Reverse Mortgages in California: Empowering Seniors with Financial Freedom

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.

If they have enough home equity, they can acquire a reverse mortgage loan, which is typically funded as a line of credit, monthly payment, or lump sum. The unique factor of this mortgage loan is that you don’t have to pay it back during your lifetime.

Reverse mortgage loans become due and payable once the borrower passes away, moves out permanently, or sells the home they were funding. They only have to pay back the home’s resale value, even if it’s less than the original loan amount.

The reverse mortgage borrower is not responsible for paying the difference since these mortgages are insured.

Definition & Purpose

A reverse mortgage is a type of loan that allows homeowners to borrow money using the equity in their home as collateral. The primary purpose of a reverse mortgage is to provide homeowners with access to their home’s equity without requiring monthly mortgage payments. This type of loan is designed for homeowners aged 62 and older who have significant equity in their home and want to supplement their retirement income or pay for living expenses. By converting part of their home equity into cash, homeowners can enjoy financial flexibility without the burden of monthly mortgage payments.

How Does a Reverse Mortgage Work?

In California, a reverse mortgage doesn’t require homeowners to make payments to the lender. Instead, funds are provided directly to the borrower.

The borrower can also choose how they’ll receive the funds. They also don’t need to pay more interest than the original owed amount or any upfront since the loan balance collects it. The best part is that you’ll also keep the home’s title.

Of course, loans always come with a catch. Your debt will increase, and your home equity will drop over the reverse mortgage term. Your home will also be the collateral for this loan.

If you move permanently or pass away, the house will be sold to repay the loan. If the resale value exceeds the owed amount, the rest will go to you or your estate.

The IRS states that reverse mortgages are not taxable. According to the California Civil Code Section 1923-1923.10, a reverse mortgage in California must meet certain criteria:

• The loan funds the borrower based on the equity or the value of their owner-occupied principal residence.

• The loan requires no payment of interest or principal until the entire loan becomes due and payable.

• The loan is offered by a lender licensed or chartered under California or United States laws.

Benefits of a Reverse Mortgage

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

1. Additional Income for Retirees

Only 52% of California private sector employees aged 25–64 have dedicated retirement savings. Reverse mortgages can be a beneficial choice for retirees with limited cash savings and investments. This type of loan will allow them to turn their illiquid assets into additional income as long as their properties have enough wealth.

2. Keeping the Property

You won’t need to sell your home to liquify your assets. With a reverse mortgage, the borrower can even continue living on the property while getting more funding out of it. This way, they won’t have to worry about being priced out of their neighborhood or downsizing.

3. Paying Off Existing Home Loan

Home loans in California are at an all-time high. In fact, the California Dream for All Shared Appreciation Loan program is expected to support 1,600–2,000 new loans in 2024.

The good news is you must pay off any home loan before taking out a reverse mortgage. You can even use the reverse mortgage funds to pay off your existing home loan. Additionally, you must maintain the property and pay property taxes to avoid foreclosure.

4. Tax Liability

According to the IRS, proceeds from a reverse mortgage are considered loan advanced instead of an income. That means these proceeds don’t have any tax liability. 

5. No Monthly Mortgage Payments

One of the most significant benefits of a reverse mortgage is that it does not require monthly mortgage payments. Unlike traditional mortgages, where homeowners must make monthly payments to the lender, reverse mortgages allow homeowners to receive payments from the lender without making any monthly payments. This can be especially beneficial for homeowners who are living on a fixed income and need to supplement their retirement funds. By eliminating the need for monthly payments, reverse mortgages provide financial relief and help seniors maintain their standard of living.

Eligibility Requirements:

Having the right reverse mortgage information for seniors can be the difference between getting scammed and getting funded. Don’t let unreliable lenders tell you false information about the eligibility criteria. Here are all the requirements you need to know about.

1. Property Type

If your property was built after June 15, 1976, good news – you qualify for a reverse mortgage loan. However, this only applies to houses, townhouses, condos, and manufactured homes. 

The FHA states that cooperative housing owners cannot take out reverse mortgages. That’s because these “owners” don’t technically own the house they live in – they only have shares. However, that is only the case for certain states, like New York. 

Luckily, co-op owners in California are eligible to take out reverse mortgages. 

2. Equity and Fees

Unlike traditional loans, reverse mortgages don’t ask for proof of income or credit scores. While that makes it easier to become eligible, getting disqualified is still possible. 

Besides being 62 years old, you must have at least 50% in your home or own it. You’ll need to pay:

• Mortgage insurance premiums (MIPs)

• An origination fee

• Loan servicing fees

• Standard closing costs

• An up-front insurance premium

• Interest

Don’t worry; some of it is in your favor, too. Lenders must also follow the federal government’s rules on how much they can charge for each item. 

3. Reverse Mortgage Counselor

Before taking out a reverse mortgage loan, borrowers must complete a counseling session approved by the US Department of Housing and Urban Development (HUD). This session, which costs about $125 and lasts 90 minutes, will tell you all about the loan and its implications. This is a fraud prevention step you can’t miss.

4. Collateral Protection

The HUD also requires you to fulfill certain reverse mortgage home maintenance requirements, including the obligation to pay property taxes. For instance, you must stay current on homeowner’s association fees, insurance, and property taxes. You’ll also have to repay the loan if you stop living in the house for over a year.

Types of Reverse Mortgages

There are two major types of reverse mortgage loans: HECMs and proprietary reverse mortgages. Here’s what you need to know about them.

1. Home Equity Conversion Mortgages (HECMs): HECMs are pretty simple to get approved for. They’re also called FHA reverse mortgages since they only come from FHA-approved lenders. The American Recovery and Reinvestment Act increased the national HECM lending limit to $625,500 in 2009.

2. Proprietary Reverse Mortgages: This type of reverse loan allows senior borrowers to borrow up to $4 million in equity. Since they don’t have the same regulations as an HECM, they’re a lot more susceptible to scams. However, loan proceeds from proprietary reverse mortgages are disbursed tax-free in California.

California has a low number of interested borrowers when it comes to jumbo reverse mortgage lenders. Los Angeles, being a populous city with a significant real estate market, plays a crucial role in shaping the interest in reverse mortgages in the state.

Home Equity Conversion Mortgage (HECM)

A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage that is insured by the Federal Housing Administration (FHA). HECMs are the most common type of reverse mortgage and are available to homeowners aged 62 and older who have significant equity in their homes. HECMs offer a range of benefits, including no monthly mortgage payments, a lump sum payment option, and a line of credit that can be used to pay for living expenses. The FHA insurance ensures that even if the loan balance exceeds the home’s value, homeowners or their heirs will not owe more than the home’s worth. This makes HECMs a secure and flexible financial tool for seniors.

Choosing the Right Lender 

The simplest way to avoid getting scammed with a reverse mortgage is to contact the right lender. Here are a few things to look out for when you meet with a reverse mortgage loan officer.

• Reputation and Experience: First and foremost, your lender should have a strong track record and extensive experience with reverse mortgages. You can read their online reviews, customer testimonials, and ratings from agencies like the Better Business Bureau (BBB).

• Licensing and Certification: Your lender should also be licensed to operate in California. You can verify this through the Nationwide Multistate Licensing System (NMLS). Don’t forget to check if the lender's loan officers have certification from organizations like the National Reverse Mortgage Lenders Association (NRMLA).

• Counseling Requirement: The HUD requires all reverse mortgage applicants to undergo counseling from an approved counseling agency. A reputable lender will encourage you to complete this step to be completely informed about each step. Any dismissal of the counseling step is a red flag.

• Loan Options and Flexibility: Some lenders might specialize in certain types, such as HECMs, the most common type in California. Explore your options and make sure your lender specializes in your chosen type.

The Process of Getting a Reverse Mortgage 

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

1. The first step is to meet with a reverse mortgage loan officer who will study your situation. 

2. After the financial review with your reverse mortgage advisor, you will need to undergo a counseling session with a HUD-approved third-party counselor. Once you’re done, you’ll fully understand a reverse mortgage's terms, costs, and potential risks.

3. Then, you can file the reverse mortgage application with the lender. In California, homeowners even get a seven-day cooling-off period after counseling to make up their minds. During this time, lenders cannot charge fees or order services. 

4. An appraisal of your home may be conducted to determine its value. This will be the amount you’ll be able to borrow.

5. Once the loan is finally approved, you can sign the necessary documents, but only after reading the fine print. Hire a financial advisor to decode the loan agreement for you.

6. Finally, you’ll receive the funds as a lump sum, line of credit, or monthly payments.

How to Use the Funds From a Reverse Mortgage

You could use the funds from a reverse mortgage in many ways. Let’s look at a few of them.

• Supplement Retirement Income: Many retirees use reverse mortgage funds to supplement their retirement income. This can cover living expenses and healthcare costs without depleting other retirement savings.

• Pay Off Existing Debt: Use your reverse mortgage funds to pay off existing debts, such as a traditional mortgage, credit card balances, or other loans.

• Cover Long-term Care Costs: Healthcare and long-term care costs can drain your retirement funds. Reverse mortgage funds can cover medical bills, in-home care, or other health-related expenses.

• Make Home Improvements: If you need to make repairs, renovations, or age-related modifications (like installing ramps or grab bars), reverse mortgage funds can provide the funding. 

Managing a Reverse Mortgage

Managing a reverse mortgage requires careful consideration of the loan’s terms and conditions. Homeowners must understand the loan’s interest rate, fees, and repayment terms to ensure that they are making the most of their reverse mortgage. It’s crucial to stay informed about the loan balance and any changes in interest rates. Regularly reviewing the loan statements and maintaining communication with the reverse mortgage lender can help homeowners manage their reverse mortgages effectively. Additionally, staying current on property taxes, homeowner’s insurance, and home maintenance is essential to avoid any potential issues with the loan.

Repayment Options

Homeowners have several repayment options when it comes to paying off a reverse mortgage. These options include:

• Making lump sum payments to reduce the loan balance

• Using a home equity loan or line of credit to pay off the loan

• Selling the home and using the proceeds to pay off the loan

• Refinancing the loan to a new reverse mortgage or traditional mortgage

• Using alternative income streams or assets to pay off the loan

Homeowners need to consult with a reverse mortgage counselor or financial advisor to determine the best repayment option for their circumstances. A professional can provide guidance on the most suitable strategy, ensuring that homeowners make informed decisions that align with their financial goals and needs.

What to Know Before Taking Out a Reverse Mortgage

Reverse mortgages can seem pretty generous, but they have their fair share of downsides. Let’s look at some before you invest in one.

1. High Fees and Interest Rates

You'll pay a fixed interest rate if you choose to get your reverse mortgage as a lump sum. The other five receiving options have dynamic interest rates that often drop or skyrocket without warning. 

Variable interest reverse mortgages are tied to benchmark indexes like the Constant Maturity Treasury (CMT). In such cases, the lender often adds a 1%-3% margin to the base rate.

So, if your index rate is 2.5%, you can expect an interest rate of 3.5–5.5%.

2. Possibility of Foreclosure When Loan Balance Exceeds Property Value

The borrower doesn’t need to start paying off the loan until a maturity event. However, they still need to meet certain maintenance requirements the lender sets. If they fail to do so, the lender has the right to foreclose.

In most cases, they require you to live in and maintain the house you’ve loaned. The lender may opt for foreclosure if you purposefully allow the house’s market value to drop.

3. Susceptible to Scams

California is ranked as the #1 most scammed state in the US, scoring 100 out of 100 in the first quarter of 2023. Fraudulent reverse mortgages for 55 and older are a major part of these scams, especially due to the vulnerable nature of the borrowers. 

Unscrupulous vendors, most of whom are caregivers, relatives, and financial advisors, often prey on seniors. Some even attempt to reverse mortgage a home on their behalf and steal the proceeds. 

Conclusion

Reverse mortgages in California can help seniors into their home’s equity while enjoying their retirement years. 

Remember, the right approach starts with knowledge and reliable partners. For expert advice on navigating the reverse mortgage process, don’t hesitate to contact a trusted financial advisor. 

Contact us today to make your reverse mortgage process easy.