A reverse mortgage is defined as a loan, most often government insured, for senior homeowners 62 years of age and older. With a reverse mortgage, a borrower may be able to convert the equity in their home into non-taxed cash to use however they would like. At the same time, the borrower may continue to live in their home for as long as they choose, provided they comply with loan terms such as continuing to pay property taxes and homeowners insurance, and maintain the property. However, unlike traditional mortgages, borrowers do not have to pay a monthly mortgage payment. These features make the reverse mortgage loan increasingly attractive to many senior homeowners with equity sitting in their homes.
Misconceptions and Truths
Despite the many benefits reverse mortgages provide for retirees and senior homeowners, there are also many misconceptions. Like any loan, reverse mortgages can be misused and the consequences of past misuse as well as a lack of accurate information can thus breed misconceived notions about this loan. The following are common reverse mortgage misconceptions as well as their corresponding truth.
Reverse mortgage costs are too high compared to traditional mortgage loans
When a reverse mortgage is kept long term for the duration of a borrower’s life, the costs are not dissimilar to traditional mortgage loans. And when compared to traditional mortgage loans, the benefits of reverse mortgages outweigh costs since there are no monthly mortgage payments while the borrower to continues to live in the home and receive non-taxed cash. In addition, the majority of all costs and fees can be financed into the loan, allowing the borrower to avoid many up-front and out-of-pocket expenses that they would usually have to worry about with traditional mortgage loans.
Borrowers lose title or ownership of the house
Ownership of the home stays with the homeowner as long as they continue to live there. Just like any mortgage loan, the lender gets a security interest in the property. When a borrower closes on a reverse mortgage, they retain the title and may remain in their home for as long as they like. One of the ways a borrower may possibly lose ownership of the home is if they default under loan terms, such as failing to pay taxes and insurance. The loan would then become due and payable and the home may be foreclosed upon. Another due and payable event is no longer living in the home as a primary residence. However, if the borrower maintains taxes and insurance and meets other loan terms as they had promised, borrowers should never lose the title or ownership until they leave the home.
Borrowers may owe more than the home is worth
Under the Federally-insured reverse mortgage program, borrowers are protected from ever owing more than the home is worth when sold at loan maturity. Even if the borrower’s loan balance exceeds the home’s worth, federal insurance will cover the excess amount, and the home’s sold value is all that will be needed to repay the loan. If you are considering a non-government insured reverse mortgage, check with your advisor about loan terms.
Heirs will not support the idea of their parents getting a reverse mortgage
A National Reverse Mortgage Lenders Association (NRMLA) survey in 2010 showed that heirs are supportive of their parents’ decision to obtain a reverse mortgage. Heirs understood that reverse mortgages allow their parents to pay all their expenses, and thus allow heirs not to have to worry about them. In general, heirs usually want their parents to be independent, and they appreciate the freedom and autonomy a reverse mortgage allows their parents.
Heirs will lose their inheritance and don’t have the option to keep the home
Because senior homeowners borrow against their home equity, there is a misconception that heirs will not be able to inherit the property. However, often homes continue to appreciate over time and will retain enough equity to pass on to heirs. After the loan is repaid, heirs keep all remaining equity. Heirs may also choose to keep the home and repay the reverse mortgage, such as by refinancing into a conventional mortgage.
Medicare, Social Security, and pension benefits will be affected
Because reverse mortgage funds are considered loan proceeds and not income, Medicare, social security, and pension benefits will not be impacted. Do note however that it may be possible for Medicaid and other income entitlement programs such as SSI to be affected.
Criteria to Get a Reverse Mortgage
Now that many misconceptions have been clarified, what are the criteria required for a senior homeowner to get a reverse mortgage? According to the website for the U.S. Department of Housing and Urban Development (HUD), there are a few borrower, property, and financial criteria one must fulfill in order to secure a reverse mortgage. Requirements for non-government insured reverse mortgages are typically similar.
Borrowers must be homeowners 62 years or older who live in their home as their primary residence. The home’s original mortgage must either be paid off completely or a considerable amount must already have been paid down. Borrowers may not have any delinquent federal debt and must complete a counseling session with a HUD-approved reverse mortgage counselor before loan application.
Properties eligible for a reverse mortgage include single family homes or a 2-4-unit home with one unit occupied by the borrower. Manufactured homes and condominium projects may also qualify if HUD-approved and all requirements of the Federal Housing Administration (FHA) are met. HUD insured reverse mortgages are limited to the borrower’s primary residence, but some non-government insured reverse mortgages may be available for second homes.
Borrowers must also be financially able to continue making payments on all taxes, homeowner’s association dues and homeowner’s insurance, as required by loan terms. Unlike most mortgages, usually no escrow account is established under a reverse mortgage to pay these amounts – the borrower must pay these themselves. Financial assessment requirements going into effect in 2015 will require that lenders verify a borrower’s income, assets, expenses, and credit history to determine if a financial set-aside for taxes and insurance will be required from a borrower’s reverse mortgage proceeds.
The government-insured reverse mortgage loan is only getting increasingly stronger and safer every year and proves to be a great option for many senior homeowners across the nation. The reverse mortgage industry is also constantly working to clarify misconceptions and educate consumers on the truth about reverse mortgages. The truth is that for the many seniors who use this loan product wisely, reverse mortgages allow for a financially strategic and more comfortable retirement.
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