What is reverse mortgage counseling?

Counseling ensures you understand everything

Attend a counseling session with an expert non-profit organization to understand all about reverse mortgage terms. You can learn about the pros and cons associated with it. Get a clearer understanding of the costs, tax implications, payment options, benefits, and drawbacks. A certificate will be issued to you upon completion, which you will require to sign and submit to the lender. 

Reverse mortgage counseling refers to the mandatory counseling sessions that prospective borrowers need to undergo before they can take out a reverse mortgage. These sessions are not therapeutic in nature. They are more like tutorials, which help you understand the nature of reverse mortgages so that you have all the information you need to determine if a reverse mortgage is right for you.

Reverse mortgage counselors are intended to be independent and impartial third parties, whose only job is to help you decide whether or not you should take out a reverse mortgage. Since these counselors are supposed to be independent, counselors cannot receive any compensation from lenders. In fact, reverse mortgage lenders cannot refer you to a specific counselor or counseling agency. Neither can these lenders set an appointment or pay of counseling fee on your behalf. The lenders’ participation in the counseling process – if you can even call it “participation” – is limited to providing you with a list of counselors approved by the US Department of Housing and Urban Development (HUD), including their contact information.

Once you have chosen a specific counselor, you can set an appointment for the counseling session, which can be done either face-to-face or via telephone. Counselors are trained to provide you with the information through both methods, so either one should be fine. Sessions are usually scheduled to take place after ten business days from the date of the initial call. On average, a session takes around 60 minutes on average, but may take longer depending on the needs of the prospective borrower.

While waiting for your scheduled session, you will receive an information packet either from your counselor or lender. This packet includes the following:

  1. A document bearing the title “Preparing for Your Counseling Session,” which should contain some basic information on the reverse mortgage counseling process.
  2. A list of loan comparisons so that the counselor can review your options.
  3. The “Total Annual Loan Cost (TALC) Disclosure,” a document required by the Federal Reserve Board which is basically an illustration of the costs associated with the reverse mortgage loan for different periods.
  4. A booklet bearing the title “Use Your Home to Stay at Home – A Guide for Homeowners Who Need Help Now” prepared by the National Commission on Aging (NCOA).

How much does reverse mortgage counseling cost?

The applicant is responsible for a counseling fee. Reverse mortgage counseling costs may vary but are usually between $125 to $200.

These fees are typically required at the time of counseling, however, reverse mortgage applicants may not be turned away if they are unable to afford the fees. For this reason, some counselors allow borrowers to defer payment and use loan proceeds for compensation.

There are some counseling agencies that may give you counseling at a reduced fee or even free-of-cost. In that case, you may have to apply for a “hardship” support. 

What does a reverse mortgage counselor do?

Once the date of your appointment arrives, you will finally be able to meet with your reverse mortgage counselor. But what does your counselor actually do? Well, to be brief, the main goal of your reverse mortgage counselor is to provide you with all the necessary information to help you decide whether or not a reverse mortgage is right for you. In particular, the counselor helps you understand:

  1. What a reverse mortgage is.
  2. How a reverse mortgage works.
  3. What the financial and tax consequences of a reverse mortgage are.
  4. What common alternatives there are to taking out a reverse mortgage.

It is important to remember that a reverse mortgage counselor should not be “steering you” towards a particular choice. He should only be giving you the necessary information to make that choice in an informed and intelligent manner.

After your session, expect the counselor to schedule a follow up call. This follow up call is scheduled on a later date to allow you sufficient time to digest the information you just received and take all your options into careful consideration.

How does reverse mortgage counseling work?

Reverse mortgage counseling involves a pretty straightforward procedure, which we have outlined below:

  1. Schedule an appointment with your reverse mortgage counselor. Obviously, to start with your reverse mortgage counseling, you will first need to set an appointment with your counselor of choice. If you have already approached a lender at this point, then it should have already provided you with a list of certified reverse mortgage counselors, as required by law. However, lenders cannot refer you to a specific counselor or set an appointment for you. This prohibition is in place to secure the neutrality of counselors, who must give you impartial advice regarding your reverse mortgage. Regardless if you visited a lender or counselor first, you should receive an information packet before the date of your appointment. You will also need to provide some key information to the counselor, such as your name, contact details, and other information pertinent to your reverse mortgage. Make sure to set aside around 90 minutes of your time for the appointment. Finally, do not forget that reverse mortgage counseling does not come for free! Counselors or agencies tend to charge between $125 to $200 for the service.
  2. Take the reverse mortgage counseling session. On the date and time of your appointment, you should appear before your counselor either in person or via telephone. Both options should be made available by the counselor, as mandated by law. During the session proper, the counselor will discuss everything you need to know about your reverse mortgage and give you the necessary information to decide whether you a reverse mortgage is right for you.
  3. Get your certificate of completion. Once you finish your session, the counselor will issue a certificate of completion which you will need to provide the lender to complete the documentary requirements for your reverse mortgage application.
  4. Expect a follow-up call from your counselor. Although you have already been issued a certificate of completion, you should still expect a follow-up call from your counselor. During this call, your counselor will check up on you to see if you need any further assistance regarding your reverse mortgage. However, if you need more immediate assistance, you can also initiate the follow-up call yourself.

Why do you need reverse mortgage counseling?

Now, at this point, you may already be annoyed by the fact that reverse mortgage counseling is a mandatory requirement for loan applications and that the cost of this service needs to come out of your own pocket. However, there is a good reason for making reverse mortgage counseling compulsory.

Taking out a reverse mortgage is a complicated financial decision, whose consequences you will have to live with for – quite literally – the rest of your life. You will even have to put what is likely your most valuable asset on the line, i.e. your principal residence. Making the wrong choice here will, in all likelihood, leave you homeless. Worse still, you will be homeless during your senior years, one of the most vulnerable stages of life.

Considering the lasting consequences and serious risks involved in taking out a reverse mortgage, the government wants to make absolutely sure that you are equipped with all the necessary information to make the right decision.

What happens after reverse mortgage counseling?

Keep in mind that reverse mortgage counseling is only one step of the loan application process. Yes, it is an important step, but it is still just a single step.

Aside from having a certificate to show that you have completed reverse mortgage counseling, you will also need to satisfy the other loan requirements.

To get your reverse mortgage loan application approved, you will first need to comply with the basic eligibility requirements. You will need to be at least 62 years old and the property you intend to mortgage must currently and continuously serve as your principal residence. Furthermore, the mortgaged property must comply with the minimum standards set by the Department of Housing and Urban Development (HUD). Ideally, there should not be an existing mortgage over your home. However, if there is an existing mortgage, the balance of the same must be small enough to be paid off by the expected proceeds of the reverse mortgage loan. A reverse mortgage cannot co-exist with another type of home loan.

If these basic requirements are met, you then need to pass the financial assessment. Unlike conventional mortgages or other home loans, the financial assessment for reverse mortgage loans do not take into consideration your credit scores or credit history. All the lender is trying to find out is whether or not you are financially able to comply with the ongoing requirements of the reverse mortgage, which we will discuss shortly. If the lender thinks that you may have compliance issues in the future, your application may be denied outright. In the alternative, however, the lender may also require a “set-aside,” an agreement which allows the lender to set aside part of the proceeds of your loan to be used exclusively for the compliance of the ongoing loan requirements.

The amount of the set-aside will principally depend on your life expectancy at the time of the loan application. The younger you are, the more the set-aside will be. The reason for this obviously being that the lender needs to set aside a larger sum of money since you will have to comply with the ongoing requirements for a longer period of time.

The last step of the loan application process is paying the closing costs. The closing costs of a reverse mortgage loan are very similar to those of conventional mortgage loans, which include but are not limited to origination, title search, appraisal, surveys, inspections, and recording fees. In addition to these “standard” costs, loan applicants also need to pay the premiums for the reverse mortgage insurance provided by the Federal Housing Administration (FHA). The FHA insurance is legally required and serves a very important purpose. It protects you and other borrowers from lender failure and limits your liability for the debt to the value of your house. These closing costs may seem a bit pricey but, luckily, you will not have to pay the entire amount out of pocket. Most of these costs can be paid using the proceeds of the loan once your application is approved.

On the off chance that you get buyer’s remorse (or, in this case, borrower’s remorse) after successfully closing, you still have three business days to cancel your reverse mortgage loan. This is what the industry refers to as the “right of rescission” or “right of cancellation.” Whatever you call it though, it still refers to the right to cancel the entire transaction and demand a return the money you paid for financing. To exercise this right, you will need to notify the lender in writing and give the lender 20 days to return your money. As with all significant transactions, it is always a good idea to keep copies of all correspondence you exchanged with the lender, including all receipts and proofs of mailing.

On the other hand, if all goes well and you decide to continue with your reverse mortgage, all you need to do at this point is make sure that you keep complying with the ongoing requirements, namely that you continue paying your property taxes and insurance premiums, that you keep the mortgaged property in relatively good condition so that it continues to comply with the minimum HUD standards, that you do not sell the mortgaged property, and that you continue using the mortgaged property as your principal residence. If you are able to comply with all these ongoing requirements, then you make be sure that the reverse mortgage will not become due until the time of your death.

What if you suspect a scam?

As already discussed in detail, reverse mortgage counseling serves a very important role. It ensures that you get an impartial expert opinion as to whether you should take out a reverse mortgage. As such, it is extremely important that your reverse mortgage counselor stays neutral and disinterested your decision to proceed with your reverse mortgage application.

Your reverse mortgage counselor should not receive any form of compensation from your lender, and your lender cannot refer you to a specific counselor nor set your appointment for you.

If you think your lender or counselor is scamming you or otherwise breaking the law, you can file a formal complaint with the Federal Trade Commission, the Attorney General, or your state’s banking regulator.