As with any financial transaction–be it a mortgage, a credit card or even a bank account–there are specific rules and obligations attached to reverse mortgages. Some of them are unique to this particular financial product. You may be accustomed to such items being buried in fine print. With reverse mortgages, both loan officers and counselors will explain these specifics to you as part of the loan process.
Among the rules and obligations you need to be aware of are:
- Everyone listed on the deed of a home owned by someone seeking an FHA reverse mortgage must be 62 years or older;
- A reverse mortgage must be the only lien on a property. This means, in order to obtain a reverse mortgage you must pay off any existing traditional mortgage. You can use your reverse mortgage proceeds to pay off your traditional mortgage;
- A reverse mortgage holder is responsible for staying current on their real estate taxes and homeowner’s insurance. If you go into arrears, you take the risk of being forced into default;
- A reverse mortgage holder is responsible for maintenance of the home;
- The home must be your primary residence, which means the property where you spend the majority of the year;
- You are only permitted to live out of your home for a total of 12 months. This means, if you find yourself in, say, an extended care situation, or on an extended out-of-town work situation, you must approach your lender and discuss;
- Loan originators are not permitted to require that you purchase other financial products (i.e., annuities, long-term care insurance) as a condition for getting a reverse mortgage. If they do, you should report this to HUD or NRMLA.
If You Find Yourself in Arrears
If you find you cannot stay current on your property tax and homeowner insurance payments, you must do the following: Don’t panic! Take action!
Foreclosure is not good for anyone, you, the bank, the government. Everyone wants to take every possible step to avoid it.
If you are in arrears, you will receive a letter from your servicer informing you that you have 30 days to begin a process to cure your default. The letter will advise you to contact a counselor and provide you a list of counselors and their phone contacts. Also included will be a suggested repayment plan of up to 60 months.
HUD has trained 125 counselors around the country to help borrowers in default. The counselor will go through your monthly income and expenses to determine if there is a time period over which you can catch up on your obligations. The counselor will also go to the BenefitsCheckup.com web tool to search for any possible grant money for which you may be eligible.
If there is remaining equity in your home, the recommendation to you may be to refinance into a new HECM and use part of your proceeds to pay off back expenses.
The most important thing is that you do not wait and let your obligations build to a level where there is no viable solution.
All too frequently we tend to read or hear misinformation about reverse mortgages doled out, sometimes in the press, sometimes by consumer groups or politicians. When wrong information appears in the press, we also find that it is often repeated in future press articles. We attribute this to the fact that a reverse mortgage is a unique product that needs to be studied—and those who misinform often do not take the time to properly study or research it.
The most commonly heard misinformation is:
Reverse mortgages are some kind of scam
A reverse mortgage is a well thought out, very creative and highly effective solution to a societal problem—the inability of some seniors to have enough money to get through their retirement years. With people living longer than they might have anticipated and with many people’s savings diminished by the economic downturn, being able to use your home equity is one of the sources of support and comfort available.
Reverse mortgages are too good to be true
Reverse mortgages are not a fantasy. They are by no means a trick. You worked hard to earn the equity in your home and you deserve the chance to use that money if and when you need it. There is a cost attached to a reverse mortgage, as with every loan. And there are responsibilities that come with it.
Reverse mortgages are a loan of last resort
In some people’s cases they may be. For other’s they may not be. You may choose to use a reverse mortgage to help you cover your expenses while you wait for your retirement savings account to go back to its pre-recession levels. You may use it to help you through until home values recover and you can sell your home for a higher price. A reverse mortgage, like Social Security, Medicare/Medicaid, IRAs and 401(k)s, is an option in a retirement toolbox—and different situations require different tools.
When you take a reverse mortgage, the bank owns your home
No, you continue to own your home. And when you pass on, your heirs own your home, though they must then pay back the reverse mortgage. If you are in arrears on taxes and insurance, you are in default and, to keep your home, you must work with the lender to catch up on your obligations.
A salesman insists you use the loan proceeds to purchase another financial product as a condition for obtaining a reverse mortgage
No, this is not legal.
Reverse mortgage lenders aggressively push seniors to take the proceeds in a lump sum so they can earn interest on a high loan balance
By law, a loan originator must present all options that are available to you.
Counselors are in cahoots with the lenders and only there to make sure you take out a reverse mortgage
Untrue. Counselors must be independent and are tested and certified by HUD. A counselor’s responsibility is to the borrower, not the lender.
Reverse mortgages are expensive
Reverse mortgage fees are similar to those for any other mortgage product. The one additional fee is the Mortgage Insurance Premium, which is paid to the government mortgage insurance fund to protect you in the event the loan balance grows larger than the value of your home.
Advertising is misleading
Federal and state laws and regulations prohibit false and misleading advertising, but some lenders distribute advertisements that describe reverse mortgages as a government-sponsored program or benefit, or encourage you to contact them by a specified time in order to receive something of value.
NRMLA specifies advertising restrictions in its Code of Ethics and Professional Responsibility. Companies that run misleading ads are subject to various forms of punishment. If you see or receive a misleading or false ad, please submit a complaint on NRMLA’s ethics portal.