Complete Guide to Get a Reverse Mortgage in Texas | 2024

When it comes to a reverse mortgage loan, Texas is the third highest state in the world for such loans – around 60,000 home equity conversion mortgage (HECM) loans every year. 

Currently, seniors make up 14% of the Texan population, which is why reverse mortgages are a popular loan type in the state. Texan seniors have an average personal income of $32,000 – over 60% of whom depend on Social Security for at least 50% of their annual income. 

If you think such a loan could be beneficial to you, read our complete guide to find out the reverse mortgage Texas pros and cons. 

What is a Reverse Mortgage?

A reverse mortgage is a specific loan type for senior investors. It allows elderly homeowners to acquire funding in a non-traditional way.

Seniors who have enough home equity can acquire a reverse mortgage loan. These loans are typically funded as a lump sum, line of credit, or monthly payments. Unlike other similar loans, you don’t need to pay a reverse mortgage back during your lifetime.

This type of loan only becomes due and payable if the senior borrower passes away. It can also be due to whether they move out permanently or sell the home they were funding with the mortgage. Another unique factor about this loan is that the borrower only needs to return the home’s resale value, even if it’s lower than the original loan amount. 

Since these mortgages are insured, the borrower is not responsible for paying the difference.

How Does a Reverse Mortgage Work in Texas?

Unlike a reverse mortgage, the lender makes payments to the homeowner instead of the other way around. That’s how this loan gets its name. 

As a borrower, you can choose exactly how you receive your funds: lump sum, monthly payments, or line of credit. You also won’t need to pay any more interest than the originally owed amount since the loan balance simply collects it. Other than that, you will get to keep the home’s title. 

Before you get a reverse mortgage Texas, keep in mind that your debt will increase. Plus, your home equity will drop over the course of the loan. 

If you pass away or move away permanently before you’ve paid off the loan, the lender will sell your house to repay the loan. If it sells for more than what you owe, the remaining amount will go to your estate.

The IRS states that reverse mortgages are not taxable. When it comes to the requirements of a reverse mortgage, Texas law demands a few things:

• Texas law restricts the total loans against a home, including reverse mortgages, to not exceed 80% of the home's appraised value.
• Texas law reinforces the federal non-recourse policy, ensuring that borrowers will never owe more than the property’s value at the time the loan is repaid.
• Texas law mandates that both spouses must be 62 or over to qualify for a reverse mortgage. There must be a 12-day cooling-off period before closing the loan and mandatory counseling at least five days before closing. The fees should be at most 3% of the loan amount.

Benefits of a Reverse Mortgage

Reverse mortgages come with tons of upsides for senior homeowners in Texas. Let’s look at some of them.

1. Additional Income for Retirees

Reverse mortgages can be a helpful last-minute option for retirees who don’t have ample cash savings or investments. With this loan, they can turn their illiquid assets into extra income if they have enough home equity. Since 20% of Texan seniors do not have retirement savings, reverse mortgages can be very beneficial. 

2. Keeping the Property

With a reverse mortgage, you don’t need to sell your home to liquify your assets. You’ll be allowed to continue living on the property while you get more funds out of it. This eliminates any risk of downsizing or getting priced out of your neighborhood.

3. Paying Off Existing Home Loan

There's good news for you if you’re among the many Texans who have recently taken out a home loan. You can still take out a reverse mortgage without paying off the home first. You can even use the reverse funds to pay off your existing home loan.

Eligibility Requirements of a Reverse Mortgage Texas

Since reverse mortgages are not backed by the government, borrowers can be much more susceptible to scams. Lenders may try to scam you by telling you incorrect eligibility requirements. Here are the requirements as defined by Texas law.

1. Property Type

Any borrower with a property built after June 15, 1976, qualifies for a reverse mortgage. This rule applies to manufactured homes, condos, and townhouses.

If you’re a cooperating housing owner, you cannot take out a reverse mortgage, so you technically do not own the entire house. However, that is only officially the case for New York State – Texan borrowers must consult a financial advisor to confirm the details.

2. Equity and Fees

The selling point of reverse mortgages is that they don’t demand any proof of income or credit scores. Of course, a higher credit score will always increase your chances of getting a loan, it’s not required. 

You may still get disqualified even if you check all the other boxes. There are three main requirements: be 62 years old, have at least 50% equity in your home, and make the following payments regularly:

• Mortgage insurance premiums (MIPs)
• An origination fee
• Loan servicing fees
• Standard closing costs
• An up-front insurance premium
• Interest

Failing to pay these amounts can terminate your loan. On a more positive note, reverse mortgage laws put a cap on how much the lender can charge you for each item on the list. They’ll need to follow the federal government’s rules while setting the limits.

3. Counseling

Borrowers are required to complete a counseling session before they can take out a reverse mortgage. This session must be approved by the US Department of Housing and Urban Development (HUD). It typically costs around $125 and lasts 90 minutes. 

4. Collateral Protection

There are also certain collateral protection requirements you need to meet. For instance, that means staying current on insurance, property taxes, and homeowner’s association fees. If you don’t live in the property for over a year, you’ll also have to start repaying the loan.

Types of Reverse Mortgages Texas

Reverse mortgages Texas can be divided into two main types: proprietary reverse mortgages and HECMs. Let’s break down the two options.

1. Proprietary Reverse Mortgages: Seniors can borrow up to $4 million in home equity with proprietary reverse mortgages. However, this generous loan limit comes at a cost – proprietary reverse loans are highly susceptible to scams. All loan proceeds are disbursed tax-free.
2. Home Equity Conversion Mortgages (HECMs): HECMs are a lot easier to get approved for. They’re also sometimes referred to as FHA reverse mortgages since the lenders need to be approved by the FHA. The national HECM lending limit was increased to $625,500 by the American Recovery and Reinvestment Act in 2009.

Choosing the Right Lender For a Reverse Mortgage in Texas

Choosing the right lender for a reverse mortgage in Texas takes some research. Here’s what to keep an eye out for.

• Reputation and Experience: First and foremost, your lender’s reputation should speak for itself – a strong track record and extensive experience with reverse mortgages. We recommend reading their online reviews, customer testimonials, and ratings from agencies like the Better Business Bureau (BBB).

• Licensing and Certification: Of course, your lender should also be licensed to operate in Texas. You can visit the Nationwide Multistate Licensing System (NMLS) to verify this. More importantly, the lender's loan officers must have certification from organizations like the National Reverse Mortgage Lenders Association (NRMLA).

• Counseling Requirement: As mentioned, the HUD requires you, as the borrower, to complete a counseling session with an approved agency. A trustworthy lender will encourage you to complete this step, while a suspicious one may try to dismiss it.

• Loan Options and Flexibility: HECMs are the most common type of reverse mortgage in Texas, which is why most lenders specialize in this type. If you want to go for a proprietary mortgage instead, hire a financial advisor to find the right lender for you. . 

The Process of Getting a Reverse Mortgage in Texas

The process of getting a reverse mortgage is pretty similar across all states. Here’s what it looks like in Texas. 

1. Consult a loan officer: First, meet with a reverse mortgage loan officer to discuss your financial situation and see if this type of loan is right for you.
2. Attend HUD-approved counseling: Federal law requires you to go through counseling with a HUD-approved agency. This is the safest way for you to fully understand the terms, costs, and risks of a reverse mortgage.
3. File your application: Submit your reverse mortgage application to your chosen lender. If you're in Texas, you have a seven-day cooling-off period after counseling to decide. During this period, lenders cannot charge fees or order services.
4. Home appraisal: An appraisal will determine your home's value and how much you can borrow.
5. Review the loan agreement: Once approved, carefully review the loan agreement. It may be wise to hire an expert financial advisor to help you understand the fine print.
6. Receive your funds: You can decide to receive the loan funds in one go, as a line of credit, or via monthly payments.

What to Know Before Taking Out a Reverse Mortgage

Before you get a reverse mortgage of any kind, consider that:

The Fees and Interest Rates May Be High

Reverse mortgages aren’t exactly cheap. If you choose to receive the funds as a lump sum, the interest rates will be fixed. However, the other five receiving options have dynamic interest rates that often drop or skyrocket without warning. 

Reverse mortgages with variable interest rates depend on benchmark indexes such as the Constant Maturity Treasury (CMT). In that case, you can expect the lender to add a 1–3% margin to the base rates.

For instance, if your index rate is 2.5%, the interest rate could go up to 5.5%. 

There’s a Possibility of Foreclosure

As mentioned, the loan doesn’t become due and payable until you pass away or move out permanently. During your residence, however, you’re still responsible for maintaining the property’s value and paying certain maintenance fees. If you fail to do so, the lender may choose to foreclose the property. 

These requirements include living in and taking care of the property. In some cases, borrowers purposefully allow the house’s market value to drop so they have less to pay back once the loan term is over. In this case, the lender may choose to foreclose.

Reverse Mortgages are Susceptible to Scams

According to a study by Social Catfish, Texas ranked second highest in the nation for the total number of scam victims in 2021 – a high percentage were seniors. Reverse mortgages are one of the most susceptible loan types when it comes to such fraud.

Unscrupulous vendors – typically caregivers, relatives, and financial advisors – tend to prey on seniors. Some even attempt to reverse mortgage a home on their behalf and steal the proceeds. 

Conclusion

Reverse mortgages in Texas offer tons of benefits for older homeowners: flexibility, homeownership, high loan limits, and so on. However, the details can get tricky.  

Don't let complex terms or pushy lenders pressure you into a bad deal. Protect your financial future and the equity you've built in your home by consulting with a trusted financial advisor before you make any decisions. 

Our experts  will help you understand your options, compare offers, and avoid potential scams. Don't go it alone – contact us to get the expert guidance you deserve.