Taking a reverse mortgage is a big move for your parent. That's why it's best to be prepared. Here, key questions to ask before signing on the dotted line.
Are you a broker or a direct lender?
There are advantages and disadvantages to using a broker to get a reverse mortgage. Brokers are generally well-connected and can spend the time to advise your parent about reverse mortgages and help her find a reputable lender to work with. However, brokers do charge a commission, which will be added to the cost of the reverse mortgage.
Are you approved by the FHA and do you offer HECM loans?
Lenders approved by the U.S. Department of Housing and Urban Development's Federal Housing Administration (FHA) can offer government-insured reverse mortgages. This means that if the individual lender goes belly up, your parent will continue to receive the proceeds from her reverse mortgage. In almost all cases, an FHA-backed reverse mortgage will be the best choice for your parent. HECM -- home equity conversion mortgages -- are the only reverse mortgages insured by the FHA.
How long have you been in the reverse mortgage business?
Because the demand for traditional mortgages has dried up along with the housing market, the reverse mortgage market has been flooded with traditional mortgage brokers who are seeking out new sources of revenue. This means that there are many new brokers out there who have little experience with reverse mortgages. Make sure your lender or broker has worked with reverse mortgages for several years at least.
What are the steps to getting a reverse mortgage?
A reverse mortgage isn't an instant cash fix -- it can take weeks to apply, get approved, get the house appraised, and close before your parent will see any money from the loan. Make sure the lender walks your parent through each step of the process so there are no surprises.
What fees will be added to the cost of the loan?
Your parent's lender should be able to provide a complete breakdown of costs and fees for every reverse mortgage option. Watch out for any hidden or unexpected fees, and make sure your lender can explain all of the costs involved.
Are you a member of NRMLA?
Lenders belonging to the National Reverse Mortgage Lenders Association are required to meet certain ethical rules and follow a code of conduct. Even though the government heavily regulates reverse mortgages, it's a good idea to choose a lender belonging to this trade group.
How do I make sure that my parent is getting the best reverse mortgage for her needs?
Although all reverse mortgage applicants are required to receive HUD-mandated independent counseling, check with the lender to see whether it has its own processes to make sure that borrowers fully understand their options and what they're agreeing to.
What is the loan's interest rate based on?
Reverse mortgages are available with either monthly or annually adjustable interest rates tied to the one-year constant maturity treasury rate or the one-month LIBOR (the London Interbank Offered Rate). Generally, monthly adjustable loans offer lower interest rates, but your parent should consult her financial planner about which interest rate and index is best for her situation.