A traditional mortgage is a loan made for the purchase of real estate that requires a person to make monthly payments to their lender until the loan is paid in full. If the debtor defaults, the lender can take ownership of the real estate to recoup the amount still owed on the loan, because the loan is secured by the real estate.
With a reverse mortgage, as the name implies, the lender provides a person with a line of credit or monthly payments based on the amount of equity the homeowner has in the house.
The homeowner does not have to repay a reverse mortgage loan until they die, sell the house or move out of the house. However, the interest on the loan continues to accumulate, so the loan balance grows, rather than declining as does the balance owed on most traditional home mortgages.
The homeowner who has a reverse mortgage is required to pay property taxes, insurance and maintain their home. The homeowner can face foreclosure, i.e. loss of their home, if they fail to pay the property taxes, insurance and maintain the home. Or, if they vacate the home and lease it to someone else, this can trigger foreclosure.
These loans are usually more expensive than traditional loans, because the interest rates on the loans are very high relative to interest rates on other forms of debt. Again, the balance on the loan increases until it is paid off in the event the homeowner dies, sells the house or moves out of the house. It is possible for the unpaid loan balance to eventually grow to exceed the value of the house, if home values should decline or if the debtor continues to live in the house for many years. However, the debtor (or the estate of the debtor) generally is not required to repay any loan balance that exceeds the value of the house.
Reverse mortgages are generally offered only to people who are 62 or older for homes that are their primary residence, not second or vacation homes or rentals.
Who Can Get a Reverse Mortgage?
A reverse mortgage is typically made available to homeowners who are 62 or older whose mortgages are paid off or close to being paid off. The person can use the payments from the reverse mortgage to maintain their financial stability. For instance, reverse mortgage payments have been used for many purposes, including property improvement, medical expenses, the ordinary expenses of living or travel.
The money from the reverse mortgage loan can be paid in one lump sum, in monthly payments or as a line of credit similar to a home equity line of credit.
The lump sum payment created a risk that the homeowner would squander the money and then find themselves unable to pay property taxes, homeowners’ insurance or necessary maintenance of the home, thus risking foreclosure. Department of Housing and Urban Development (HUD) rules limit the amount of money that a homeowner can take within the first 12 months of the reverse mortgage in order to try to avoid this outcome.
Are There Any Issues with Reverse Mortgages?
For senior citizens living on a fixed income with a mortgage that is close to being paid off, a reverse mortgage may be an attractive option. It allows a senior to continue to own and live in their home and make use of the equity in their homes to pay bills or fund personal projects.
However, because reverse mortgages are a product usually sold to senior citizens, these types of transactions can be ripe for abuse and scams on the elderly. Senior citizens in a reverse mortgage scam may be offered inappropriate investment opportunities for the money they receive from their reverse mortgage. Or, they might be told of “free homes” or foreclosure assistance that will not materialize if they should face foreclosure. And foreclosure is a possibility under certain circumstances, e.g. inability to pay property taxes.
Sometimes the senior citizen might be pushed by a lender to take out a reverse mortgage when that lender knows it is not the best option for them. They are often targeted by people they know, popular public figures, as well as strangers through television and direct marketing.
What are Things You Should Look Out For?
Scammers, of course, can always be quite clever in how they manipulate gullible people, so there are several things to keep in mind when considering a reverse mortgage:
- Shop Around: It is always best to get personal recommendations from people who have used a lender with whom they have had a successful experience and search out more than one possible lender;
- Counseling: An applicant for a reverse mortgage must go through a counseling session with a HUD-approved counselor the average cost of which is around $125. Counseling is required because HUD is concerned that seniors considering reverse mortgages may enter into transactions without being warned about the drawbacks. Counseling should also help a person determine whether a reverse mortgage is really the best option for them given their particular circumstances;
- False claims: There are legal disclosures that a lender must make to a person before they sign a loan. A legitimate lender explains the information that must be disclosed and why they are disclosing it;
- Aggressive sales tactics: If a person receives a random call from someone claiming to be in the business of selling reverse mortgages, this is always a red flag. However, any lender can use aggressive sales tactics. Aggressive sales tactics are a warning sign..
- For example, suppose a person needs to complete repairs on their home and their contractor suggests taking out a reverse mortgage to fund the cost of the repairs. Then the contractor suggests the name of a lender who could provide the homeowner with a reverse mortgage. The recommendation might be entirely legitimate, but it is important to understand the motivation of the person recommending a reverse mortgage. The homeowner would want to know if the contractor is receiving a kickback for recommending a certain reverse mortgage lender.
- Deceptive Advertising: Reverse mortgages are advertised on television. A person may even receive marketing material in the mail about reverse mortgages. Sometimes these advertisements make false claims, such as that the reverse mortgage is authorized or offered by the government, or they fail to tell prospective borrowers about significant fees and disadvantageous terms of the reverse mortgage agreement.
- For example, a lender tells a homeowner that they will never be in danger of losing their home. This is great news for the homeowner who wants to move into a retirement home and lease their home to a relative, however it is false.
- The homeowner must continue to live in the home in order to continue to qualify for the reverse mortgage. The homeowner can also lose the home if there is a transfer of title, or if the homeowner fails to pay the property taxes, insurance and maintain the home and its value.
- Free income: Some scammers may claim that a reverse mortgage is a great idea because it is a no-risk mortgage that offers a person free income. That is a false claim because there are clear risks to taking out a reverse mortgage. Further, the person is not receiving income from a reverse mortgage. The debtor is using the value of the equity in their home and the reverse mortgage is a loan that has to be paid back at some point, e.g. if any of the conditions of the loan are triggered.
Should I Consult an Attorney for Any Issues with a Reverse Mortgage?
Remember, a reverse mortgage is not free money. It eventually must be repaid, usually by the proceeds of the sale of the home, and there are certain conditions that you must continue to satisfy in order to keep your home.
If you are considering a reverse mortgage, it is very important that you do your homework and consult with a local mortgage attorney before you sign any documents. As well, an attorney can advise you if you find you are the victim of a reverse mortgage scam. A home is usually a significant asset for most Americans and a person should always proceed with maximum caution when using their home equity for any purpose.