during a reverse loan term, your balance grows until the loan is finally paid off. This projected cost over time is the TALC rate.
TALC Must Include 9 Reverse Mortgage Examples
Your mortgage lender can only roughly project your total costs because of the variables of the loan, including how long you will keep your loan. As a result, TALC disclosures must calculate and disclose interest rates based on at least nine separate scenarios that reflect different interest rates, loan terms and home value appreciation rates. It's up to you to decide which scenario most closely applies to you. Once you decide, you can refer to the same scenario in each TALC you have received to effectively compare reverse mortgage quotes.
Loan terms are always fixed in traditional forward mortgages; they figure into the calculation of the TIL form’s APR. Reverse mortgage loan terms, however, are not set — 30-year reverse loans don’t exist — so lenders must calculate TALC rates based on conjecture. All reverse mortgage lenders must calculate TALC interest rates for three scenarios using three different loan terms:
- Two years
- The youngest borrower’s life expectancy
- A term equal to 1.4 times the youngest borrower’s life expectancy
Find a life expectancy table in Regulation Z’s Appendix L.
Reverse mortgage lenders must calculate TALC rates for three scenarios based on three different home value appreciation rates — annual appreciation rates of zero percent, 4 percent and 8 percent. Why these three specific percentages? The 4 percent rate, taken from HUD's historical housing price data, is the expected rate and reflects the most likely appreciation rate of your property. The zero percent and 8 percent figures demonstrate the effects of slower or faster appreciation on the costs and benefits of reverse mortgages.
TALC Must Include All Costs
The estimated total cost of credit must reflect all fees and expenses, including origination fees, reverse mortgage interest, mortgage insurance premiums, closing costs and service fees. The HECM requires almost no out-of-pocket payments, and all advances made for your benefit (which are added to the balance if you don't pay them at closing) must be accounted for in the TALC calculations.
The TALC also reflects other lesser-known costs. For example, some reverse mortgage lenders include a shared equity provision in the loan. A borrower who signs a mortgage loan with a shared equity requirement agrees to share the equity in a property that comes from increases to the property value during the loan term. The TALC must factor in this appreciation in equity that you might have to pay to the lender.
In addition, nearly all reverse mortgages are non-recourse loans, meaning you can never owe more than your home's value even if the loan balance overtakes it. The TALC must include any such amount that could be potentially written off.
Additional TALC Information
Lenders must supply this additional information in the TALC disclosure:
- Statement that you have no legal obligation to complete the mortgage transaction simply because you received the disclosures or signed an application.
- List of reverse mortgage terms and charges, accompanied by an explanation that includes the age of the youngest borrower and the appraised property value.
- Explanation of the lender's table of total annual loan cost rates.
If your TALC disclosure is incomplete, it might be because your lender is not complying with the law, or is perhaps hiding something from you. Or, it might be the lender does not understand or care about complete TALC disclosures. Whatever its reason for giving you an incomplete TALC, it's a sign you should look for a different lender.
5 Qualities to Look for in a Good Reverse Mortgage Lender
When interviewing the "finalists" remember that the person you choose to help you with your loan will be privy to some personal information about your goals, life and finances. You'll want to find a loan officer or broker who will communicate effectively with you and be considerate and respectful. Here are the hallmarks of good lenders — choose yours accordingly.
Signs of a Good Reverse Mortgage Lender
Returns Your Calls
Good lenders return your calls usually within an hour.
Uses Plain English
Good lenders can back up their recommendations with good reasoning and explain programs and lending terms in plain English.
Explains Your Options
If they recommend a mortgage loan product, they should explain why it's suitable for you. They present alternatives. Good lenders outline pros and cons to help you make a smart choice.
Asks You the Right Questions
The right loan depends on how long you expect to have the property, the reason you need the money, and your estate-planning strategy. Lenders need this information to do a good job.
Works for You on Your Terms
Want your loan documents early to review them at your convenience? Would you like your lender at your closing? Do you communicate better by phone, email, or text? Good lenders operate in your comfort zone, not theirs.
How to Avoid Reverse Mortgage Scams
Reverse mortgage lending used to be like the Wild West. Scam artists operated alongside respectable lenders, and the industry had a somewhat seedy reputation that may not have been deserved. Today, reverse mortgages are so tightly regulated that as long as you choose a licensed and reputable lender, the chances of being conned are extremely low.
According to the CFPB, "reverse mortgage grievances totaled just 1 percent of all mortgage complaints" during a three-year study. Most of the complaints involved borrowers' "frustrations with their loan terms, servicing procedures and issues related to foreclosure."
However, there are and will always be con artists out there who flout regulations and don't care about losing their licenses — because they don't have a license to begin with! Here are some of the more popular reverse mortgage swindles today.
4 Reverse Mortgage Scams
Equity stripping is a rip-off that can be attached to any refinance mortgage, not just a reverse mortgage. It involves wrapping financing costs into the loan and hiding them from borrowers. The victims don't understand how much the loan is costing them because it isn't disclosed and they aren't bringing money to the closing table. If a reverse mortgage borrower has a $200,000 home and borrows $50,000 but the lender wraps another $50,000 in costs into the loan, that's $50,000 in equity that gets "stripped."
With this scheme, con artists tell homeowners in danger of foreclosure that they can save their home with a reverse mortgage. Homeowners actually can save themselves from foreclosure if they qualify for a HECM — they must be able to borrow enough to pay off the old loan with a reverse mortgage, and then they no longer have to make payments. Unfortunately, though, these victims are told that they don't qualify for a HECM but there is "another program" that they could qualify for. All they have to do is sign the papers. They end up signing their homes over to the fraudsters, believing they are being "rescued."
Some contractors go door to door offering to fix houses up with no out-of-pocket costs to homeowners. They may even tell the homeowners that it's a "government program" that repairs their house for free. The paperwork they sign, though, obligates them to a reverse mortgage, and if it's not government-backed, the costs could be extremely high. Even worse, many of these repair "professionals" don't perform the work as advertised. They take the money and run or do slipshod work and disappear.
Another scam to watch out for is the salesperson that uses a reverse mortgage pitch to sell another product — one that's expensive and wildly inappropriate. For example, in San Francisco, a 76-year-old woman was convinced to take out a reverse mortgage to pay for two annuities maturing in 33 years. After paying over $12,000 in reverse mortgage fees, she also had to pay surrender charges to the annuity provider when she needed access to her money — ironically, to complete home repairs required by the reverse mortgage lender. Surrender charges can be as high as 20 percent of the annuity amount.
There are also investment schemes "used by mortgage fraud perpetrators to steal the HECM loan proceeds under the guise of investing it in an annuity, real estate, or other investment product," according to the FBI. "The perpetrators of this scheme are often affiliated with the originator of the HECM loan and cross-sell the investment product to the victim," the FBI reports.
How to Avoid Fraudulent Reverse Mortgage Lenders
Counselors Should Work for You
Beware a lender who steers you to a specific counselor. The counseling is supposed to be objective.
Insist on Legally Required Disclosures
Walk away from a lender that doesn't provide the legally required disclosures, which show the Total Annual Loan Cost (TALC) and list all loan-related fees (Good Faith Estimate, or GFE).
Watch for Discrepancies in the Contract
They provide loan documents that don't indicate a HECM loan is insured by the Federal Housing Administration (FHA).
Beware Cold-Calling Lenders
They solicit you from out of the blue. Some even pay people in the community to befriend and bring them victims. Work with licensed lenders in good standing and find them yourself — not guys going door to door or cold calling you.
Walk Away From Bundles
Con artists will pressure you to buy other financial products like annuities or long-term care insurance, or they require expensive "credit insurance" as a condition of providing the loan.
Although reverse mortgage scams make good headlines, the reality is reverse mortgages cause relatively few complaints to regulators, and most of those are not related to fraud.
Compare offers from several lenders, verify their licenses and do your own loan shopping. If in doubt, consult a trusted family member, accountant or attorney. And remember that even in the "bad old days" of reverse mortgage lending, a survey by AARP found that 90 percent of borrowers who chose reverse mortgages were glad they did.
About Gina Pogol