A Simple Guide To Reverse Mortgages In Washington
You’ve paid your mortgage diligently for years—perhaps even paid it off—and built up considerable equity.
And now that you’re retired or preparing to retire, it’d make a world of difference if you could access all that “locked-up” equity.
That’s where reverse mortgages enter the picture.
You’ve probably heard plenty about them in ads or in conversations with family or friends.
However, they’re a little more nuanced than many folks realize. We’ll explain how they work in plain English, then walk through their advantages and disadvantages, so you can make an informed decision for yourself, your family, and your heirs.
Above all, it’s important to move deliberately. Jumping into a reverse mortgage prematurely could be a major financial mistake. As we’ll see, there are numerous reverse lending options (not to mention other financing solutions) that suit different situations. Yet, in our experience, big lenders tend to herd clients through a cookie-cutter process.
We take a different approach.
Since 2002, David has helped many retirees navigate complex options to find the right solution for their unique finance, family, dreams, health, and lifestyle. As his Google reviews attest, David has built a sterling reputation and lasting relationships by putting himself in his clients’ shoes.
What, exactly, is a reverse mortgage?
A reverse mortgage lets homeowners aged 62 and over borrow cash against a portion of their home equity.
Unlike a HELOC or a home equity loan, it requires no ongoing payments. Instead, a reverse mortgage loan is due in full once the homeowner no longer primarily occupies the property. Interest accumulates until that time, but the amount due will never exceed the value of the house.
The name can be a little confusing, so let’s take a second to clarify what “reverse” actually means.
It’s not reverse in the sense of switching roles with the bank. You’re still the borrower, and you’re still obligated to repay principal plus interest.
It is reverse in terms of the timing of cash flow. With a standard loan, you generally receive a lump sum on day one and repay it gradually. With a reverse mortgage, you generally receive funds gradually (although a lump sum is possible) and repay it all at once upon selling the property.
Why do so many seniors get reverse mortgages?
Many seniors get reverse mortgages to close the gap between their limited income and rising expenses, without having to sell their home. Reverse mortgages are easier to keep up with than a standard loan or line of credit, since they don’t require monthly loan payments.
Lenders have long realized that over 79% of seniors own a house and a similar percentage are retired. In other words, those who have substantial home equity are likeliest to need to access that equity.
Reverse mortgages turn equity into liquidity, so seniors can supplement their income to maintain a good standard of living (something economists refer to as “consumption smoothing”).
It’s always been difficult to cover high Washington costs on a retirement income. Then came the sharp inflation of of 2021–2022, which blew many retirees’ budgets out of the water. Every year, programs like HECM (more on that below) help thousands of Washington seniors to maintain their quality of life despite escalating expenses.
Reverse mortgage requirements in Washington State
Washington’s requirements are straightforward. According to HUD and the WA Department of Financial Institutions:
- All borrowers must be at least 62 years old.
- At least one borrower must reside in the house for most of the year.
- The property must be one of the following:
- a) Single-family.
- b) Owner-occupied multi-family.
- c) An FHA-approved condominium.
- d) A manufactured home built since 1976, depending on its foundation and other structural requirements.
Planned or new construction is eligible in some cases, subject to certification of occupancy.
Washington lenders may offer any combination of a lump sum, fixed payments, or a line of credit.
Note that private lenders may have tighter or simply different requirements. Some common ones, like minimum property value, may effectively rule out certain dwellings.
Types of reverse mortgages
HUD reverse mortgage
The Department of Housing and Urban Development (HUD) insures certain reverse mortgage products. These are often referred to as “HUD reverse mortgages.”
Home equity conversion mortgage (HECM)
The most common type, by far, is a home equity conversion mortgage or HECM. In fact, it’s so common that “HECM” and “HUD reverse mortgage” are often used interchangeably.
HECMs are regulated by the FHA and limited to $1,089,300 or your home’s appraised value—whichever is less. It’s mandatory to meet with a HUD-approved reverse mortgage counselor before taking on a HECM loan.
HECM for purchase (H4P)
A HECM for purchase, or H4P, is another HUD-insured product.
An H4P works much like a standard HECM, but allows you to receive the funds and purchase a new primary residence in a single transaction.
Single-purpose reverse mortgages
Less often, borrowers need funds for a specific and limited purpose, like major repairs or tax bills. In these cases, single-purpose reverse mortgages can be a cost-effective alternative.
They’re typically offered by a state/local government or not-for-profit organization. Single-purpose loans often carry lower fees than private or even HECM loans, but they’re also less widely available, and may have income limitations.
Private (proprietary) reverse mortgages
Proprietary reverse mortgages are permitted in Washington. They tend to cost more than HECM loans, but offer greater flexibility in terms of the borrower’s age, loan amount, and loan purpose.
A common example is a “jumbo” reverse mortgage. Its limit of $4,000,000 is nearly quadruple that of a HECM loan.
In Washington State, proprietary reverse mortgages are available as soon as age 60. Lenders have quite a bit of flexibility with loan features and requirements, so it’s all the more important to vet your lender, read the loan terms carefully, and seek outside financial or legal advice for any concerns.
Advantages of reverse mortgages
Reverse mortgages are a legitimate, regulated financial product. Like any other home loan, they’re subject to standards on income, assets, debt level, collateral, and so forth. That keeps rates generally comparable to those of standard mortgages.
What’s more, they’re flexible. While many seniors need general cash flow, others choose a reverse mortgage to fund anything from specific repairs to a whole new home.
And since they’re non-recourse loans, it’s impossible to owe more than the property is worth. That means you or your estate won’t be left with debt following the sale. If any equity remains after paying off the loan, it belongs to you or your heirs.
Speaking of equity, reducing it with a reverse mortgage may make certain borrowers eligible for assistance like Medicaid long term care payments. The state’s rules can be confusing, so it’s important to discuss the matter with your attorney as well as your mortgage counselor.
Disadvantages of reverse mortgages
If you take on a reverse mortgage, you’ll still need to keep up with tax and insurance payments. If those amounts are substantial, they can quickly consume your cash flow.
Reverse loans occupy what’s called first lien position, meaning they take priority over all other obligations. If you have an existing mortgage, then you’ll like need to pay it off before (or with proceeds from) a reverse mortgage.
Keep in mind that fees and costs may be more than you’d pay for a home equity loan or HELOC. A reverse mortgage may indeed be the right choice, but it’s still worth exploring all options to borrow, restructure, or pay off existing debt.
Finally, the lack of monthly payments helps with cash flow, but it also means the loan balance rises quickly. To avoid surprises, mortgage counseling is mandatory for HECM borrowers, and prudent for everyone.
Common questions & concerns
How long can I live in a house with a reverse mortgage?
With a reverse mortgage, you can live in the house indefinitely—as long as it remains your (or your surviving co-borrower’s) primary residence.
What happens if I pass away with more balance owed than the value of the property?
If you have a surviving co-borrower, typically a spouse, then he/she may remain in the property.
If you have no (surviving) co-borrower, then one of three things can happen:
- Your eligible Non-Borrowing Spouse, as defined by HUD, continues to live in the house.
- Your heirs repay the full balance and keep the house.
- Your property is sold and the lender is paid off only from proceeds of the sale. (Generally, the property must sell for at least 95% of appraised value, and mortgage insurance covers the rest.)
Your options depend on spouse and co-borrower statuses, so review them in detail with your lender.
Will my heirs inherit the debt?
No. Your heirs will not inherit the reverse mortgage debt, since the lender can’t claim anything beyond the value of the collateral (i.e., the house).
Your heirs will only pay the entire balance if they wish to keep the house, which is strictly optional.
