Reverse mortgages are complex products which have led to common misconceptions about how they work. Reverse mortgages were created specifically for older adults, who are at least 62 years old, to provide them with an option to help improve their financial situation in retirement. A recent survey reveals many homeowners are unfamiliar with or have little knowledge of reverse mortgages (74%) and many others have misperceptions about how they work.1
To help better understand reverse mortgages, here are facts about the common misconceptions about the product.
Myth: The bank owns your home
Fact: A reverse mortgage allows senior homeowners to live in their homes for as long as they wish and keep the title of their home.
- Your lender or the government does not own your home.
- You will not be evicted or foreclosed on as long as you meet the obligations of the loan.
- Your home is your primary residence, and you continue to pay required property taxes, and homeowners insurance, and maintain the home according to FHA.2
Failure to meet these requirements of the loan can trigger a loan default that may result in foreclosure.
Myth: The bank gets my home
Fact: A reverse mortgage is like a traditional mortgage, except with a deferred payment. You can leave your home to your children, or to anyone that you choose. When the loan becomes due, you or your heirs have the option of paying off the balance of the loan and keeping the home.
- If your heirs want to keep the home, they will need to pay off the loan with cash or take out a new loan to pay off the old loan. Your heirs won’t have to repay more than 95% of the home’s appraised value, even if the loan balance is greater.
- If the value of the home is less than the mortgage balance, heirs are not responsible for the difference and are not required to use their assets to pay off the loan.
- If your heirs don’t want the home, they can manage the sale of the home.
Myth: My heirs are left with my debt
Fact: Reverse mortgages are ‘non-recourse” loans and if the home is sold to repay the loan, heirs won’t owe more than the loan balance or the value of the property (whichever is less), and no assets other than the home will be used to repay the debt.
Furthermore, they can keep any capital gain if the home is sold for more than the reverse mortgage loan balance.
Myth: I can be evicted if I outlive my life expectancy
Fact: You cannot be evicted or foreclosed on if you outlive your expectancy, as long as you continue to meet the loan obligations.2
There are also protections for the eligible non-borrowing spouse if they did not qualify because of their age and are not on the loan. Upon the passing of the last remaining borrower, an eligible non-borrowing spouse3 may have repayment of the reverse mortgage deferred if certain requirements are met.4
Myth: You have a mortgage payment
Fact: A major benefit of a reverse mortgage for borrowers is not having a monthly mortgage payment.5 You can have a current mortgage or other debt on your home’s title as long as you have enough equity in the property to qualify for a reverse mortgage. The mortgage or debt must be paid off with the proceeds of the reverse mortgage, which eliminates the mortgage payment.5
Safeguards have been put into place to ensure that older adult homeowners know what to expect and can make an educated decision about a reverse mortgage loan.
- All applicants must take a financial assessment. The Department of Housing and Urban Development (HUD) requires a financial assessment that evaluates the borrowers’ willingness and capacity to meet their financial obligations and mortgage requirements.4
- Borrowers are also required to complete counseling by an independent Home Equity Conversion Mortgage (HECM) counselor as part of the application process.6
- In some cases, and as required by the Federal Housing Administration (FHA), a portion of the loan proceeds may be placed into a Life Expectancy Set Aside (LESA), to assist and ensure the borrower can pay required property taxes and homeowners.
A reverse mortgage may be to help seniors supplement their retirement plans. Call 1-800-976-6211 to speak with a licensed loan advisor and they can help determine if a reverse mortgage is right for you.
2 As required by the Federal Housing Administration (FHA), you will be charged an initial mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance.
3 A spouse must meet the following requirements to be considered eligible: 1) Be the spouse of the reverse mortgage borrower at the time of loan closing and remain the spouse of the borrower for the duration of the borrower’s lifetime. 2) Be properly disclosed to the lender at origination and specifically named as a Non-Borrowing Spouse in the loan documents. 3) Occupy, and continue to occupy, the property securing the reverse mortgage as the principal residence.
4 Mandatory obligations are those fees and charges, as defined by the U.S. Department of Housing and Urban Development (HUD), incurred with the origination of the HECM loan that are paid at closing or during the first 12-month disbursement period. This includes but is not limited to: existing liens on the property; the loan origination fee; counseling fee; upfront MIP; third-party closing costs; customary fees and charges for warranties, inspections, surveys, engineer certifications; repair set-asides; set-aside for property taxes and insurance; and delinquent federal debt.
5 Your current mortgage(s) and any other existing liens against the property must be paid off at or before closing. You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
6 The U.S. Department of Housing and Urban Development (HUD) provides a list of approved reverse mortgage counseling agencies for you to choose from. The purpose of this requirement is so you are aware of all of your options and can evenly weigh the pros and cons of each.
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