Can I Get a Reverse Mortgage If I Have a Mortgage?

A reverse mortgage allows homeowners to convert a portion of their home equity into cash. This financial tool is designed for older individuals, providing access to funds without requiring them to sell their property or make monthly mortgage payments. Many people wonder if they can qualify for a reverse mortgage if they still have an existing mortgage on their home. The presence of an existing mortgage does not automatically disqualify a homeowner from obtaining a reverse mortgage.

Basic Eligibility and Home Equity

To be eligible for a reverse mortgage, the most common type being a Home Equity Conversion Mortgage (HECM), homeowners generally must be 62 years of age or older. The property must serve as the primary residence, and it needs to meet specific Federal Housing Administration (FHA) property standards. While some proprietary reverse mortgages may have a lower age requirement, HECMs maintain the 62-year-old threshold.

A significant requirement is having sufficient home equity in the property. Lenders determine the amount of equity by subtracting any outstanding mortgage balance and other liens from the home’s appraised value. The reverse mortgage loan amount is then calculated based on the borrower’s age, current interest rates, and the home’s value. Generally, the older the borrower and the higher the home’s value, the more funds can be accessed.

Homeowners with an existing mortgage can still be eligible, provided the reverse mortgage proceeds are primarily used to pay off that outstanding balance. The homeowner retains the title to the property, even after obtaining a reverse mortgage, maintaining ownership throughout the loan’s life.

Paying Off Your Existing Mortgage

A critical aspect of obtaining a reverse mortgage with an existing traditional mortgage is the requirement that the original mortgage be paid off using the proceeds from the new reverse mortgage. This payoff typically occurs at the loan’s closing, ensuring the reverse mortgage becomes the primary lien on the property. This is a mandatory step, as lenders require the reverse mortgage to be in a first lien position.

The outstanding balance of the existing mortgage is directly satisfied from the funds disbursed by the reverse mortgage lender. This eliminates the obligation of monthly mortgage payments on the previous loan.

Once the existing mortgage is paid off, any remaining funds from the reverse mortgage can then be accessed by the homeowner according to their chosen disbursement option. This process effectively converts the equity tied up in the home into liquid funds, while removing the burden of recurring principal and interest payments that were associated with the forward mortgage. The homeowner does not need to use personal savings to clear the original mortgage; the reverse mortgage itself facilitates this payoff.

Understanding Reverse Mortgage Options

Home Equity Conversion Mortgages (HECMs) are the most widely used type of reverse mortgage, backed by the Federal Housing Administration (FHA). Beyond HECMs, proprietary reverse mortgages are offered by private lenders, sometimes allowing for higher loan amounts or catering to homeowners below the HECM age requirement. Single-purpose reverse mortgages, less common, are typically offered by state or local government agencies and non-profits for specific uses like home repairs or property taxes.

Borrowers have several options for receiving their reverse mortgage funds. A lump sum disbursement is often chosen when a significant portion of the loan is needed upfront to pay off an existing mortgage or for immediate large expenses. This provides all available funds at once, minus initial costs and the existing mortgage payoff.

Alternatively, homeowners can choose to receive funds as a line of credit, which allows them to draw money as needed over time, with interest accruing only on the amount borrowed. Tenure payments provide fixed monthly payments for as long as at least one borrower lives in the home, while term payments offer fixed monthly payments for a specified period. A combination of these options can also be structured to meet individual financial needs after the existing mortgage has been addressed.

Financial Considerations and Obligations

Obtaining a reverse mortgage involves several costs, similar to a traditional mortgage. These typically include closing costs, which can cover origination fees, title insurance, appraisal fees, and other administrative charges. Mortgage Insurance Premiums (MIP) are also a significant expense for HECMs, with an upfront premium and an annual premium added to the loan balance.

Interest accrues on the outstanding loan balance, and because no monthly payments are required, this interest compounds over time, increasing the total amount owed. The loan balance grows as interest, MIP, and servicing fees are added to it each month. While this means the homeowner’s equity in the home decreases over time, they are not making out-of-pocket payments during the loan’s life.

Despite the absence of monthly mortgage payments, homeowners retain important ongoing financial obligations. These include paying property taxes and homeowner’s insurance premiums, as well as maintaining the home in good condition. Failure to meet these responsibilities can lead to a default on the reverse mortgage, potentially resulting in foreclosure. Lenders conduct a financial assessment to ensure borrowers have the capacity to meet these ongoing costs, sometimes setting aside funds from the loan for future payments.

What Happens When the Loan Becomes Due

A reverse mortgage becomes due and payable when certain events occur, most commonly when the last surviving borrower permanently leaves the home. This could be due to selling the property, passing away, or moving into a long-term care facility for more than 12 consecutive months.

When the loan becomes due, the homeowner or their estate has several options to satisfy the debt. One common approach is to sell the home, using the proceeds from the sale to repay the reverse mortgage balance. Heirs typically have a period, such as six months, which can often be extended, to decide how to proceed.

Another option for heirs is to pay off the loan balance, retaining ownership of the property. For HECMs, the amount owed can never exceed the home’s appraised value or 95% of its appraised value, whichever is less, at the time the loan becomes due. This non-recourse feature means that borrowers or their estates are not personally liable for any loan balance that might exceed the home’s value, protecting other assets. Heirs may also be able to refinance the reverse mortgage into a traditional mortgage.