The term mortgage refers to a type of security interest that is attached to a property. This interest serves as collateral for the repayment of a loan borrowed from a bank or other financial institution in order to pay for the property.
Thus, when a person wants to buy a house but does not have enough money to outright purchase it, a bank or other lender will provide the money needed to purchase the house. Next, a mortgage is placed on the property ensuring that if the borrower defaults on their loan, the lending bank or financial institution has the right to take possession of that property.
A reverse mortgage is a type of loan available to the elderly, in order to assist with their expenses. It works by allowing qualified individuals to convert the equity in their home to cash, while retaining their home ownership. The homeowner receives money from the lender every month, as opposed to making monthly payments to a lender.
Additionally, the homeowner is not obligated to repay the money so long as they live in the home. In exchange, the lender holds onto some, most, or all of the home’s equity. Once the home is sold or vacated, the borrower must begin repaying the loan. It is important to note that the homeowner is still responsible for other payments at this time, such as taxes and insurance. If the property is subject to a homeowner’s association, the homeowner must also maintain their responsibility to pay those dues.
In order to be eligible for a reverse mortgage, a homeowner must:
- Be at least 62 years of age. It is important to note that this generally applies to all individuals listed on the property’s deed of title;
- Own a home that is their primary residence; and
- Have the reverse mortgage as the primary lien on their home.
Additionally, the homeowner must have paid off all or the majority of their home’s mortgage, giving the homeowner a significant amount of equity in the home to borrow against once the reverse mortgage goes into effect.
This type of mortgage is traditionally meant for those who are retired and on a fixed income, in order to cover their living expenses by using equity from their homes. This money may be used to pay for any expenses. Common examples of reasons to obtain a reverse mortgage include:
- Covering the cost of medical treatments;
- Buying long term care insurance;
- Financing home improvement projects; and
- Supplementing income.
Are There Different Types of Reverse Mortgages?
Yes, there are different types of reverse mortgages distinguished by the source of the loan. These different types include:
- Single Purpose Reverse Mortgages: These types of reverse mortgages are typically offered by state and/or local government agencies. These loans are also known as property tax deferral programs, or deferred payment loans. They allow the homeowner to access part of, but not all, their homeowner’s equity in order to pay for an expense approved by the lender. The most common expenses approved for this type of reverse mortgage are property taxes and essential home repairs;
- Home Equity Conversion Mortgages: Known as “HECM,” these are federally insured mortgages typically distributed by the Department of Housing and Urban Development (“HUD”). HECM allows senior citizens to convert the equity of their home into cash based on the appraised value of the home, as well as the age of the borrower; and
- Proprietary Reverse Mortgages: Proprietary reverse mortgages are offered by banks, mortgage companies, and other private lenders. These mortgages operate on the same basic principle of using a homeowner’s home equity, but has no government involvement in the process. Lenders determine their own rules, and the loans are not restricted by the limits on proceeds placed by the government.
Regardless of the type of reverse mortgage, the homeowner is typically not required to disclose their income or provide any medical data to qualify for the loan. However, applicants may be required to go through some type of mortgage counseling before they can be approved. The amount that the homeowner can borrow is calculated using the homeowner’s age, the house’s equity and value, and the available interest rate.
What are the Pros and Cons of a Reverse Mortgage?
Reverse mortgages are an ideal solution for homeowners who are “house rich, but cash poor.” This is because reverse mortgages allow the individual to remain in their home while maintaining financial stability. Reverse mortgages can also help alleviate some of the financial strain of being retired or living on a fixed income as an elderly person.
However, homeowners must be aware of the negatives associated with reverse mortgages. Reverse mortgages are often more expensive than traditional loans, and the interest attached to such mortgages is generally not deductible until the loan has been paid off, whether in part or in full. Additionally, the equity in the person’s home may be fully or partially depleted by the reverse mortgage which would leave the homeowner with little to no equity. Another area of concern is that there have been many reported cases of lender abuse or reverse mortgage fraud.
Homeowners are often still responsible for paying taxes, fuel, insurance, maintenance, and other expenses on the home. Thus, if the purpose of the reverse mortgage is to alleviate financial strain, the reverse mortgage may still not be enough. Although many people understand that to be a given, some people are not aware of this fact and may be blindsided after receiving the loan.
Finally, lenders are allowed to charge homeowners for origination fees, closing costs, or servicing fees. If the borrower dies with the loan still attached to the property, the person’s estate or legal heirs will be responsible for settling the debt. In general, they could do this by paying off the loan in full or paying 95% of the home’s property value.
What Kind of Problems Come with a Reverse Mortgage?
Numerous homeowners believe that by having a reverse mortgage, the bank is in full control of the home, and will not allow the borrower to sell their home. However, the title of the property remains in the homeowners name, even after taking out a reverse mortgage. This means that selling a home subject to a reverse mortgage is not much different from selling a home with a more traditional mortgage.
However, many buyers question whether to purchase a home with a reverse mortgage. This is because there are extra steps that must be first taken before the home with a reverse mortgage may be sold. First, the homeowner must contact their loan servicer and inform them of their intention to sell the home. Next, the homeowner must repay the total debt of the reverse mortgage or 95% of the home’s current appraised value. This means that an appraisal is necessary.
After this, the homeowner will establish a repayment plan or pay the debt off in full in order to satisfy the loan. Importantly, all of these steps must be done in accordance with a strict timeline in order to not trigger a maturity event under the reverse mortgage terms. This means that buyers will have to adhere to the strict timeline when purchasing the home, and navigate the complex process of selling a home with a reverse mortgage alongside the seller.
Additionally, elder abuse is often associated with reverse mortgages. Oftentimes, the interest that has accumulated on the reverse mortgage is greater than the amount of equity the homeowner has in the property. Some lenders will seek out elders with diminished capacity and force them into signing reverse mortgages that they don’t understand.
Lenders often take advantage of elders in order to foreclose upon their property. However, if the homeowner opted for an HECM, rather than a private reverse mortgage, neither themselves nor their heirs would be responsible in paying the lender funds above the value of the house.
Do I Need a Lawyer If I Am Having Problems with a Reverse Mortgage?
As can be seen, there are pros and cons to reverse mortgages. Although it is not a requirement, having an experienced real estate attorney is still beneficial. An experienced attorney can guide you in navigating the different reverse mortgages available to you, as well as help you ensure that your rights are protected throughout the process.
If you suspect that a lender is engaging in reverse mortgage abuse during the loan process, you should immediately consult with a well qualified and experienced real estate attorney. An experienced real estate attorney can determine if the lender has violated the law, as well as help you file a complaint against them. Further, they can represent you in court, as necessary.