Reverse mortgages key terms
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- Appraisal
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A written document that shows an opinion of how much a property is worth. It describes what makes the property valuable and may show how it compares to other properties in the neighborhood.
- Co-borrower
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A person, usually the borrower’s spouse or partner, who also signs the reverse mortgage loan note and who is equally responsible for fulfilling all the loan obligations and who also receives the benefits from the loan.
- Deed-in-lieu of foreclosure
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An arrangement where the borrower voluntarily turns over ownership of the home to the lender to avoid the foreclosure process.
- Default
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The failure to meet the loan requirements included in the reverse mortgage. For example, the requirements of a Home Equity Conversion Mortgage (HECM) loan include occupying the home as the principal residence, keeping the home in good repair, and paying the property charges on time. A borrower’s failure to fulfill these obligations would cause the loan to fall into default and may lead to foreclosure.
- Eligible non-borrowing spouse
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A borrower’s spouse who is not a co-borrower, but qualifies under HUD’s rules to stay in the home after the borrower moves into a healthcare facility for more than 12 consecutive months or passes away.
- Equity
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The amount the property is currently worth, minus the amount owed on any existing mortgages on the property.
- Federal Housing Administration (FHA)
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The federal agency that insures HECMs, the most common type of reverse mortgage loan. FHA is part of the U.S. Department of Housing and Urban Development (HUD).
- Foreclosure
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The process where the lender takes back property because the borrower no longer fulfills the obligations of the reverse mortgage loan. Foreclosure processes differ by state.
- Good Faith Estimate
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A Good Faith Estimate, also called a GFE, is a form that a lender must give borrowers when applying for a reverse mortgage. The GFE lists basic information about the terms of the mortgage loan offer.
Read more - Home Equity Conversion Mortgage (HECM)
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The most common type of reverse mortgage today. One way they differ from private reverse mortgages (sometimes called “proprietary” reverse mortgages) is that HECMs are federally insured by the Federal Housing Administration (FHA).
- Homeowners insurance
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Pays for losses and damage to the property if something unexpected happens, like a fire or burglary. Standard homeowners insurance doesn’t cover damage from earthquakes or floods, but it may be possible to add this coverage. Homeowners insurance is also sometimes referred to as "hazard insurance." Borrowers with a HECM loan are required to maintain homeowners insurance in addition to the mortgage insurance that is also required with a reverse mortgage loan.
- HUD-approved housing counseling agency
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An organization with housing counselors who are approved by HUD. Borrowers taking out a HECM reverse mortgage loan must receive counseling from a HUD-approved reverse mortgage counseling agency before receiving the loan.
- Lender
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The financial institution that loaned money to the borrower.
- Loss mitigation
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The steps mortgage servicers take to work with a borrower to avoid foreclosure. Loss mitigation refers to a servicer’s responsibility to reduce or “mitigate” the loss to the investor that can come from a foreclosure. Certain loss mitigation options may help a borrower stay in their home. Other options may help a borrower leave their home without going through foreclosure. Loss mitigation options for reverse mortgage borrowers may include a deed-in-lieu of foreclosure or a repayment plan.
- Maximum claim amount
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The lesser of the appraised value of the home, the sale price of the home being purchased, or the maximum limit HUD will insure. The maximum claim amount is one factor used to calculate how much a homeowner can borrow with a reverse mortgage loan.
- Non-borrowing spouse
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A borrower’s spouse who is not a co-borrower on the reverse mortgage loan.
- Origination fees
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A one-time upfront fee that the lender charges the borrower for making the loan. These fees are limited by the maximum claim amount and may not exceed $6,000.
- Principal limit
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The amount of money the borrower can borrow with a reverse mortgage loan. The principal limit for a HECM is calculated using the age of the youngest borrower or Eligible Non-Borrowing Spouse, the interest rate on the loan, and the maximum claim amount. The principal limit generally will increase each month, possibly making additional funds available over time for borrowers with adjustable rate HECMs, but not fixed-rate HECMs. In general, loans with older borrowers, higher-priced homes, and lower interest rates will have higher principal limits than loans with younger borrowers, lower-priced homes, and higher interest rates.
- Principal residence
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The property where the borrower, and if applicable, the non-borrowing spouse, maintain their permanent home and where they typically spend the majority of the year. A borrower may only have one principal residence at a time.
- Property charges
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Obligations the borrower must pay including property taxes and homeowners insurance, and when applicable, flood insurance premiums, ground rents, condominium fees, planned unit development fees, homeowners’ association fees, and any other special assessments that may be levied by municipalities or state law. Paying property charges on-time is a requirement of a HECM loan.
- Proprietary reverse mortgage
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Reverse mortgage loans that are not insured by the federal government and are typically designed for borrowers with higher home values than those insured by HUD.
- Reverse mortgage
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A type of loan that typically allows homeowners age 62 or older to borrow against the equity in their homes. Most reverse mortgages today are called HECMs, insured by the Federal Housing Administration (FHA). It is called a “reverse” mortgage because, instead of making payments to the lender, the borrower receives money from the lender. The money the borrower receives, and the interest charged on the loan, increases the balance of the borrower's loan each month. Over time, the loan amount grows. Since equity is the value of the borrower's home minus any loans, borrowers have less and less equity in their home as their loan balance increases, which could become a problem if a borrower ever wants or needs to move.
Read more - Servicer
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The company that handles the day-to-day management of the loan including making monthly payments to borrowers or processing draws from the line of credit, sending mortgage statements, responding to borrower inquiries, sending and collecting annual occupancy certifications, and keeping track of principal and interest paid. The loan servicer may handle foreclosure processing for the lender. Typically, the servicer is not the same company as the lender.