Setting the Record Straight
Reverse Mortgage Misconceptions You May Have Read or Heard
The Home Equity Conversion Mortgage (HECM) is the most common type of Reverse Mortgage and is the fastest growing segment of the mortgage marketplace. But as it has grown in popularity, so have the misconceptions, fabrications, and misleading “facts” associated with this valuable financial planning tool for homeowners age 62 or older. There are many sources of misinformation and “opinion as fact” about reverse mortgages, including national media, financial institutions, senior advocates, and even friends and family.
“Don’t touch your equity!” You’ll hear this refrain from a few narrowly focused professional “consumer protection” advocates who mean well but don’t have all of the right information. Unfortunately, a homeowner who heeds this advice runs the risk of having their home equity seized by Medicaid when circumstances require long term care, rather than using the equity in their home to sustain a dignified lifestyle for themselves and their spouses. The truth is that many financial professionals, attorneys, and advocacy associations do not really understand the HECM. It is sad, but true, that many people who could benefit from the HECM are dissuaded by good intentioned but often mistaken professionals.
It is our goal to educate and inform, and to set the record straight about reverse mortgages by addressing some of the misconceptions about them. If you’ve heard great things about reverse mortgages, you have also heard some of these misrepresentations.
Detailed and supportive information about reverse mortgages is readily available from the American Association of Retired Persons (AARP), the Federal Department of Housing and Urban Development (HUD), the National Council on Aging (NCOA), and the Federal Housing Administration (FHA). A reverse mortgage is a valuable and safe financial planning tool for people age 62 and older, and should certainly be given serious consideration when potential borrowers and their adult children are exploring all of the options available to fund retirement, increase cash flow, and provide cash for a multitude of quality-of-life needs and don’t want to have to make a monthly payment. It fills the crucial need of providing cash from a borrower’s home equity without saddling them with additional payments.
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MISCONCEPTION #1 - THE LENDER OR BANK WILL TAKE MY HOME:
With a reverse mortgage, the homeowner retains title throughout the life of the reverse mortgage. You cannot, as a result of a reverse mortgage, be forced out of your home as long as your property taxes and insurance are paid and the home is maintained in reasonable living condition.
The fact is that the home MUST be in and REMAIN in the name of the borrowers only. You and your family or your estate continues to retain ownership of your home, just like in a regular or “forward” mortgage. The Lender does not take control of the title, own or take your home, nor do they have any rights to it. The lender's interest is limited to the outstanding loan balance.
A reverse mortgage is similar to a forward mortgage - a lien is placed on the property, and the lien will eventually have to be repaid. The mortgage ends upon the death of the last borrower living in the home; the voluntary sale of the home by the homeowner, or if the homeowner voluntarily moves out of the home for at least 12 months. Only then will the lender want its money back and will use the house as collateral. At this point the home is usually sold. The lender receives the amount of the mortgage and you or your heirs receive the remaining proceeds.
Most properties secured by reverse mortgages still have equity when a maturity event occurs; the borrower or heirs can opt to sell the home to repay the loan and preserve this equity for the benefit of the borrower or his/her estate. If the home is for some reason worth LESS than the amount due on the loan, however, the homeowner is not obligated to pay the difference: Since the HECM is insured by the FHA, you can never owe more than the marget value of the home, even if the balance is greater. You or your heirs can never be forced to pay more than the value of the home.
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MISCONCEPTION #2 - WE WILL HAVE NOTHING TO LEAVE TO OUR CHILDREN?
Reverse mortgages are known as "non-recourse" loans, meaning that if, under the circumstance that more is owed to the lender than the home is worth, and the loan is due because of death, sale, or vacating the premises, the maximum amount the heirs are required to pay the lender is the value of the home at the time of repayment. The only asset guaranteeing the loan is the property itself. If the property value is less than the balance of the reverse mortgage, the lender cannot request other assets from the estate and must make an insurance claim for the loss to the FHA. (In the opposite situation, where the home is worth more than the balance of the loan, you or your heirs receive the additional monies.)
For example, let's assume someone takes out a reverse mortgage and owes $50,000 after 5 years. Then the homeowner passes away and the estate sells the house for $250,000. The lender receives $50,000, together with the interest starting from the date that the HECM was taken until the date that the loan is paid off; the estate inherits the balance. You will never owe more than the loan balance or value of the property, whichever is less. So no debt can pass to your heirs. The lender cannot come after the family for the difference.
Potential borrowers should talk with their family about reverse mortgages. Often adult children are pleased that their parents have a financial solution available to help them live more independently and be financially secure. Since you always maintain ownership, you have the freedom to leave your home to anyone you choose. Your estate will be responsible for paying back the amount of money you borrowed up to the market value of the property. In most cases, your estate will sell the home, pay back the money borrowed, and then divide the remaining funds among your heirs. The loan is designed to give you cash flow, not take away your home.
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MISCONCEPTION #3 - WHEN THE LOAN BECOMES DUE, THE LENDER WILL SELL MY HOME.
The homeowner will always retain title to his/her home. The loan becomes due when all homeowners no longer live in the home permanently. At that time, the homeowner or the heirs can either sell or obtain a forward mortgage to refinance the reverse mortgage in order to repay the loan. While it's common for the borrower or heirs to sell the home to repay the loan, it's a decision that they make, NOT THE LENDER. Lenders earn their income by helping you keep your home and meet whatever financial needs you may have in order to help you maintain financial independence. Reverse Mortgage borrowers may remain in the home for as long as they wish. However, should they decide to sell the home for any reason, the loan would then become due and payable just like any other mortgage.
MISCONCEPTION #4 - THERE ARE STRICT CREDIT AND INCOME REQUIREMENTS
There are no income, asset, employment or credit qualifications because there are no monthly payments due. To qualify, a homeowner must be at least 62 years of age and live in the home as his/her primary residence. With the government Home Equity Conversion Mortgage (or HECM) the only additional requirement is that you cannot be delinquent on a federal obligation such as an FHA loan, Federally Insured Student Loan, Federally Insured SBA Loan, etc. If you have declared bankruptcy, you are still eligible for a HECM reverse mortgage. If you are currently on a bankruptcy payment plan, you can still qualify. You can even get a reverse mortgage if you are currently in foreclosure!
MISCONCEPTION #5 - YOU CANNOT HAVE AN EXISTING MORTGAGE ON YOUR HOME
As long as there is enough equity in the home to pay off any existing mortgage or lien, a homeowner who is at least 62 years old may qualify for a reverse mortgage. While some borrowers get a reverse mortgage to augment their income and start with homes that are paid in full or have loans with very small balances, other borrowers take a reverse mortgage just so they can pay off their existing financing and never make another loan payment for life. In fact, some people bring in cash to close the loan, just to stop having to make mortgage payments for the rest of their lives.
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MISCONCEPTION #6 - WHEN THE LOAN COMES DUE YOU MAY OWE MORE THAN THE HOME IS WORTH
There are several safeguards for reverse mortgages, including built-in insurance from the Federal Government, through FHA. With this federal insurance, the total amount of debt that will have to be repaid if the home is sold can never be greater than the value of the home at the time of sale. If the property declines in value and the reverse mortgage balance is higher than the property value, the FHA insurance will cover the difference. You and/or your heirs are protected, which is very reassuring in a declining market.
MISCONCEPTION #7 - MY SOCIAL SECURITY AND MEDICARE BENEFITS WILL BE AFFECTED
Reverse Mortgage proceeds are not taxable because they are not considered income but are, in fact, a loan. And since the United States Government sets Social Security, Medicare, and FHA Reverse Mortgage rules, all have been made compatible. The FHA has even set up the growth on a Reverse Mortgage line-of-credit to accumulate as non-taxable growth and not taxable income. Such Government entitlement programs as Social Security and Medicare are not affected by a reverse mortgage. However, it should be noted that Supplemental Security Income (SSI) and Medicaid may be affected if you exceed certain liquid asset amounts. To remain eligible for SSI and Medicaid, the homeowner needs to manage how much is withdrawn from the reverse mortgage in any month to ensure that it does not exceed the Medicaid limits. We recommend that if you receive these programs that you consult with a trusted financial advisor prior to applying for the reverse mortgage.
MISCONCEPTION #8 - THERE ARE RESTRICTIONS ON HOW THE MONEY IS USED.
There are absolutely no restrictions on how the money from a reverse mortgage can be used. Many homeowners use the money to pay off an existing mortgage, pay for home health care expenses, or have a cash cushion for an increased sense of financial security.
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MISCONCEPTION #9 - WE WILL HAVE TO MAKE MONTHLY PAYMENTS
There are never any monthly payments. Payment of taxes, insurance and general upkeep of the home are the only responsibilities of the homeowner. However, if the borrower wants to make monthly payments he/she can do this in any amount desired.
MISCONCEPTION #10 - WE WILL HAVE TO PAY TAXES ON THE FUNDS RECEIVED
A reverse mortgage is a loan. The proceeds from a reverse mortgage are not considered income and are therefore not taxable. Furthermore, the interest on a reverse mortgage is tax deductible when it is repaid.
MISCONCEPTION #11 - THE LENDER MAY REQUIRE IMMEDIATE REPAYMENT
The HECM reverse mortgage was created specifically to allow borrowers age 62 or older to live in their home for the rest of their lives. Because the homeowner receives payments from a reverse mortgage instead of making payments to a lender, the homeowner can never be evicted or foreclosed on for non-payment. You are not required to make monthly payments on your reverse mortgage. When you sell your home, when it is no longer your primary residence, or when your estate is settled, the loan then must be repaid. The Reverse Mortgage is a “non-recourse” loan. The most the estate will be required to pay to the lender is the value of the home at the time of repayment. This is true even if the home value decreased or the borrower lived to an extremely old age.
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MISCONCEPTION #12 - A REVERSE MORTGAGE IS SIMILAR TO A HOME EQUITY LOAN
The only similarity between a reverse mortgage and a home equity loan is that both use the home's equity as collateral. There are several differences:
- Any homeowner can apply for a home equity loan. A homeowner must be age 62 to apply for a reverse mortgage.
- A home equity loan must be repaid in monthly payments during a set period of years. A reverse mortgage is not paid back until the homeowner moves out of the property or passes away.
- A home equity loan requires stable income and a solid credit score. A reverse mortgage does not consider income or credit scores.
- A home equity loan charges no closing costs but has a higher interest rate over the life of the loan. A reverse mortgage charges upfront closing costs but has lower interest over the course of the loan.
MISCONCEPTION #13 - REVERSE MORTGAGES ARE PREDATORY
Reverse mortgages are one of the most regulated of all mortgage loans. You are required to obtain counseling by an independent third party HUD-approved agency before even applying for a reverse mortgage. In addition, there is a 3 day right to cancel as with a standard refinance. Ethical lenders will make sure that you are fully knowledgeable of the product and that it makes sense for you.
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MISCONCEPTION #14 - ITS DIFFICULT TO QUALIFY FOR A REVERSE MORTGAGE
All property types (1-4 family houses) are eligible for a Reverse Mortgage except manufactured (mobile) homes built before June 15, 1976 and co-operatives (Co-ops). Co-ops will be eligible in the future when FHA approves the administrative procedures. Even homeowners with existing mortgages that can be paid from the equity can obtain Reverse Mortgages.
Also misunderstood are the requirements for obtaining a Reverse Mortgage. Because no re-payment is required as long as one (1) surviving borrower remains in the home, there are NO income or credit requirements. Even bankruptcy does not disqualify the borrower as long as it has been discharged. . The borrower must be 62 years or older; however, both spouses do not need to be 62. There are situations where one spouse is not eligible due to being under 62. In most of these situations the loan still can be done, but with some risk to the underage spouse. The only other requirement is that the borrowers alone must own the home with no others on the deed. A reverse mortgage may also be done if the home is in a revocable trust, as long as the eligible borrowers are the only trustees.
Some borrowers feel that they will have to clear existing debts against their properties in order to qualify for the reverse mortgage. This is not true. While the debts that involve liens on the property must be paid off, they don’t have to be paid BEFORE applying for the Reverse Mortgage. They can be paid and cleared by the loan advance obtained from the mortgage. Also, credit scores pay no role in qualifying for a Reverse Mortgage. In summary, there are very simple and straightforward requirements in qualifying for a reverse mortgage. We can help see if you’re qualified and how much equity you can access from your home.
MISCONCEPTION #15 - REVERSE MORTGAGES ARE PROHIBITIVELY EXPENSIVE
HUD strictly limits Reverse Mortgage fees. The truth is that closing costs are about the same as for a forward FHA mortgage. The same closing process is required with the same service providers.
With a forward mortgage several fees like a Mortgage Insurance Premium (MIP), are paid every month when you make your payment. However, with a Reverse Mortgage this fee is paid up front; it’s front-loaded, making INITIAL closing costs slightly more expensive, but after closing, you’ll never pay another penny on the loan for the rest of your life. The longer you hold the loan, the cheaper it becomes. In a Reverse Mortgage there are NO junk fees - unlike a conventional loan where you can be charged underwriter fees and application fees, to name a few. There are NO hidden fees in a Reverse Mortgage. There are NO pre-pay penalties on a Reverse Mortgage, so you can pay the principle and interest as you go if you want.
HUD limits Reverse Mortgage lenders in the amount of origination fee that they can charge. If you were to compare, on an FHA forward or conventional mortgage, lenders can charge much more for the same mortgage amount, depending on which state they are in. Anyone who has tried to get a Reverse Mortgage will know that most mortgage companies don’t offer them. The reason is simple: they make much more money doing forward mortgages.
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MISCONCEPTION #16 – A REVERSE MORTGAGE IS ONLY FOR THOSE IN DESPERATE NEED AND/OR AS A LAST RESORT
A reverse mortgage is a wonderful financial planning tool, used by homeowners in all walks of life, both rich and poor, as a way of improving their lifestyle. Some borrowers may have a greater need than others for the cash or monthly income. But there are many homeowners in up to million dollar homes using a reverse mortgage as part of their financial plan. You can use a reverse mortgage for a variety of reasons from estate planning, vacations, paying for college and paying down debt. In most cases obtaining a reverse mortgage can be a very wise decision. You can even use a reverse mortgage to purchase real estate. While a Reverse Mortgage is often used to provide additional income to homeowners with limited income, it can also provide cash for a vacation, a visit to the grandchildren or that new boat and it can also be an important part of an estate or financial plan.
Everyone has varying levels of cash needs from time to time. An unexpected medical bill or other family catastrophe can be handled gracefully by having a reverse mortgage. Others like the idea of using the equity in their home for retirement income while they are still living there. Many folks just like the feeling of financial security they get by having funds readily available. While each of these situations is different, they all can be handled through a reverse mortgage.
MISCONCEPTION #17 - REVERSE MORTGAGES ARE NOT SAFE
To start with, a HECM Reverse Mortgage is safer for the senior consumer than a regular mortgage! That’s because you cannot be foreclosed for not making a payment, because NO payments are required!
Many people react to the suggestion of a Reverse Mortgage by assuming that lenders will take their homes. The fact is that the home MUST be in and REMAIN in the name of the borrowers only. Since the Reverse Mortgage is a mortgage, a lien is placed on the property like any other mortgage. This assures that the lender eventually will be repaid but for only the amount owed which is principle, interest, and costs just like any other type of mortgage.
Since there are no payments to make, you cannot fall behind in your payments. If you choose the monthly payout/tenure option FHA insurance guarantees that the monthly income is for life. Consumer protections include counseling by AARP or an FHA approved counseling agency. The FHA also limits the fees that can be charged. More than ninety-five (95) percent of Reverse Mortgages closed are the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) version. This guarantees the full protection of the United States Government through use of the required two (2) percent insurance fee paid on all FHA Reverse mortgages. The remaining less than five (5) percent of Reverse Mortgages are the Federal National Mortgage Association (FannieMae) and Proprietary Reverse Mortgages, which are guaranteed by private lenders that insure their safety.
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OTHER MISINFORMATION YOU MAY HAVE HEARD:
It's cheaper to move to a smaller house.
Potential borrowers need to analyze their costs carefully before making this assumption. Selling a home and moving can be expensive. The typical real estate commission of 6 percent, combined with moving expenses, can make finding a new home a serious financial undertaking.
If I do a reverse loan, I cannot sell my home.
Since you always retain ownership, you can sell your home at anytime. If you choose to sell your home, you must pay off whatever money you borrowed. The balance of money from the sale after you have paid the reverse mortgage is entirely yours.
My spouse will be forced to pay back the money we borrowed if I die first.
The loan is due only when both original borrowers no longer live in the home.
You will get more money if you wait until you are older.
If age were the only factor, more money would always be available if you wait until you are older. But age is only one of three factors (home value and interest rates are the other two) that determine the amount of money available from a reverse mortgage. Decreasing home values and increasing interest rates can substantially reduce the amount available. It is not possible to know if you will get more or less money if you wait until you are older.
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FOR MORE INFORMATION:
With the misconceptions of Reverse Mortgages removed, a person may ask, where can I get more detailed information about this program? Here are some sources:
- The American Association of Retired Persons (AARP) has provided more literature than anyone else on this subject and it is very positive. They have an excellent publication called “Home Made Money”.
- The Federal National Mortgage Association (FannieMae) also offers a publication titled “Money from Home” that is helpful.
- The National Council On Aging (NCOA) completed a study in 2005 called “Use Your Home to Stay At Home” plus two booklets “A Planning Guide for Older Consumers” and “A Guide for Homeowners Who Need Help Now”.
- The American Bar Association (ABA) publishes a book “Reverse Mortgages – A Lawyer’s Guide to Housing and Income Alternatives”. The ABA passed a resolution supporting Reverse Mortgages in August of 1995.
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