How a Texas Reverse Mortgage Works According to an Experienced Industry Insider

An experienced and successful industry veteran breaks down what you need to know about how Texas reverse mortgages work.

I’ve helped hundreds of seniors get reverse mortgages over the years. I can tell you that much of what you’ve heard about reverse mortgages is either dated or simply not true. Rumors and misconceptions abound.

My goal is to dispel the rumors and cover how a reverse mortgage in Texas really works. I’ll also cover some unique Texas reverse mortgage requirements and where to find lenders and counselors that operate in Texas.

My goal is to equip you with the information you need to decide if a reverse mortgage is the right solution for you and your family.

What is a Reverse Mortgage?

A reverse mortgage is a unique home loan designed to give you access to a portion of your home’s value without a mortgage payment and without giving up ownership of your home.

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

Congress created the HECM as part of the Housing and Community Development Act of 1987, which was signed into law by President Reagan. 

HECM reverse mortgages are funded by private Texas-licensed mortgage lenders, but are insured and regulated by the Federal Housing Administration (FHA).

How Does a Texas Reverse Mortgage Work?

So, how does a reverse mortgage work in Texas? It’s actually pretty simple, but the opposite of what you’re probably used to.

With a traditional “forward” mortgage, you borrow a large amount and pay it back on a monthly basis over time. Your loan balance decreases and your home equity increases over time.

A Texas reverse mortgage works in the opposite direction. You borrow over time and pay it back in one lump sum when you’re no longer living permanently in the home. The idea is to convert home equity into cash that you can use for whatever you like.

No mortgage payments are required as long as at least one borrower lives in the home and pays the property taxes, homeowner’s insurance, and HOA dues (where applicable).

You remain the owner of your home and you’re free to leave it to your heirs. Your heirs can keep the home by paying off or refinancing the loan balance. If your heirs don’t want the home, they can sell it, pay off the loan, and keep the remaining equity.

Your heirs can also let the lender sell the home if they don’t want to keep it or mess with selling it.

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

Payout Options

The Texas reverse mortgage comes with multiple payout options, which makes it flexible and customizable. Lenders can tailor it to your individual financial goals and needs.

Proceeds can be taken as a lump sum, line of credit, term/tenure income, or some combination of all of these options. Homeowners commonly use the proceeds to:

• Eliminate existing mortgage payments
• Eliminate consumer debt payments (credit cards, auto loans, personal loans, etc.)
• Pay for medical bills
• Finance home improvements
• Supplement retirement income
• Supplement retirement assets
• Set up a “rainy day” or emergency fund

You can use the proceeds for pretty much whatever you like.

How much you qualify for is based on a few different factors, including age, home value, current interest rates, and what HECM product you select. If you’d like to get an idea of how much you can get from a reverse mortgage, check out our reverse mortgage calculator.

Basic Eligibility Criteria

A reverse mortgage is easier to qualify for than other types of home loans, but there are still some minimum requirements you need to meet. The most important Texas reverse mortgage eligibility requirements are:

1. Age – The minimum qualifying age for a HECM reverse mortgage in Texas is 62. This applies whether you’re married or unmarried.
2. Property Type – Only single-family homes, FHA-approved condos, 1-4 unit multiplexes, and doublewide manufactured homes built after June 15, 1976 are eligible. Additional qualifying criteria may apply. Your home needs to be reasonably well-maintained with no major repairs needed.
3. Occupancy – At least one borrower must live in the home for the majority of the year.
4. Income – The income requirements for reverse mortgages are relatively lenient compared to other types of home loans. In my experience, few applicants are disqualified based on income. If your income does come up short, your lender may still approve you by applying compensating factors. If that doesn’t work, your lender may still approve your loan with a life-expectancy set aside (LESA).
5. Payment History – Your lender will evaluate your payment history for property taxes, homeowner’s insurance, HOA dues (if applicable), loans, mortgages, and credit cards. Lenders generally want to see a perfect payment history for property taxes, homeowner’s insurance, and HOA dues for the last two years. Late payments on mortgages, loans, and credit cards are less critical as long as you don’t have too many of them and they weren’t more than one month late. If you have late payments, your lender may still approve your loan by documenting extenuating circumstances beyond your control that led to the late payments. If you don’t have a valid extenuating circumstance, your lender may still approve your loan with a life-expectancy set aside (LESA).
6. Counseling – HUD requires all reverse mortgage applicants to complete reverse mortgage counseling as part of the application process. The purpose of counseling is to ensure that you understand how the reverse mortgage works. The cost of Texas reverse mortgage counseling is usually around $125 to $175, but many counselors don’t charge at all. Your counselor will issue a certificate once the counseling is complete.

Upfront and Ongoing Costs

A reverse mortgage is a home loan, so there are some upfront and ongoing costs. The costs generally fall into two buckets: interest and closing costs.

Interest and MIP

HECM interest rates are usually comparable to traditional “forward” mortgage rates.

Reverse mortgage interest is calculated the same as any other type of home loan: it accrues monthly based on an annual percentage rate.

The difference is that you don’t have to make payments on the interest (or the principal for that matter). Any unpaid interest simply accrues onto the loan balance over time. Your home equity pays the mortgage “payment” so you don’t have to make a mortgage payment out of your pocket.

FHA also assesses it’s own mortgage insurance premium on top of the initial interest rate. This premium, which is called annual mortgage insurance premium (MIP), works just like the initial interest rate. It’s based on an annual rate with accruals on a monthly basis.

The annual mortgage insurance premium is important because it helps make the HECM non-recourse.

Closing Costs

HECM closing costs can be pricey, but they’re not always pricey. These are the most common closing costs you may encounter:

• Third-party costs: These include the third-party services the lender has to hire to complete your reverse mortgage. Such services include title insurance, escrow, appraisal, government recording, attorney fees, etc.
• Origination: Lenders often charge origination fees to cover the costs associated with processing and completing your loan.
• Initial mortgage insurance premium (IMIP): This is a one-time fee charged by FHA at closing. FHA uses IMIP premiums to insure HECMs, make them non recourse, and guarantee the reverse mortgage funds even if your lender goes out of business.

Regardless of whether the closing costs are cheap or not, the vast majority are usually not paid out of pocket. Most lenders will allow the closing costs to be rolled into the new loan balance.

The exception is HECM for purchase; if you’re buying a home with a HECM, the closing costs are paid out of pocket as part of your cash to close.

Closing costs vary widely depending on loan scenario, interest rate conditions, and property value. Most reverse mortgage calculators available online likely don’t include closing cost estimates. If you’d like to get a closing cost estimate, you’ll need to contact a lender.

Frequently Asked Questions