Reverse mortgage explained: what every agent should know

Maybe it's a 78-year-old seller who mentions, halfway through the listing appointment, that she took out a reverse mortgage 10 years ago. Maybe it's her kids calling you after she passes, holding a letter that says the loan is due. Either way, a reverse mortgage changes how the deal works.

A reverse mortgage is a loan that lets homeowners age 62 or older turn home equity into cash without making monthly mortgage payments. The most common type is the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA). The loan comes due when the last borrower dies, sells, or moves out. For 2026, the U.S. Department of Housing and Urban Development (HUD) caps the home value a HECM can be based on at $1,249,125.

The part most agents get wrong is what happens after the owner dies. The USRT Heir Clock Checklist below covers the 30 days after heirs get the notice that the loan is due.

Common questions about reverse mortgages

How does a reverse mortgage work?

The lender pays the homeowner out of their home equity. Interest and fees don't get paid each month. They get added to the loan balance instead.

Home equity is the difference between what a home is worth and what the owner still owes on it. For a refresher, here's our guide to what equity is in real estate.

With a regular mortgage, you pay the lender and your balance shrinks. A reverse mortgage runs the other way, and the balance grows every month. That has a name: negative amortization, which is when a loan balance goes up over time instead of down. The Consumer Financial Protection Bureau (CFPB) puts it plainly: a reverse mortgage is not free money. It's a loan the borrower or heirs must repay, usually by selling the home.

Example: Dolores owns her $500,000 home free and clear. She takes out a reverse mortgage and draws $150,000 over a few years. She never makes a payment, so interest and insurance premiums keep stacking on top of that $150,000. A decade later, she owes far more than she borrowed, and her equity is smaller.

A Home Equity Conversion Mortgage (HECM) is a reverse mortgage insured by the Federal Housing Administration. According to the Congressional Research Service, the amount a borrower can get depends on 3 things: their age, the interest rate, and the home's value.

How the money comes out depends on whether the rate is adjustable or fixed. An adjustable-rate HECM can pay out as a line of credit, monthly payments for life, monthly payments for a set term, or a mix of monthly payments and a line of credit. A fixed-rate HECM pays out only as a single lump sum at closing.

Who qualifies for a reverse mortgage?

To get a HECM, a borrower must be at least 62, live in the home as their main residence, and meet with a HUD-approved counselor first. Here's the core list, per the Congressional Research Service and the CFPB:

1. Age 62 or older. The youngest borrower must be at least 62.
2. Ownership. The borrower must hold title to the property.
3. Main residence. The borrower must live in the home most of the year.
4. Counseling. A session with a HUD-approved counselor is required before the loan.
5. Ability to pay property costs. Borrowers must pass a financial check showing they can keep paying property taxes and homeowners insurance.

The CFPB lists 2 more: no delinquent federal debt, like unpaid federal income taxes or federal student loans, and a home that meets HUD's property standards.

Any existing mortgage has to be paid off at or before closing, and borrowers can use HECM money to do it. So if your seller still owes a lot, there may not be much cash left over.

Reverse mortgage vs. regular mortgage: what's the difference?

It comes down to which way the money flows. With a regular mortgage, the borrower pays the lender. With a reverse mortgage, the lender pays the borrower.

Here's how the 2 loans compare side by side.

People also mix up reverse mortgages and home equity lines of credit. A home equity line of credit (HELOC) is a line of credit backed by your home that you repay with monthly payments. Our home equity loan vs. HELOC guide breaks that one down.

What does a reverse mortgage cost?

A HECM carries a 2% upfront mortgage insurance premium and a 0.5% yearly premium. That's on top of interest, an origination fee, and normal closing costs.

The premium math starts with the maximum claim amount, which is the lesser of the home's appraised value, the sale price if the loan is used to buy, or HUD's national limit. For 2026, that limit is $1,249,125 in every area, per HUD Mortgagee Letter 2025-22.

The upfront premium is 2% of the maximum claim amount. On a $600,000 home, that's $12,000. The yearly premium is 0.5% of the outstanding balance. HUD set both rates in Mortgagee Letter 2017-12 for every HECM with an FHA case number assigned on or after October 2, 2017.

Most borrowers roll the premiums into the loan. That adds to a balance that's already growing with interest.

Does the bank take your house with a reverse mortgage?

No. The borrower keeps the title and stays the owner as long as they follow the loan terms. The CFPB says the title stays in the borrower's name.

Agents also hear that the kids will inherit a pile of debt. They won't. A non-recourse loan is one where the lender can collect only from the home, not from the borrower's or heirs' other money. HECMs are non-recourse. If the balance grows past the home's value, the CFPB says heirs can pay off the loan by selling the home for at least 95% of its appraised value. Mortgage insurance covers the rest.

Example: Walt's reverse mortgage balance has grown to $520,000, but his home now appraises at $480,000. After he passes, his kids can sell it for at least $456,000, which is 95% of $480,000, and the loan is settled. Nobody writes a check for the other $64,000.

The real risk is the one people skip. The CFPB says HECM borrowers must keep paying property taxes and homeowners insurance, and failing to pay either may lead to foreclosure.

What happens to a reverse mortgage when the owner dies?

The loan becomes due and payable after the last borrower, co-borrower, or eligible nonborrowing spouse dies, according to the CFPB. An eligible nonborrowing spouse is a spouse who isn't on the loan but meets HUD's rules to stay in the home after the borrower dies.

Next comes the due-and-payable notice, a letter saying the full loan is now owed. Heirs have 30 days after that notice to buy the home, sell it, or turn it over to the lender. The CFPB says that timeline may be extended up to 6 months so heirs can sell or get their own loan. Under HUD's rule at 24 CFR 206.125, the servicer, the company that manages the loan, generally must start foreclosure within 6 months unless HUD approves more time.

If the family calls you, use the USRT Heir Clock Checklist:

1. Note when the notice arrived. The 30-day clock starts when it arrives.
2. Get a current payoff. The balance grows every month.
3. Compare balance to value. Pull comps, meaning recent sales of similar nearby homes, or order an appraisal.
4. Pick a path. Keep the home, sell it, or turn it over to the lender.
5. Ask about an extension in writing. Don't assume the clock stops on its own.
6. Loop in the pros. Point heirs to the servicer and to a probate attorney, the lawyer who handles settling an estate.

Keeping the home works a little differently. Heirs pay off the loan, often with a new mortgage. HUD's HECM servicing FAQs say heirs who inherit the home can pay the lesser of the balance or 95% of the current appraised value. HUD counts that transfer as a sale. HUD's rule at 24 CFR 206.125 points the same way: it treats some transfers of title to heirs as a sale. Some CFPB and HUD consumer pages just say "pay the full balance," so get the servicer's payoff figure in writing.

How do reverse mortgages show up in real estate deals?

Most often in 3 kinds of deals: a senior selling their home, heirs selling after a death, and buyers 62 or older using a reverse mortgage to buy.

For listings, order the payoff early. The balance keeps rising while the home sits on the market. For heir sales, set expectations on day one.

For older buyers, there's the HECM for Purchase. A HECM for Purchase lets a buyer 62 or older use HECM money, usually plus a large down payment, to buy a new main home. HUD created it under the Housing and Economic Recovery Act of 2008. Federal rules at 24 CFR 206.39 require the buyer to move in within 60 days of closing.

Example: A retired couple sells the big family house and wants a one-story home nearby. With a HECM for Purchase, they put a large share of their sale money down, the HECM covers the rest, and they have no monthly mortgage payment in the new place.

In every case, point clients to a HUD-approved counselor and a lender for the money questions.

Will reverse mortgages be on the real estate exam?

Probably as a loan type. Reverse mortgages fit under financing, so know 4 facts cold: the age 62 minimum, FHA insurance, a growing balance, and non-recourse protection.

Pearson VUE's national salesperson outline, in effect since 2025, gives financing and settlement 7 of the 80 scored questions. Those cover types of loans, FHA requirements, and mortgage insurance premiums. The outline doesn't name reverse mortgages, and other testing companies use their own outlines, so check your state's.

Review it alongside the other 10 loan types to know for the real estate exam, and see how FHA loans compare to conventional and VA loans.

Is a reverse mortgage worth it for your client?

It can be, for a homeowner 62 or older who plans to stay put, needs cash flow, and can keep up with taxes and insurance. It's a poor fit for someone who wants to leave the home free and clear to their kids.

The upside is no mortgage payments and cash while living at home. The trade-offs are shrinking equity, steep upfront costs, and heirs who will likely have to sell or refinance. Your job is to spot the issues and send clients to the right expert.

Memory tricks

• Forward vs. reverse: Forward mortgage, you pay the bank. Reverse mortgage, the bank pays you.
• Spot the fake: If a loan needs monthly payments, it isn't a reverse mortgage. That rules out home equity loans (a lump sum borrowed against your equity) and HELOCs.
• HECM: Home Equity Conversion Mortgage. You convert equity into cash.
• The heir numbers: 30 days to act, up to 6 months with an extension, and no more than 95% of the appraised value when the home is worth less than the loan.

Try a sample question

Which loan lets a 70-year-old homeowner receive payments from a lender without making monthly payments?

• A. Home equity loan
• B. Home equity line of credit (HELOC)
• C. Reverse mortgage
• D. Fixed-rate forward mortgage

Answer: C. Only a reverse mortgage pays the homeowner with no monthly payment due. Home equity loans and HELOCs both require monthly payments.

The rule to remember

The balance grows. The title stays. The house is the limit.

Ready to lock in loan types before exam day? Reverse mortgages are one of many finance topics that trip people up on test day. Mix up a reverse mortgage and a HELOC, and you can give away an easy point. The USRT Exam Prep package gives you unlimited practice exams, vocabulary flashcards, and video explainers so these questions feel easy. Start the Exam Prep package today.