Understanding The Basics About Reverse Mortgages in California
California is not only the largest state in the country but it is also the state with the highest number of reverse mortgages. There are quite a few reasons many California homeowner's have turned to a reverse mortgage to unlock some of their home's wealth in retirement. High home prices with strong home appreciation in recent years combined with favorable property tax laws have set the state for many older homeowners in California to turn to a reverse mortgage as a way to age in place during retirement.
What is a Reverse Mortgage?
In the simplest terms, a reverse mortgage is a loan that can allow older homeowners who have substantial equity in their home a way to convert part of their home equity into cash or useable funds in retirement. This page will take a deep dive into the world of reverse mortgages and is a great place to start exploring.
Exploring California Reverse Mortgage Basics 101
presented by John Correll, CRMP - Certified Reverse Mortgage Professional
John Correll is a licensed loan officer in San Diego and works with clients across the entire state of California. John has over 25 years mortgage lending experience. He has dedicated his career to reverse mortgages and committed himself to educating older homeowners and their family or trusted advisors on everything related to reverse mortgages.
(888) 603-1550 | (619) 294-9820
How Does a Reverse Mortgage Work in California?
A reverse mortgage is a special type of mortgage loan which has been specifically designed designed for older homeowners that have substantial home equity. A reverse mortgage can convert some home equity into cash or proceeds which can be used and accessed while living in the home. Unlike traditional mortgages where the borrower makes monthly payments to reduce their loan balance, a reverse mortgage has no required monthly mortgage payment. Any interest and finance charges are added to the loan balance which does not become due until there is a maturity event such as death or moving out of the home. During the loan, while there is no monthly mortgage payment - the borrowers must continue to pay their own property taxes, homeowners insurance and any hoa dues plus home maintenance expenses to keep the loan in good standing. At least on borrower must also continue to live in the home.
A reverse mortgage can provide older homeowners a way to access a portion of their home's value without having to sell the property. The reverse mortgage can enable homeowners to stay in their homes while they receive payments out of the reverse mortgage or take draws from a line-of-credit. They can also work well for those seeking to supplement their retirement income, cover medical costs, or finance home improvements. The reverse mortgage loan typically doesn't need to be repaid until the homeowner moves out, sells the home, or passes away - provided they continue to keep current with property taxes, homeowners insurance and maintenance on home. At that point, the loan comes due, and the lender is repaid, usually from the sale or by another method. Any remaining equity after the loan is paid off goes to the homeowner or their heirs. As with all mortgages, the borrower should assess the pros and cons of a reverse mortgage and consider factors like interest expenses and potential impacts on their estate plan, before deciding if one is right for them.
Eligibility Requirements to Qualify For a California Reverse Mortgage
The qualifications to secure a reverse mortgage in the State of California are similar for the most part to the requirements in the rest of the country, with the exception of a few unique rules in California. Here is an overview of what to expect to qualify for a reverse mortgage:
Age Requirement For a Reverse Mortgage:
Reverse mortgages are designed for older homeowners. To get a reverse mortgage at least one borrower must be age 62 years old for a HECM (Home Equity Conversion Mortgage) which is the most widespread type of reverse mortgage. Proprietary reverse mortgages currently have a lower minimum age requirement of only 55.
In the case of married borrowers, if one spouse is under the age of 62 then there are some special provisions for non-borrowing spouses which HUD created back in 2015 to make the reverse mortgage product safer.
Homeowner With Substantial Equity:
To qualify, the borrower must either own their home outright or have significant equity in it. If the the borrower has a "traditional mortgage" that they are making payments on, the reverse mortgage must "refinance" the current loan balance into the new reverse mortgage and in general requires there to be substantial equity built up in the home. This means the borrower should have paid off most or all of their regular mortgage or owned the home long enough for signification appreciation.
Primary Residence (owner occupied): Must reside in home during life of the reverse mortgage
The home the reverse mortgage is taken out on must be the borrower's primary residence. This means home home where they live for the majority of the year. Vacation homes or second homes and investment properties do not qualify. For the loan to remain in good standing during the life of the reverse mortgage loan, at least one borrower must continue to occupy the home as their primary residence.
Eligible Property Type: Reverse mortgages on residential 1-4 unit homes
Eligible properties for reverse mortgages include:
- Single-family homes
- Some multi-unit properties with up to four units
- Planned Unit Development (PUD) homes
- FHA-approved condominiums - exceptions exist for proprietary reverse mortgages
- Manufactured homes that meet HUD guidelines
Financial Assessment: Reverse Mortgage Financial Evaluation
Lenders are required to assess the borrower's financial ability to meet basic living expenses like property taxes, insurance, and other home-related costs and debts to qualify for the reverse mortgage. A reverse mortgage is generally easier to qualify for than a traditional mortgage. Most reverse mortgages do not have a minimum fico score requirement. In the event the borrower fails financial assessment, underwriting may require that a set-aside is created to so the reverse mortgage is setup to pay future property taxes and homeowners insurance bills on behalf of the borrower to make the reverse mortgage safer.
California Reverse Mortgage Counseling Requirement
To obtain a reverse mortgage in California, all borrowers and homeowners must complete a counseling session with a HUD-approved counselor via a phone call or in-person. This counseling is designed to ensure all borrowers fully understand the terms, costs, and potential risks associated with the reverse mortgage. This assists the borrower in making sure a reverse mortgage is the right choice for them and also helps set them up for a successful reverse mortgage experience.
Additional California Reverse Mortgage Counseling Requirement
Unique to California, all reverse mortgage borrowers have a seven-day cooling-off period after their counseling session. What this means is that during this period the lender cannot charge fees or order services. This gives the borrower time extra time to consider things and to change their mind or ask questions. After the seven days have passed the lender can order services and move forward with the loan including ordering the appraisal on the home.
How Is the Reverse Mortgage Loan Size Calculated in California
The loan amount for the reverse mortgage is based on:
- The age of the youngest borrower
- The appraised amount of the property
- Current interest rates
- Current lending limits for type of reverse mortgage
2023 HECM Reverse Mortgage Maximum Claim (lending limit): $1,089,300
Jumbo Reverse Mortgage maximum loan amount: $4 million (with exceptions up to $6 million)
Note: The national lending limit on the HECM Reverse Mortgage in California is the same across the entire united states as they are set by HUD each year and not California specific.
Types of Reverse Mortgages Available in California
There are 3 primary types of reverse mortgages available:
HECM - Home Equity Conversion Mortgage
- HECM is the most common and widespread type of reverse mortgage. A HECM reverse mortgage is insured by the Federal Housing Administration (FHA). The qualify for a HECM at least one borrower must be age 62. The loan amount is determined based on factors like the borrower's age, the appraised value of the home, current interest rates and lending limits. These loans come with certain consumer protections and the safety of FHA mortgage insurance
- HECM offers 4 draw options:
- Monthly disbursement for a fixed term, or life
- Line of credit
- Lump sum
- Any combination of the above 3
Proprietary or Jumbo Reverse Mortgage to Maximize California Home Equity
- Proprietary reverse mortgages are offered by private lenders and are not insured by the FHA. They are designed for borrowers who may not qualify for a HECM or may not be served fully by the HECM. With loan amounts up to $4 million, they are designed for homeowners with higher-value homes who may desire a larger loan amount than they could get with a HECM. These reverse mortgages may have more flexible terms and payment options, but they also tend to have higher fees and interest rates. Minimum borrower age is lower at age 55.
Single Purpose Reverse Mortgage to Pay For California Property Taxes or Home Improvements
- Single-purpose reverse mortgages are usually provided by state or local government agencies or nonprofit organizations. These loans are tailored for particular needs, like covering property taxes or funding home repairs. Generally these types of reverse mortgages come with restrictions on how you can use the funds. These mortgages are primarily aimed at seniors with lower incomes and might have income-based eligibility criteria.
Benefits of a California Reverse Mortgage
There are a number of potential benefits of securing a reverse mortgage in California. Here are few highlights.
- Lower cost of living in retirement: Reverse mortgages can lower monthly expenses to improve cashflow.
- Stay in the Home: Seniors can continue living in their homes and maintain homeownership during life of the loan.
- Debt Consolidation: Borrowers can use the funds to consolidate debts such as credit cards or car loans into the reverse mortgage.
- Supplement Income: Reverse mortgage funds can be used to add to other income sources for better cashflow
- Fund Home Improvements: Proceeds can be used to renovate or improve the property.
- Long-Term Care: Loan funds can help cover the costs of long-term care or an in-home caregiver.
- Tax-Free Income: The money received from a reverse mortgage is considered loan proceeds and not typically not considered taxable income.
- No Monthly Payments: Borrowers are not required to make monthly mortgage payments during the loan term. *NOTE: borrower must still continue to pay their property taxes, homeowner's insurance and other housing expenses including maintenance for the loan to stay in good standing.
- Create an Emergency Fund: Utilize available reverse mortgage funds for unexpected expenses.
- Financial Flexibility: Reverse mortgage funds can be accessed as needed, providing financial flexibility.
- Travel or Leisure: Many borrowers use their funds to take dream vacations or pay for other leisure activities.
- Control over Funds: Borrowers have control over how they use the funds.
NOTE: for the reverse mortgage to remain in good standing at least one borrower must continue to occupy the property as their primary residence and continue to pay the property taxes, homeowners insurance costs plus maintenance expenses on the home. If those are done the reverse mortgage stays in good standing without any required monthly mortgage payments.
Common Questions About Reverse Mortgages
Who Owns The House with a Reverse Mortgage in California?
The reverse mortgage works just like any other mortgage does when it comes to title and home ownership. During the life of the reverse mortgage loan, the borrower remains the owner on the title to their California home. The reverse mortgage is simply a lien on title similar to how any other mortgage places a lien on title to protect the lender.
Can I get a Reverse Mortgage If My Home is in a Trust in California?
Yes. Assuming the borrower qualifies and the trust is approved by the lender and title company, the home can remain in the trust during the life of the reverse mortgage loan. Trusts are very popular in California and systems are in place to keep the home in the trust at closing.
Can a Reverse Mortgage be Used to Purchase a Different Home in California?
Yes. There is a Reverse For Purchase loan which is designed to purchase a different home using the funds from the reverse mortgage. This works similar to how a traditional mortgage works but with the benefits of a reverse mortgage. The funds from the reverse mortgage are combined with the borrowers down-payment proceeds to complete the home purchase. The new reverse mortgage is on the home the borrower buys and move into as their primary residence.
How Much Money Can I Get From a Reverse Mortgage in California?
A reverse mortgage does require that the homeowner have "substantial" equity in the home in order to secure a reverse mortgage. The amount of money the borrower qualifies will depends on home value, borrowers age, lending limits, current interest rates and mortgage balance owed (if any). So generally speaking the older a borrower is, the larger the reverse mortgage they can get. In a lower interest rate environment the lending percentages are higher which means the borrower could get more money. As a general rule of thumb a reverse mortgage could offer a loan between 30%-70% of the homes value.
The best way to find out how much you might qualify for is to request a personalized quote.
We are happy to provide that quickly - just give us a call or request a quote online.
What Happens to My House in California After I Die With a Reverse Mortgage?
After the death of the last remaining borrower, the reverse mortgage becomes "due and payable". At this point the heirs should contact loan servicing and advise the last borrower has died. Loan servicing will map out options to the estate. The estate can request an extension to have time to sell the home or make other arrangements. Neither the heirs nor the estate are personally liable for the debt, however if the heirs wish to keep the house then reverse mortgage would need to be paid off. This can be done thru sale of home, refinancing the reverse mortgage into another mortgage, paying off the balance with other assets or allowing the mortgage company to foreclose or deed in lieu of foreclosure.
In the event the estate chooses to sell the home, any remaining equity in the home after sale of home after borrowers death would pass to the estate or heirs after the reverse mortgage is paid off at the close of escrow.
Reverse Mortgage Resources For California Homeowners
Further reading for those seeking to secure a reverse mortgage in California or learn more.
John Correll, CRMP
Certified Reverse Mortgage Professional
(888) 603-1550 | (619) 294-9820
Together let's have a conversation about ways home equity might help support your retirement goals.
