How Does a Reverse Mortgage Work in Texas?

A reverse mortgage provides a financial tool for homeowners to convert a portion of their accumulated home equity into accessible funds. This type of loan allows individuals to utilize the value built up in their home without needing to sell the property or take on additional monthly mortgage payments. Essentially, it functions as a loan against the home’s equity, providing a way to access liquidity from a significant asset.

Eligibility and Property Requirements

To qualify for a reverse mortgage, specific criteria must be met by both the borrower and the property. All borrowers listed on the loan must be at least 62 years old. The home itself must serve as the primary residence, meaning the homeowner occupies the property for the majority of the year.

Additionally, borrowers must continue to pay property taxes and homeowners insurance premiums throughout the life of the loan. Failure to meet these responsibilities can lead to the loan becoming due and payable, potentially resulting in foreclosure proceedings. The property must also possess a sufficient amount of equity, as the loan amount is determined by the home’s appraised value, the youngest borrower’s age, and prevailing interest rates.

A higher home value and older borrower age allow for a larger principal limit. This principal limit is influenced by the expected interest rate over the life of the loan and the home’s value, up to the Federal Housing Administration’s (FHA) maximum claim amount. Eligible property types commonly include single-family residences. Multi-unit properties, specifically those with two to four units, may also qualify if one of the units is owner-occupied and meets specific FHA guidelines for multi-unit dwellings.

Condominiums must be approved by the Federal Housing Administration (FHA) to be considered eligible for a reverse mortgage. Manufactured homes meeting specific structural requirements, such as being on a permanent foundation and adhering to HUD code, can also qualify.

Fund Disbursement and Repayment

Borrowers have several options for receiving funds from a reverse mortgage. One common method is a single lump sum disbursement. Another option is a line of credit, which allows borrowers to draw funds as needed over time, with interest accruing only on the amount actually borrowed. This line of credit can also grow over time, increasing the available funds for future use.

Monthly payments can also be chosen, either as a “tenure” option, which provides equal monthly payments for as long as a borrower lives in the home, or a “term” option, which provides equal monthly payments for a fixed period. Borrowers can also combine these disbursement methods. The interest on the reverse mortgage accrues on the outstanding loan balance.

Repayment of the loan is not required until a specific triggering event occurs. This event happens when the last surviving borrower permanently leaves the home. Reasons for permanently leaving the home include death, selling the property, or moving out for an extended period. As long as the terms of the loan are met, the borrower is not required to make monthly mortgage payments.

Upon the occurrence of a triggering event, the loan becomes due and payable. The borrower or their heirs have a period, often around six months, to repay the loan. Repayment usually occurs through the sale of the home. If the heirs wish to keep the home, they can choose to repay the loan themselves or by refinancing the property. The amount owed will never exceed the home’s value at the time the loan becomes due, due to the non-recourse nature of most reverse mortgages.

Borrowers retain ownership of their home throughout the life of the reverse mortgage. With this ownership comes the ongoing responsibility for maintaining the home in good condition. Borrowers remain responsible for paying homeowners association fees.

Costs and Fees

Obtaining a reverse mortgage involves several costs and fees. One significant upfront expense is the origination fee. This fee is capped and can vary based on the home’s value and the maximum claim amount of the loan. For instance, for FHA-insured Home Equity Conversion Mortgages (HECMs), the origination fee is generally limited to $2,500 for homes valued up to $125,000, and 2% of the first $200,000 of the home’s value plus 1% of the amount over $200,000, up to a maximum of $6,000.

Another substantial upfront cost is the initial mortgage insurance premium (MIP). For HECMs, this premium is a percentage of the home’s value or the FHA lending limit, whichever is less, and is typically 2% of the maximum claim amount. This insurance protects both the lender and the borrower, ensuring expected payments and guaranteeing repayment even if the loan balance exceeds the home’s value. Various closing costs are also incurred, including appraisal fees, title insurance, and recording fees.

Borrowers are also required to complete a counseling session with a HUD-approved counselor, and a fee for this service is typically charged, often ranging from $125 to $200. Many of these upfront costs, including the origination fee and the initial MIP, can be financed into the loan amount, reducing the immediate financial burden on the borrower.

Ongoing costs include an annual mortgage insurance premium, which is generally 0.5% of the outstanding loan balance for HECMs. Servicing fees may also be charged monthly to manage the loan account. Finally, interest accrues on the outstanding loan balance over time, increasing the total amount owed. This means the loan balance grows, reducing the remaining equity in the home.

Texas-Specific Regulations

Texas has unique constitutional provisions that significantly impact reverse mortgages. These homestead protections are designed to safeguard homeowners’ equity and prevent predatory lending practices. Reverse mortgages in Texas operate under a distinct set of rules that provide additional consumer safeguards, often more stringent than federal requirements.

One fundamental requirement in Texas is mandatory counseling by an independent, HUD-approved counselor. This counseling session must occur before the loan application is submitted, ensuring homeowners fully understand the implications, risks, and alternatives associated with a reverse mortgage. This is a legally mandated step to protect consumers. After closing the reverse mortgage, Texas law also requires a three-day right of rescission.

A significant protection unique to Texas is the “12-day cooling-off period” before closing. This means that after the application for a reverse mortgage is submitted, there must be at least 12 days before the loan can be closed, providing an extended period for the borrower to reconsider their decision. Another important safeguard is the prohibition against deficiency judgments; lenders cannot pursue borrowers or their estates for any loan balance that exceeds the home’s value at the time of sale.

Texas law also specifies precise conditions under which a reverse mortgage becomes due and payable. Beyond the standard events like the death of the last borrower or the sale of the home, the loan can be called due if the property ceases to be the borrower’s primary residence. Failure to pay property taxes or homeowners insurance also triggers the loan to become due, as does abandonment of the property. These specific conditions ensure the loan remains tied to the primary residence and its proper maintenance, aligning with the state’s strong homestead protection principles.