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Reverse mortgages key terms

Appraisal

A written document that shows an opinion of how much a property is worth. It describes what makes the property valuable and may show how it compares to other properties in the neighborhood. An appraisal helps assure you and your lender that the value of the property is based on facts, not just the seller’s opinion.

Default

The failure to meet the loan requirements included in the reverse mortgage. For example, the requirements of a Home Equity Conversion Mortgages (HECM) loan include occupying the home as the principal residence, keeping the home in good repair, and paying the property charges on-time. A borrower’s failure to fulfill these obligations would cause the loan to default and may lead to foreclosure. 

Eligible non-borrowing spouse

A borrower’s spouse who is not a co-borrower, but qualifies under HUD’s rules to stay in the home after the borrower has died.

Good Faith Estimate

A Good Faith Estimate, also called a GFE, is a form that a lender must give you when you apply for a reverse mortgage. The GFE lists basic information about the terms of the mortgage loan offer. 

Home Equity Conversion Mortgage (HECM)

Most reverse mortgages today are HECMs.  One way they differ from private reverse mortgages (sometimes called “proprietary” reverse mortgages) is that HECMs are federally insured by the FHA.

Homeowners insurance

Pays for losses and damage to your property if something unexpected happens, like a fire or burglary. Standard homeowner’s insurance doesn’t cover damage from earthquakes or floods, but it may be possible to add this coverage. Homeowner's insurance is also sometimes referred to as "hazard insurance." Borrowers with a HECM loan are required to maintain homeowners insurance in addition to, the mortgage insurance also required with a reverse mortgage loan. 

Loss mitigation

The steps mortgage servicers take to work with a borrower to avoid foreclosure. Loss mitigation refers to a servicer’s responsibility to reduce or “mitigate” the loss to the investor that can come from a foreclosure. Certain loss mitigation options may help you stay in your home. Other options may help you leave your home without going through foreclosure. Loss mitigation options for reverse mortgage borrowers may include deed-in-lieu of foreclosure or a repayment plan.

Principal limit

The amount of money the borrower can borrow with a reverse mortgage loan.  The principal limit for a HECM is calculated using the age of the youngest borrower or Eligible Non-Borrowing Spouse, the interest rate on the loan, and the maximum claim amount.  The principal limit generally will increase each month, possibly making additional funds available for borrowers with adjustable rate HECMs, but not fixed-rate HECMs. In general, loans with older borrowers, higher-priced homes, and lower interest rates will have higher principal limits than loans with younger borrowers, lower-priced homes, and higher interest rates. 

Principal residence

The dwelling where the borrower, and if applicable, the Non-Borrowing Spouse, maintains their permanent home and where they typically spend the majority of the year.  A borrower may only have one principal residence at a time.  If the borrower moves someplace else for a majority of the year, or to a nursing or assisted living facility for more than 12 consecutive months, the borrower must pay back the reverse mortgage loan. 

Property charges

Obligations the borrower must pay including property taxes and homeowners insurance, and when applicable, flood insurance premiums, ground rents, condominium fees, planned unit development fees, homeowners’ association fees, and any other special assessments that may be levied by municipalities or state law. Paying property charges on-time is a requirement of a HECM loan.

Reverse mortgage

A type of loan that typically allows homeowners age 62 or older to borrow against the equity in their homes. Most reverse mortgages today are called HECMs, insured by the Federal Housing Administration (FHA). It is called a “reverse” mortgage because, instead of making payments to the lender, you receive money from the lender. The money you receive, and the interest charged on the loan, increases the balance of your loan each month. Over time, the loan amount grows. Since equity is the value of your home minus any loans, you have less and less equity in your home as your loan balance increases, which could become a problem if you ever want or need to move.

Servicer

The company that handles the day-to-day management of the loan including making monthly payments to borrowers or processing  draws from the line of credit, sending mortgage statements, responding to borrower inquiries, sending and collecting annual occupancy certifications, and keeping track of principal and interest paid.  The loan servicer may handle foreclosure processing for the lender.  Typically, the servicer is not the same company as the lender.