Does the Bank Own Your Home With a Reverse Mortgage? The Biggest Myths, Debunked

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Who a reverse mortgage is really for

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom, and today we're talking about reverse mortgages. If you or your friends or family have been thinking about one, there are a lot of myths out there — and the regulations changed. After our last financial recession, when property values dropped and homes were being foreclosed, the CFPB wrote all kinds of new regulations. That was many years ago, but there are still so many people who don't understand how a reverse mortgage works.

I have a lot of clients and friends who've called me and said, “My parents are going to take a reverse mortgage — I don't think they should. I'm really worried about it.” Most of the time, the pushback on this transaction comes from the children or family of the elderly couple looking at the loan — and much of what they believe about a reverse mortgage is simply not accurate.

Reverse mortgages can be great for somebody who needs to use their home as their retirement vehicle. I have clients right now who don't have Social Security or a pension — they were self-employed their whole lives and never built that Social Security account, so they receive no retirement at all. But they own their home free and clear. What are their real options? Sure, they could sell, take the cash, buy something smaller, and live on the equity — but they'd also pay a hefty price in capital gains taxes to cash it out completely. A reverse mortgage lets you stay in the home.

I've had many clients call and say, “My mother has full-time caregivers and we don't want to put her in a home. She really wants to stay in her property, but the medical expenses are just too much.” In that situation it's a great vehicle for that person to stay where they are and stay comfortable. Now, a reverse mortgage is not for everybody. I can't even count how many loan programs are out there, because everybody's scenario is different — what's good for one person may not be good for another. So let's start by getting rid of the myths.

Myth: the bank or lender owns your home

This is probably the biggest myth I hear, and a lot of people believe it. The bank does not own the home. You own the home — the person taking the loan owns it. Title remains in their name, whether they're in a trust or not. Just like with a traditional mortgage, the lender places a lien against the property. They do not take title. When you pass away, your heirs — through a trust, a will, or probate — still have the opportunity to inherit that home.

Myth: your heirs will be responsible for repaying the loan

This one comes up a lot. Reverse mortgages are non-recourse loans. If more is owed than the home is worth at the time of your passing, your children can have an appraisal done, and they will never pay more than the appraised value. You could owe $4 million on a property worth $1 million, and the heirs could purchase it for what it's worth. They can also choose not to purchase it at all and let it go back to the bank. That is their choice — they are not on the hook to make payments or pay off that loan.

And it's not overnight. Your heirs have six months to get the property refinanced or sold. If they need longer, they can call the number on the mortgage statement and request an extension — most mortgage companies will grant an additional six months. Not all, but the majority will work with you.

Myth: you'll be forced out of your home

Reverse mortgages — particularly home equity conversion mortgages, called HECMs — are designed to help seniors remain in their homes for as long as they live there. You can't be foreclosed on as long as you fulfill your loan obligations: paying property taxes and insurance and maintaining the property.

Now, there are no monthly payments required on a reverse mortgage, so you might wonder how you could default. You are still responsible for property taxes, homeowners insurance, HOA dues if you have them, and upkeep. If the property starts falling apart — it needs a roof, it needs stucco — you're responsible for maintaining it, and letting it go is a way to violate the terms. But keep the home in good shape, insured, and current on taxes, and you will not lose it. It doesn't matter if the real estate market crashes or how much you owe versus what the home is worth. You stay until you pass.

A loan officer friend watching the show put it well: a reverse mortgage is one of the sweetest things spouses can do for each other. If one of you passes away, there's no mortgage payment left behind — the survivor doesn't have to sell or move. The reverse mortgage stays in place until both borrowers have passed. Only then does the six-month clock for the heirs start.

Do mobile and manufactured homes qualify?

A viewer asked whether all of this applies to mobile homes. On mobile homes, the answer is no — they don't get the same financing options or loan programs as residential property. A manufactured home is different: it's essentially the same structure, but it has gone through the full permitting process with the county and city, received its HUD tags, and given up its license plates to become real property. In all my years I've never had someone call about a reverse mortgage on a manufactured home, so rather than guess, I'll look it up — email me or contact me through the website and I'll get you the answer. And if the home sits in a park, nine times out of ten it's not a manufactured home — that requires a true mobile home lender, which I am not.

Myth: you won't have money left to leave your children

While interest and fees accrue on a reverse mortgage, your home's value may also appreciate, leaving remaining equity for your heirs. They can repay the loan and keep the home, or sell it and keep the leftover proceeds. Over the last four or five years we've seen an unprecedented amount of appreciation — so someone in a reverse mortgage whose property kept gaining equity year over year wasn't necessarily losing ground even as the balance increased; their equity percentage often stayed very similar.

Do I think homes will keep appreciating at that pace? No. Values are leveling off, and in some cases dropping a little. I don't think a major crash is coming — there still isn't enough housing or enough listings for values to collapse — but I do think they needed to level off and come down a bit. If you asked me, I'd expect about a 10 to 15% decrease in home values over the next couple of years, and then I think we're on our way back up again. Nobody has a crystal ball; that's just my opinion.

How the balance actually grows

Most people know the “forward” mortgage: you get a loan, you make a payment, and every payment brings the balance down — heavily weighted toward interest in the early years, just like a car loan. A reverse mortgage is the exact opposite. If you're not making a payment — and you can make payments if you choose — your balance goes up instead of down. There's still an interest rate on the loan. A bank isn't going to hand you four, five, or eight hundred thousand dollars and not charge interest; they just don't collect it monthly. So yes, you'll owe more on the property over time if you never make a payment.

But for somebody with no Social Security, pension, or 401(k) who doesn't want to sell and take on capital gains, it's a great vehicle: you eliminate any existing mortgage payment, you can put cash in the bank for living expenses, and you stay in your home.

Myth: you must own your home free and clear to qualify

Absolutely inaccurate. You can get a reverse mortgage even if you owe money today. Say you owe $300,000 and the home is worth $900,000 or a million — the reverse mortgage can pay off your existing loan and set you up with no payment going forward. There may not be enough equity left to pull cash out on top, but eliminating the payment alone changes lives. The only time you'd bring money in is if there isn't enough equity to cover the payoff — if your balance is $400,000 but the maximum loan for your age is $380,000, you'd cover the difference and closing costs.

One thing I want to be very clear on: reverse mortgages are typically for people 62 and over. We do have programs for 55 and older. If you're not at least 55, this isn't for you — but it may be exactly right for your parents or grandparents.

How your age sets the loan amount

The loan amounts are based on age. Average life expectancy in the US is about 78 years for men and 81 for women. When the lender decides how much to give you, they're looking at how old you are today and how long they'll likely hold the note while the balance grows. So a 78-year-old can get a higher loan-to-value against the property than somebody who is 55, 60, or 65. The older you are, the more you can draw.

Myth: you can't sell a home with a reverse mortgage

Yes, you can sell. You own the house — the bank never took title. Say the property is worth a million dollars, you took a $200,000 reverse mortgage a few years ago and now owe $250,000 or $275,000. You can list the house and sell it. You can also refinance into a regular mortgage, start making payments again, and keep the home. If you decide the reverse mortgage isn't what you thought — the balance is climbing faster than you like — you have options. The difference between the sale price and the payoff is your equity, and you keep it.

Social Security, Medicare, and needs-based benefits

Reverse mortgages generally don't impact your Social Security retirement benefits or Medicare. However, if you receive needs-based programs — Medicaid or Supplemental Security Income — managing the loan proceeds carefully is essential to keep your eligibility. If you pull $500,000 out of your property and it's sitting in your bank account, you suddenly have assets that can disqualify you from needs-based aid. Work with an attorney if that's your situation. Sometimes, too, if the money is available for care, you may not need those programs. But if you're simply retired with Social Security, Medicare, and a pension — nothing changes.

Myth: reverse mortgages are too expensive

There are upfront costs, but on a refinance they can generally be financed into the loan — you're not bringing money in to close, just like a normal refinance. The fees are set by the reverse mortgage lender and can run higher than a traditional mortgage. You don't need perfect credit, which is great — but your credit determines whether the lender requires a set-aside account, where part of the proceeds is put aside to pay property taxes and homeowners insurance because the payment history there hasn't been strong.

Using a reverse mortgage to buy a home

You can also purchase with a reverse mortgage. Say you're retired in a big house the kids have moved out of, and you want a smaller home or a condo with no yard maintenance. You sell, walk away with $700,000 in cash, and you're buying the next place — but you don't want a mortgage payment and you don't want to give up all your cash either. You purchase the next property with a reverse mortgage: bring in the down payment required for your age-based loan-to-value, and finance the rest with no monthly payment. If you're 67 and the program allows 50% loan-to-value on a $300,000 condo — easy studio numbers — you bring in $150,000, they lend $150,000, and you keep the rest of your cash in the bank. You pay your taxes, insurance, and HOA dues, and you have no mortgage payment. Capital gains on the sale is a question for your CPA or tax advisor.

Q&A: processing time, fees, and set-aside accounts

Michelle asks: “Is the processing time the same between a reverse and a refi? Are the loan fees and commission the same?”

Great question. The timeline depends on the file. If the owner — say a parent or grandparent — is no longer mentally capable of making decisions, and the family is arranging the loan so they can stay home with care instead of going into a facility, now we're talking powers of attorney, trusts, and doctor's letters about whether they can sign their own documents. That can take much longer than a standard closing. But for a couple in their 50s, 60s, or 70s with no cognitive impairment, signing their own paperwork — in a trust or not — it's a normal transaction that can close in about 30 days.

The fees are set by the reverse mortgage lender doing the loan and can be more expensive than a traditional mortgage — there's a bigger setup process. And again: credit history matters. If property taxes or insurance haven't been paid on time in the past, part of the proceeds may be required to sit in a set-aside account to cover them going forward.

Q&A: COVID forbearance balances

Nicholas asks about the loan he modified during COVID, with a deferred balance attached to his mortgage. During COVID, servicers handed out forbearances and deferments like candy — if you asked, you got one, whether you needed it or not. When repayment came due, most mortgage companies did not modify the loan, because rates at the time were 3 or 4% and a modification would have meant a higher rate and payment. Instead they took the missed amount — call it $30,000, $40,000, $50,000 — and attached it as a second balance. Your statement looks unchanged, but when a payoff demand is ordered, that amount is added to it. A reverse mortgage orders a payoff demand exactly like a regular refinance, so the new loan has to be big enough to cover the entire amount owed, deferment included. Nothing gets waived or settled for less.

Nicholas also asks: “Is the reverse mortgage at the original rate from when you bought the home, or a new rate?” Look at it this way: if we're paying off the current loan on your house, you're getting a brand-new loan with a brand-new lender. The product is a reverse mortgage, but it is a refinance — you're subject to current interest rates at the time you apply, not the rate you have today.

Owner-occupancy and when the loan comes due

Unlike traditional mortgages, there's no set term length on a reverse mortgage. It doesn't have to be repaid until the borrowers permanently leave the home. And this part is important: a reverse mortgage is for your owner-occupied primary residence only. Live there until you're 120 — as long as you've maintained the property and paid your taxes, insurance, and HOA, they cannot make you repay, sell, or move. But the minute it's no longer your primary residence, you can't keep the loan. It has to be refinanced into a forward product with a monthly payment, or paid off.

When you pass, the loan has to be paid off. Your heirs can sell the home, pay off the loan, and keep the difference; they can walk away and let the bank take it; or if it's upside down, they can buy it at appraised value. One more distinction people get tangled up in: if you're still alive and your child wants to buy the house from you while you owe more than it's worth, they have to pay off the full loan. The appraised-value option only kicks in after the borrower has passed.

Someone asked if there's an age minimum — yes: most reverse mortgages are 62 and older, with some products down to 55. This is a retirement vehicle, not something for someone still of working age.

Q&A: what about a home that burned down?

Serene asks: “Can someone whose property burned down in the Eaton fire qualify for a reverse mortgage?”

I'll never claim to know everything, but I'm going to say 99.9% no. Somebody whose home burned down needs the home rebuilt, and a reverse mortgage is not a construction loan or a home improvement loan — it isn't set up to monitor and disburse rebuild funds. Most reverse mortgages are done through an FHA program, and FHA has very specific property guidelines: no busted windows or cracked tiles, working air conditioning, no roof leaks, no termite damage or peeling paint on the eaves. A home that isn't standing can't qualify. If I'm wrong, I'll do the research and reach out to you directly — I have your contact information.

Wrap-up

Reverse mortgages are truly a great retirement vehicle — but they're not for everybody. Just like we have 30-year fixed loans, HELOCs, adjustable-rate mortgages, FHA and VA loans, bank statement loans for the self-employed, and debt-service ratio loans for investors, there's a loan built for each individual situation. If you think this could be right for you or someone you know, reach out and let's see if it makes sense — and if it doesn't, there may be a better option. Go to mortgagemomradio.com and hit the contact button, or call the office. If you want to know when I go live each week, text the word LIVE to 844-935-3634 — that's 844-WE-LEND-4, the same number to reach me or the team. I'll be back next Wednesday. Talk to you all real soon.