10 Legit But Little-Known Reverse Mortgage Loopholes

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Are reverse mortgage loopholes a real thing? Potentially, yes! We’ll cover the basics of how a reverse mortgage works, then we’ll get into some unique strategies to help you get more out of a reverse mortgage.

Reverse Mortgage Basics

So, what is a reverse mortgage and how does it work?

First of all, a reverse mortgage is simply a home loan. However, it’s a unique home loan that enables seniors 62 or older to convert home equity into cash without a mortgage payment or giving up ownership of their homes.

The most popular reverse mortgage in America today is the FHA-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders).

No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home, maintains it, and pays the required property charges.

You always remain the owner of your home and you’re free to leave it to your heirs. Your heirs will inherit any equity remaining in the home.

The HECM is a non-recourse loan, which means the most that will ever have to be repaid is the value of your home. FHA covers any shortage if your home isn’t worth enough to pay off the entire balance.

The HECM is flexible and customizable, which means it can be used for a lot of different things. Proceeds can be taken as a lump sumline of creditterm/tenure income, or some combination of all of these options.

Potential “Reverse Mortgage Loopholes”

Before we dig into some potential reverse mortgage loopholes, I want to be clear that this isn’t about trying to evade your reverse mortgage obligations. We’re not encouraging you to game the system, which could trigger a maturity event and make your reverse mortgage due and payable.

Instead, by “reverse mortgage loopholes”, we mean strategies that are either little-known or weren’t necessarily intended when the reverse mortgage was designed, but are nevertheless 100% legitimate.

This is about helping you get the most out of a reverse mortgage. It’s not about trying to beat the system.

I’ve done a lot of reverse mortgages over the years, and I’ve learned a few tricks along the way. Not all of these reverse mortgage loopholes will be applicable to your situation, but hopefully you’ll find at least a few of them helpful.

Increase Your Growth Rate

If you owe little to nothing on your home and you don’t need the money from a reverse mortgage right away, the best payout option will likely be the growing line of credit.

If your goal is to maximize line of credit growth, you may want to ask the lender for a higher margin. This probably sounds counterintuitive, because a higher margin will increase the initial interest rate on the loan.

Yes, a higher rate means more interest will accrue on the loan balance. But, if you don’t plan to use the line of credit anytime soon, your balance will be minimal for a long time to come – which means your interest costs will be minimal as well.

The reason you may want a higher margin is because it will increase the line of credit growth rate. Your line of credit will grow and compound faster, giving you access to more equity faster.

Having that said that, this may not work in all market conditions. If your increase your margin, it could reduce your proceeds somewhat.

This reverse mortgage loophole works best when interest rates are low. When rates are low, the loan may price out below the so-called floor rate, which means you can increase the margin without significantly reducing proceeds.

Don’t forget that the HECM is non-recourse; FHA covers the shortage if your home isn’t worth enough to pay off the entire balance.

If your line of credit grows large enough, you could have access to more money than your home is worth. There’s no set limit on how large your line of credit can grow.

FHA backs and guarantees the funds in your reverse mortgage even if your lender goes out of business.

Maximize Your Line of Credit

This strategy only works if you have the variable-rate HECM, which comes with the line of credit payout option.

If you have the cash, you may want to pay your reverse mortgage down to the minimum allowed balance, which maxes your available line of credit and minimizes your interest costs.

When you have a large line of credit, it grows and compounds faster, giving you access to more equity faster.

This strategy works best if you have a large amount of cash that isn’t earning a good return. By investing it back into your reverse mortgage, you recoup line of credit, increase your growth, and reduce your interest costs to almost nothing.

If you need the cash in the future, you can get it from your lender with a quick phone call.

Important: Do not pay your balance to zero! If you pay it to zero, your reverse mortgage will close out. Check with your servicer to confirm the minimum balance to keep your reverse mortgage open.

Reduce Loan Balance Growth

The purpose of a reverse mortgage is to convert home equity into cash without a monthly payment, but you can still make payments if you want to.

For example, let’s say you use a reverse mortgage to eliminate a large mortgage payment. You can still make occasional partial payments on your reverse mortgage to keep the loan balance from growing.

Your monthly cash flow will still be better than it was before the reverse mortgage and you’ll be preserving your home equity for longer.

Depending on your tax situation, you may also be able to write off any mortgage interest you paid. Of course, check with a qualified tax professional to be sure.

Reduce Your Costs or Interest Rate

If you’re paying off a large mortgage balance with your reverse mortgage, you may have some negotiating power.

Lenders make money primarily on starting loan balance. If you’re starting off with a large loan balance, you may be able to negotiate closing costs or interest rate.

Lenders offer closing cost discounts in the form of a lender credit. Lenders don’t waive or remove closing costs, they use a lender credit to offset closing costs. For example, if the total closing costs are $10,000 and you receive a lender credit for $8,000, the net closing costs are $2,000.

The lender will still break down the full $10,000 in closing costs on the appropriate disclosures, but $8,000 of the costs will be paid on your behalf by the lender credit.

If you’d like a rate reduction, ask the lender to reduce the margin. Not only will it reduce interest costs, but it may increase your proceeds as well.

As with traditional “forward” mortgages, there’s a trade off between interest rate and closing costs. If the lender gives you a large lender credit, don’t expect a large rate reduction as well.

Bad Credit Workaround

Per FHA guidelines, reverse mortgage lenders do not need a credit report for a non-borrowing spouse unless the non-borrowing spouse’s income will be used to qualify.

This is handy in situations where one spouse has good credit and the other has bad credit.

For example, let’s assume Jack and Jane are a married couple applying for a reverse mortgage. Jack has good credit, but Jane has multiple medical collections on her credit that are making it difficult for them to qualify.

Jack has good income, so we don’t need to use Jane’s income to qualify. If we make Jane a non-borrowing spouse, we can essentially ignore her bad credit.

As a non-borrowing spouse, Jane still has all the protections that come with the reverse mortgage if Jack passes away. No mortgage payments are required as long as she lives in the home, maintains it, and pays the required property charges.

The only possible “catch” for Jane is that any available funds in the reverse mortgage will close out when Jack passes away. This could be a potential issue for Jane if a lot of money remains in the reverse mortgage and she needs the funds.

However, she could potentially refinance the reverse mortgage into a new reverse mortgage in her own name.

Reduce Your Rate And/Or Get More Cash

When the HECM was created back in 1989, there was no option to refinance a HECM into a new HECM. So-called HECM-to-HECM refinances weren’t created until the 2000s.

If you already have a HECM and interest rates drop and/or home values increase, you can potentially refinance it to get more cash.

If your existing HECM is only a few years old, you may receive a discount on closing costs and you may not have to repeat the counseling.

Get a Line of Credit When Purchasing – Option 1

If you’re purchase a home with a HECM (yes, this is a real thing!), you can pay more than the minimum down payment and convert the difference into a growing line of credit.

This is a great reverse mortgage loophole because it reduces your starting loan balance, which reduces interest costs and helps preserve your home equity for longer.

Even better, you’ll convert a portion of your home equity into a growing line of credit, which serves as a fantastic emergency or “rainy day” fund.

This can work especially well if you have available cash, but it’s not earning a good return.

It’s possible that some lenders may not allow you to use this strategy. Make sure you find out from your lender upfront about whether or not this is allowed.

Get a Line of Credit When Purchasing – Option 2

If your lender doesn’t allow the “Option 1” strategy above, you can accomplish the same thing by putting down the minimum and paying down the balance after closing. As long as you have the variable-rate HECM, you’ll recoup what you paid down as growing line of credit.

If you decide to go this route, make sure you pay down the balance as soon as possible after closing to minimize interest accruals on the larger starting balance. Interest starts accruing once the loan funds.

Retire With Rental Income

If you’re looking to downsize, consider downsizing into a 2-4 unit residential building. You can finance the purchase with a reverse mortgage, then collect rent on the other units.

No monthly mortgage payments are required as long as you live in and maintain the building and pay the required property charges.

I would also suggest hiring a good property manager, who can handle maintenance, rent collection, and tenant qualification for you. Yes, you’ll pay a portion of your rental income to the manager for their services, but it’s money well spent in my opinion.

Get More Proceeds

To maximize your proceeds, ask your lender to reduce their margin. When you reduce the margin, you reduce the expected interest rate, which impacts proceeds.

When the expected interest rate decreases, your proceeds increase.

Frequently Asked Questions

What are some reverse mortgage loopholes?

Yes, there are some potential reverse mortgage loopholes that can help you get more out of a reverse mortgage. To be clear, we’re not suggesting that you try to game the system, which can trigger a maturity event that makes your reverse mortgage due and payable. However, there are some little-known tricks that you can take advantage of to get more out of a reverse mortgage. We cover several of these so-called reverse mortgage loopholes on this page.

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About Mike Roberts

Mike Roberts is the founder of MyHECM.com, a published author, and a highly experienced mortgage industry veteran with over a decade of mortgage banking experience. When he's not working, he enjoys spending time with his family, skiing, camping, traveling, or reading a good book. Roberts is the author of The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage, which is available on Amazon.