An Advisor's Guide to Reviewing a Reverse Mortgage Proposal

What to evaluate, what questions to ask, and why the loan officer often matters more than the loan.

Most financial advisors have never been taught how to review a reverse mortgage proposal.  This isn’t overly shocking since most advisors haven’t been exposed to how they work, how they could fit into a retirement plan, or what the general differences are. However, if you haven’t been asked by a client how, or if, one of these could come into play, expect that you will.  And not just your clients that have run out of money, more often we’re hearing from clients about how these can come into play much sooner, as a strategic part of their retirement plan.  So, when it does come into play, let’s get you prepared…     

Unlike an investment proposal or retirement income analysis, reverse mortgage illustrations often contain dozens of pages of unfamiliar terminology, charts, projections, disclosures, and assumptions. It's easy to get lost in the details while overlooking the questions that matter most.

The result is that many advisors begin by asking about the interest rate or closing costs before determining whether the strategy itself improves the client's retirement plan.

Instead, review a reverse mortgage proposal the same way you would evaluate any other planning recommendation: start with the objective, understand the assumptions, evaluate the tradeoffs, and determine whether the recommendation helps the client achieve better outcomes.

Get clear on what you’re comparing

One of the biggest misconceptions is that every reverse mortgage proposal represents a different product.  The reality is that the majority of your clients will be evaluating the federally insured Home Equity Conversion Mortgage (HECM). In some cases, an alternative proprietary product may be in the mix, but even among these, there are only a few. 

With the Home Equity Conversion Mortgage (HECM), the loan itself is standardized. Regardless of the lender, every HECM follows the same eligibility rules, principal limit calculations (lending limits), borrower protections, mortgage insurance requirements, and nonrecourse provisions. Lenders have some flexibility in areas such as their margin on adjustable-rate loans, origination fees (within HUD limits), service model, technology, and processing efficiency.  But the product is largely the same.

However, the professional designing, presenting, and fulfilling the solution is not the same.

The loan officer's ability to effectively profile a client, understand retirement planning, identify the appropriate strategy, model different scenarios, explain tradeoffs, coordinate with the advisory team, and successfully navigate the loan process can vary tremendously.

That means advisors should spend as much time comparing the HECM itself as the time evaluating the quality of the recommendation and the professional behind it. 

Here are a few steps to consider:

1. Start with the Planning Objective

Before getting into the numbers, identify a few key things:

• What problem is this intended to solve?
• Why is a reverse mortgage being recommended?
• What alternatives were considered?
• What happens if the client chooses not to implement this strategy?

The proposal should support a retirement strategy, mitigate a specific risk, or create options for your client.

2. Verify the Assumptions

Every illustration is built on assumptions. Review the basic inputs before analyzing the projections:

• Home value
• Youngest borrower's age
• Existing mortgage balance
• Expected interest rate (not the same as the initial rate your client will be charged)
• Closing date
• Home appreciation assumptions
• Projected draws or payments

Even small changes to these variables can materially affect borrowing capacity, future line of credit growth, how it can be used, and projected equity.

3. Understand the Principal Limit

This is a term that is unique to reverse mortgages.  It’s essentially the full amount a lender can lend.  Many people immediately look at the available proceeds, the amount the borrower will get in a distribution.  Instead, begin by understanding how those proceeds were determined. 

The available borrowing amount is influenced primarily by:

• Age of the youngest borrower
• Home value (subject to FHA lending limits)
• Expected interest rate
• Mandatory obligations (what needs to be paid off when this loan is funded)

The principal limit represents borrowing capacity, not necessarily the amount the client should use.

4. Review How the Proceeds Are Being Used

This defines the strategy that is being implemented in setting up the loan. 

Is the loan being used to:

• Eliminate an existing mortgage?
• Improve retirement cash flow?
• Create a liquidity reserve?
• Provide a buffer for market volatility?
• Fund future healthcare expenses?
• Complete home modifications?
• Bridge income before claiming Social Security?
• Improve overall retirement flexibility?

There are many individual uses, as well as providing overall options and flexibility to an existing plan.  The design of the loan, the initial draw, and the emphasis in the illustration should reflect this. 

5. Evaluate the Distribution Strategy

Many proposals illustrate a line of credit, monthly payments, or some combination of both. For many retirees, an unused line of credit isn't simply available cash. It represents future borrowing capacity that grows over time under the HECM program, regardless of future home appreciation.

If your client has excess cash flow, continuing to make payments toward the loan could also make sense; reducing the interest accrual and increasing future access through the revolving line of credit.  Understanding why one distribution strategy was recommended over another tells you far more about the loan officer than it does the loan.

6. Understand the First-Year Distribution Limits

Many advisors are surprised to learn that borrowers cannot always access all available proceeds immediately. HUD intentionally limits first-year distributions in many situations to encourage responsible use of home equity and preserve future borrowing flexibility. In fact, when asked when to avoid the reverse mortgage, one of the main reasons is when clients have a spending problem.  If they are outspending retirement assets, the extra access to liquidity could be a meaningful benefit.  However, if access to the funds increases their propensity to spend, we’ve only exacerbated the problem. Don’t do that. Ensure they will be disciplined in their spending and management of the credit line.   

7. Understand the Amortization Schedule

One of the more important parts of the illustration to examine is the amortization schedule. This will reveal how the loan is projected to perform over time.  When payments are not being made, interest accrues, and the outstanding balance grows over time.  If payments are made on the loan, this will reduce the total interest accrued over the life of the loan.  The other critically important column to look at is the principal limit.  This represents the total credit line, which will increase monthly at the same rate that is charged on the outstanding balance. The difference between the total credit limit and the outstanding balance is the credit that is available to your client. (Much like unused credit in a HELOC or a credit card.)  

The growing line of credit may be one of the most misunderstood and under-appreciated features of the HECM line of credit. Use the amortization schedule to wrap your head around the planning opportunities this provides. And a good loan officer should be able to explain this in a way that makes sense.     

8. See Beyond the Amortization Schedule

As you examine the amortization schedule, you must also consider what is happening across the client’s entire balance sheet. If they refinanced an existing mortgage and have chosen to not make payments, what impact does that have on their cash flow? (Example: if their previous mortgage had a payment for $2,000 per month, they now have the option to allocate that elsewhere. You should account for this.)   

By eliminating the mortgage payment, are they able to take less from their investments?  What impact will this have long term?  If they were taking distributions from a retirement account, how will reducing these withdrawals impact their taxable income?

Could your client now avoid selling investments during a market decline?

Does the additional liquidity create greater planning flexibility?

A growing loan balance doesn't necessarily indicate a poor outcome. It simply reflects one side of a much larger financial picture.

9. Review the Remaining Equity Projection

The proposal should illustrate projected home value alongside the projected loan balance.  The difference between the value and the loan balance is the remaining equity in the home.  For many, this number is important as it represents a future goal of leaving something for their kids. The duration of the time the loan is held, how payments or withdrawals are handled, variable interest rates, projected home appreciation, all of these will impact their future equity position.  

This discussion naturally leads into legacy planning, future housing decisions, alternatives to the loan, long-term care, and estate considerations. These are client concerns, address them.

10. Evaluate Costs in Context

Every mortgage includes costs. For the reverse mortgage, you can expect origination fees, mortgage insurance, third party closing expenses, appraisal expense, and all the other nagging things that come with a refinance. Like any fee or expense, the price to do the loan becomes an issue in the absence of value.  What is the value or return on the investment you’ll make if you put this loan in place? This is where it’s important not to view the reverse mortgage as simply a mortgage, but rather as a retirement tool that can do what very few loans can do. 

And based on what you’re trying to solve for your client, what’s the comparison to the alternatives?  If you need to address in home care risk, what’s the cost to insure the risk based on the client’s age and insurability?  What flexibility is obtained by having the option to make payments if or in the amount the client chooses? What’s the cost in lifestyle by continuing to make a mortgage payment?  What’s the cost if the alternative is to sell the family home?  What if by putting this place, you extend their retirement cash flow several more years?  Is it worth it?

Like any good financial question and decision, it depends.  The answer is rarely black and white, and often not answered with math alone.  Cost without considering value rarely ends up in good planning decisions. 

Questions Every Advisor Should Ask the Loan Officer

As has been mentioned, the most valuable part of reviewing any proposal should go beyond the illustration alone. You should be evaluating the thinking behind it.

A few good questions to ask the loan officer you’re considering working with:

Planning Questions

• Why is this strategy appropriate for this client?
• What alternatives were evaluated?
• What assumptions would materially change your recommendation?
• What are the main risks my client will face in doing this?

Strategy Questions

• Why did you recommend this distribution option?
• How do you see this helping the client?
• How could this impact my client’s estate plan?
• What are the current or future tax implications?

Risk Questions

• What happens if home appreciation is lower than projected?
• How sensitive is this strategy to future interest rates?
• What happens if the client never draws the remaining line of credit?
• What happens to the heirs or estate when they move out or pass away? 

Most important: Are you part of the Equity Wealth Academy? 

(Ha! That’s a shameless plug for a learning platform and community we created for loan officers to be better at serving clients, understanding the role of home equity in retirement, connecting with financial professionals, and elevating the lending community!  If your loan officer is part of the academy, we can’t promise they are flawless, but they are committed to their craft and have access to many additional resources.)

Final Thoughts

Most reverse mortgage proposals are a pile of pages with numbers, definitions, and explanations, most of which are more confusing than helpful.  However, as you investigate them, you’ll get key insights on how this will impact your client.  And perhaps more importantly, you can learn about the loan officer that you’re trusting to work with your client.  As you know, the risk to you is not just the product, but often more in the person you introduce to deliver the solution. 

If you have an existing proposal in front of your client and want to know how to read it or determine if it makes sense, our team can help.  We partner with clients, loan officers, and advisors to ensure that both industries are properly and effectively considering housing wealth as a retirement solution.

Retirement planning comes with little margin for error. And considering the role of housing wealth and reverse mortgages is a space full of bad information and questionable practices. It’s also gaining traction in the retirement community and could be one of the most underutilized tools in retirement planning. Be informed. Be prepared to answer questions. And know what to look for in a loan proposal.