Reverse Mortgage Pros, Cons and Alternatives in California

Who Can Get a Reverse Mortgage in California

Age comes first. Federal law, at 12 U.S.C. § 1715z-20(d), requires that a HECM be signed by an "elderly homeowner," which the statute defines as a homeowner who is, or whose spouse is, at least 62 or a higher age the HUD Secretary may set. The regulation at 24 C.F.R. § 206.33 says the youngest borrower must be 62 or older at closing.

The home must be lived in. Under 24 C.F.R. § 206.39, the property must be the principal residence of each borrower, and of any Eligible Non-Borrowing Spouse, at closing. The statute requires a home designed principally for one to four families, with the borrower living in one of the units; HUD sets the further property rules.

Equity matters too. The CFPB lists other requirements, including owning the home outright or having a low mortgage balance that can be paid off at closing, owing no federal debt such as federal income taxes or student loans (though reverse mortgage money may pay it off), having enough money or setting some aside for taxes, insurance and repairs, and keeping the home in good shape. Readers who still owe on a home can read more about a reverse mortgage with an existing mortgage.

Counseling is required. The same subsection, 12 U.S.C. § 1715z-20(d), requires that the borrower has received counseling from an independent third party not tied to anyone who makes or services the loan or sells annuities, investments or insurance. HUD keeps a HECM Counselor Roster and a phone line, (800) 569-4287, on its HECM program page.

Spouses not on the loan have specific protections. Under 24 C.F.R. § 206.27, the loan documents must include a "Deferral Period" that delays the loan coming due for an Eligible Non-Borrowing Spouse until that spouse's death, or until its requirements stop being met and are not cured. Couples can learn more about non-borrowing spouse protections.

In California, the Department of Financial Protection and Innovation explains that anyone in the business of making or servicing residential mortgage loans in the state needs a license, with exemptions that include banks, licensed real estate brokers and California finance lenders. The Department of Real Estate urges seniors to check licensing before working with anyone.

The Genuine Advantages Worth Knowing

For a homeowner on a fixed income whose wealth sits mostly in the house, the first advantage is simple: no monthly mortgage payment while the borrower lives there and meets the loan's duties. That can ease a tight budget. HUD says HECM borrowers may live in their homes indefinitely as long as property taxes and homeowners insurance are kept current, and the other loan obligations still apply.

Choice in how money is paid is a second advantage. Under 12 U.S.C. § 1715z-20(d), the borrower picks a payment method: a line of credit; monthly payments for a set term; monthly payments for a set term plus a line of credit; monthly payments for as long as the borrower lives in the home; those tenure payments plus a line of credit; or another method HUD approves. A lender pays under the loan's terms, and the statute generally allows switching methods later, though HUD may limit this for fixed-rate loans.

Limits on what is owed are a third. The statute requires that a HECM provide that the homeowner is not liable for any gap between the loan balance and what the lender recovers from the home's sale or the federal insurance. This is often called "non-recourse." The CFPB says neither the borrower nor the heirs will have to pay back more than the home is worth.

Title stays with the owner. The home remains in the borrower's name, as with an ordinary mortgage.

On taxes and benefits, the Federal Trade Commission says that typically the money is tax-free and will not affect Social Security or Medicare benefits. Because the word is "typically," a tax professional can say how this applies to one household.

Finally, counseling is a real protection. The statute requires counselors to discuss options other than a HECM, its financial effects, and its possible effect on taxes, federal and state benefits, and heirs. That is an independent review before anything is signed. The advantages and risks are weighed side by side in reverse mortgage pros, cons and risks.

The Real Drawbacks and Risks

A balance that grows is the drawback advertising tends to skip. Because interest and fees are added every month, the FTC warns that a reverse mortgage can use up much, or even all, of the equity. A loan taken early in retirement has more years to grow. The CFPB notes that the older a borrower is, the more can be borrowed, and that borrowing too young may leave less for later.

Costs are real. Section 1923.2(c) of the California Civil Code allows a reverse mortgage to include lender costs and fees charged at signing, periodically or at maturity. These can include an origination fee (the lender's charge for making the loan), closing costs such as appraisal and title charges, a mortgage insurance premium, and servicing fees. Federal rules limit the origination fee, which may be financed into the loan, and the lender discloses the actual amounts.

The mortgage insurance premium, or MIP, is the charge for FHA's insurance. The statute lets HUD impose premium charges and use the insurance fund to pay borrowers money owed if a lender defaults, and to pay lenders what they are owed within the program's limits. HUD sets the current premium.

Less may remain for heirs. The CFPB says the homeowners or their heirs will eventually have to repay the loan, usually by selling the home. Heirs may pay it off and keep the house, but they do not inherit it free of the loan. Families facing this question can read about what happens later in the California guide linked below.

Long absences can end the loan. Under 24 C.F.R. § 206.27, with HUD's approval, the loan may come due if a borrower is away for longer than 12 consecutive months because of physical or mental illness and no other borrower lives there. For someone who may need long-term care, this deserves careful thought.

Default is possible. The same regulation lets the loan come due if the borrower does not pay property charges or fails another loan obligation. The CFPB warns of foreclosure if money runs short for taxes, insurance or other housing costs.

Equity used now is not available later for a sale, a move or another loan. And the CFPB calls a reverse mortgage "an expensive way to cover short term cash needs" if a move may come soon. Views on these loans vary widely, which is one reason the counseling exists.

These are the costs and risks that deserve a clear look before any decision is made.

Alternatives Worth Comparing Before Deciding

Before choosing any product, it helps to name the problem: a shortfall each month, a one-time bill, care costs, or simply the wish to stay put. A reverse mortgage is one option among several, and which one fits depends on the household's situation, goals and obligations.

A benefits and budget check. A review of programs can come first. The CFPB notes that state and local programs can help with utilities, fuel and home repairs, and that benefitscheckup.org lists benefit programs. A benefits counselor can say whether a household is missing help it may be eligible for.

Property tax help. The CFPB says state and local programs may help defer property taxes, and suggests checking with the county or town tax office. In California, the county tax office is a natural first call.

A home equity loan or line of credit. A home equity loan pays a lump sum; a home equity line of credit, or HELOC, lets the owner draw as needed. The CFPB says these might be a cheaper way to borrow against equity, but they carry their own risks, usually have monthly payments, and depend on income and credit.

A cash-out refinance. This replaces the current mortgage with a larger one and pays out the difference. It brings a monthly payment the owner must afford. The CFPB notes a refinance may lower monthly payments in some cases.

Selling and downsizing. Selling frees the equity, and the CFPB says moving to a more affordable home may reduce overall expenses. The trade is leaving the current home, paying moving costs, and possible tax questions a tax professional can answer. In high-cost California, a smaller home may still be costly, so the math is worth working through.

Help from family. Some families arrange a private loan or shared costs. This works best in writing, and an attorney can explain the documents.

Readers who own outright can compare these in light of a reverse mortgage on a paid-off house.

California-Specific Rules and Protections

What does California add for a homeowner here? Mainly more warnings, more time and some firm limits on lenders, all in the Civil Code.

A written warning before applying. Civil Code section 1923.5 bars a lender from taking an application unless the applicant first receives a large-type notice. It states that a reverse mortgage "is a complex financial transaction" and that the applicant must consult an independent counselor before going ahead. The same section requires a worksheet guide titled "Is a Reverse Mortgage Right for Me?" for the borrower to bring to counseling.

Counseling and a waiting period. Civil Code section 1923.2 requires the lender, before accepting a final application, to give a list of at least 10 HUD-approved counseling agencies. The counseling agency may not be paid by the lender or anyone selling annuities or insurance, with a narrow exception for unrelated charitable support. The lender cannot accept a final application or charge fees until seven days after counseling and a signed counseling certificate.

Limits on selling other products. The same section bars requiring an annuity to get a reverse mortgage, and generally bars referring the borrower to buy an annuity or other financial product before closing or before the right to cancel ends. Customary products such as title and hazard insurance are allowed.

Absences and fair dealing. Section 1923.2 says absences of up to 60 consecutive days do not make the loan due, and absences over 60 days but under a year do not either if the borrower first secures the home in a way the lender accepts. Prepayment is allowed without penalty, and a lender that wrongly withholds advances and fails to cure can owe the borrower three times the amount withheld, plus interest. Federal rules, including the 12-month illness rule above, also apply to a HECM.

The right to cancel. The CFPB says that with most reverse mortgages, the borrower can cancel within three business days after closing, for any reason, without penalty.

Home value and the HECM limit. HUD says the amount available depends on the youngest borrower's or eligible spouse's age, the current interest rate, and the lesser of the appraised value, the HECM FHA mortgage limit or the sales price. A high California value may exceed that limit, which HUD publishes; the California reverse mortgage guide explains more.

This page is general information, not a loan offer, a commitment to lend, or financial, legal or tax advice.