How Does a Reverse Mortgage Work in Texas?

A reverse mortgage provides homeowners a financial tool to access home equity without selling the property or making monthly mortgage payments. This loan allows individuals to convert a portion of their home’s value into cash. While reverse mortgages are federally regulated and insured, state laws can introduce additional protections. Texas has distinct considerations that shape how these loans operate.

Core Concepts of Reverse Mortgages

A reverse mortgage is a loan secured by a home, allowing homeowners aged 62 or older to convert a portion of their home equity into accessible funds. Unlike a traditional mortgage where the borrower makes payments, with a reverse mortgage, the lender pays the homeowner. No monthly mortgage payments are required, and the homeowner retains title to the property. Funds received are generally tax-free, as they represent loan proceeds rather than income.

The loan balance grows as interest accrues and fees are added. This compounding interest causes the amount owed to increase, potentially reducing remaining equity. Federally insured reverse mortgages, such as Home Equity Conversion Mortgages (HECMs), are non-recourse. This protection ensures the amount owed will never exceed the home’s value, or a lesser agreed-upon amount, meaning borrowers and heirs are not personally liable for any shortfall if the loan balance surpasses the home’s sale price.

Texas Specific Requirements and Safeguards

Texas has unique constitutional provisions governing reverse mortgages, making its regulatory landscape distinct. Texas Constitution Article XVI, Section 50(a)(7) permits these loans but imposes additional conditions to protect homeowners. All borrowers listed on the deed must be at least 62 years old to qualify. This contrasts with some other states where only one borrower needs to meet the age threshold.

The home must serve as the borrower’s primary residence, a common federal requirement reinforced by Texas law. Texas mandates specific counseling requirements exceeding federal standards, including a face-to-face meeting with a HUD-approved counselor if reasonably possible. This counseling session helps ensure borrowers fully comprehend the terms, costs, and obligations. Texas law also includes a “12-day cooling-off period” after loan application and disclosures are received, providing borrowers ample time to review terms before closing.

Texas’s strong homestead protections interact with reverse mortgages by reinforcing the non-recourse feature, limiting lender remedies if the loan balance exceeds the home’s value. The state also imposes a restriction that the total amount of all liens against a homestead, including a reverse mortgage, cannot exceed 80% of the property’s appraised value. This 80% loan-to-value ratio is a specific safeguard designed to preserve a portion of the homeowner’s equity. These state-specific provisions aim to provide consumer protections for Texas homeowners considering a reverse mortgage.

Financial Aspects of a Reverse Mortgage

Borrowers have several options for receiving funds, offering flexibility based on financial needs.
A lump sum disbursement provides all eligible funds at closing, often with a fixed interest rate.
A line of credit allows borrowers to draw funds as needed, with interest only accruing on the amount withdrawn.
Tenure payments provide fixed monthly advances for as long as at least one borrower lives in the home.
Term payments offer fixed monthly advances for a specific period.
Borrowers can also opt for a combination of these disbursement methods.

Various costs are associated with reverse mortgages, typically financed into the loan balance. Origination fees cover the lender’s administrative costs for processing the loan. Federal regulations cap these fees, often at $6,000, or a percentage of the home’s value (e.g., 2% of the first $200,000 and 1% over $200,000). Mortgage insurance premiums (MIP) are a cost, with an initial premium of 2% of the appraised value or maximum lending limit paid at closing, and an annual premium of 0.5% of the outstanding loan balance.

Other closing costs resemble those of traditional mortgages and can include appraisal fees, title insurance, recording fees, and document preparation fees. Appraisal fees generally range from $300 to $500. Some lenders also charge a monthly servicing fee, typically up to $35, to manage the loan. While most of these costs can be rolled into the loan, the mandatory counseling fee, usually between $125 and $200, must often be paid out of pocket.

Maturity and Repayment of the Loan

A reverse mortgage loan becomes due and payable upon specific triggering events. The most common events include the last surviving borrower selling the home, permanently moving out, or passing away. A permanent move is generally defined as not occupying the home as a primary residence for more than 12 consecutive months. Borrowers are obligated to maintain the property, pay property taxes, and keep homeowner’s insurance current. Failure to meet these ongoing obligations can also cause the loan to become due and may lead to foreclosure.

Upon a triggering event, the loan balance, which includes the principal, accrued interest, and fees, becomes repayable. Heirs typically have several options: they can repay the loan in full, often by refinancing the property with a traditional mortgage, or sell the home to satisfy the debt. Due to the non-recourse nature of federally insured reverse mortgages, heirs are generally not personally liable for any shortfall if the sale proceeds are less than the loan balance. To keep the home, heirs usually must repay the loan balance or 95% of the appraised value, whichever amount is less. If heirs choose not to repay the loan or sell the property, the lender may initiate foreclosure proceedings.