What’s a reverse mortgage in Texas?

Texas is among the most populous states in the United States with a total population of over 29 million people, and the number is expected to grow even further. Seniors above age 60 comprise about 18.6% of the population. Texas is also one of the largest reverse mortgage markets in the United States.

A reverse mortgage is a type of loan that allows homeowners to tap the equity in their home in exchange for a lump sum payment, monthly payment, or a line of credit. Texas requires that homeowners must be age 62 or older to qualify for a reverse mortgage. You can borrow a reverse mortgage to pay healthcare costs, pay your existing mortgage balance, purchase a new home, or supplement retirement income.

What is a reverse mortgage?

A reverse mortgage is a financial agreement that allows senior homeowners to tap their home’s equity. Typically, the homeowner gives up the equity built up in their home in exchange for a monthly payment or a single payment without having to move out or sell the home. The Department of Housing and Urban Development (HUD) allows senior homeowners to borrow against the equity in their homes or use the reverse mortgage to purchase a new home.

Unlike a traditional mortgage, qualifying homeowners are not required to make loan repayments as long as at least one borrower lives in the property, and ongoing costs like property taxes, homeowner insurance, and maintenance costs are paid on time. This means that the reverse mortgage accrues interest over the years until when a qualifying event occurs. If the last homeowner moves out, sells the home, or dies, the reverse mortgage lender will recover the principal amount plus accrued interest and other costs.

Reverse mortgage requirements

If you need money to fund your retirement years, a reverse mortgage can be a good option. Here are some of the requirements that you must meet to qualify for a reverse mortgage:

You must be at least age 62 or older (if married, both borrowers must be 62 or older)

The home must be your primary residence, meaning you have lived there for the majority of the year.

You must own the home outright or have a low balance on the existing mortgage. You can pay off the mortgage balance using your own funds or using proceeds from the reverse mortgage.

You don’t owe any federal debt such as federal student loans. However, if you owe any federal debts, you can use the proceeds from the reverse mortgage to pay off any debts.

You must have enough income to pay ongoing costs including taxes and insurance. Alternatively, you can agree to set aside part of the loan proceeds at closing to pay the ongoing costs.

The property must be in good condition and meet HUD’s quality standards. If the home is in disrepair, you will be required to pay for the required repairs before you can get approved for a reverse mortgage.

You must complete a HUD-approved counseling session. In Texas, HUD counseling is handled in person or over the phone by a counseling agency.

How much can you borrow?

The borrowing limit for a reverse mortgage in Texas depends on your home value, your age, interest rates, and the type of reverse mortgage.

Home value

Typically, you cannot borrow more than your home value, since the lender wants to be sure that they can recover the full loan amount. Most lenders allow prospects to borrow 40% to 60% of the appraised home value.

Age of the younger borrower

Age is another key factor that affects how much you can borrow. Lenders consider the age of the youngest borrower to know how long they will have the loan, how long the interest will accrue, and how long it can take to receive payments. Typically, older borrowers can get higher loan amounts than younger borrowers. For example, an 80-year-old senior homeowner can borrow significantly more than a 65-year-old would.

Interest rate

The interest rate on a reverse mortgage is also an important consideration. When you borrow a reverse mortgage, the interest accrues over time as the mortgage balance grows. If the interest rates are low, it means less interest is added to your loan over time, and hence, you can access higher loan amounts upfront. However, if the interest rates are high, more interest is added to your loan amount, and this lowers the amount you can borrow.

Type of reverse mortgage

Depending on the type of reverse mortgage you choose, the loan amount may be capped by federal limits. If you are borrowing a HECM loan, you can borrow up to $980,700 in 2022. However, if you are borrowing a proprietary reverse mortgage, you can borrow more than the HECM limit, sometimes up to $6 million, since it is offered by private lenders and is not federally insured.  

How to apply for a reverse mortgage

A reverse mortgage application process takes about 30 to 45 days and has five key steps. Here are the basic steps of the reverse mortgage application process:

Application

Your reverse mortgage application authorizes the lender to consider your application. If you are applying for a HECM, you must complete a counseling session before the lender can incur any costs on your behalf. At this stage, the lender will specify the loan amounts, interest rates, and mortgage costs.

Documentation

You may be required to provide certain documents including a mortgage statement, bank statement, annual tax return, paystubs, insurance, proof of income, etc. You may also be asked to provide your passport, ID, or other forms of identity.

Reverse mortgage counseling

You must complete a mandatory HUD-approved counseling session, and submit a signed counseling certificate to the lender. You can complete the counseling session before or after the initial application. This session allows you to ask questions about the reverse mortgage and discuss the mortgage terms with the counseling agency.

Appraisal

The lender will order an appraisal to determine how much your home is worth. The appraiser must be FHA-approved and follow a specific format provided by the FHA. If you had a separate appraisal conducted by an independent appraiser, the lender may require another appraisal to establish the legal value of the property.

Underwriting

The underwriting process involves ascertaining the legal ownership of the property. The lender will conduct a title search, purchase title insurance, and work with the applicant to clear any issues with the property such as unpaid liens, bankruptcies, and deceased owners on the title.

The lender will also review the appraisal report, and conduct a financial assessment of the borrower. Once the underwriting process is complete, the application will change to "clear to close", and a final closing date can be set.

Closing

At closing, the applicant meets with a notary or attorney to sign the closing documents. This stage also allows the borrower to review the reverse mortgage terms to make sure the loan amount, interest rates, and fees are as expected.

Once the closing documents are signed, there is a three-day rescission period when the borrower can cancel the application with no penalty. After this period lapses, the lender will issue a check to the borrower. If the borrower has an existing mortgage balance, the title company will send the mortgage payoff directly to the mortgage company, and send a check with the remaining funds to the borrower.