Common Misconceptions about Reverse Mortgages
There are significant misconceptions which circulate, through word-of-mouth, on Internet sites and even in media reports, which relate to reverse mortgages. To set the record straight, we scanned the internet and identified some of the most frequently cited instances of misinformation. Here we aim to set the record straight with some straight facts.
False: When you take out a Reverse Mortgage the lender will own your home.
Fact: The borrower retains title and ownership to his home over the entire course of the loan. The borrower can also decide when and if to sell it at any time. Borrowers are responsible for maintaining the home and paying property taxes, insurance payments and, where indicated, flood insurance. These items are standard clauses in any home loan.
False: The survivors of a reverse mortgage borrower will have to repay the loan.
Fact: Reverse mortgages are “non-recourse” loans, meaning that if the borrower passes away or abandons the property, the home will be sold, by the lender, in order to repay the debt. There is no debt liability of any type remaining for family members. The amount owed is capped, based on the market value of the home.
False: If you haven’t yet paid off your home’s mortgage, you won’t be able to take out a Reverse Mortgage
Fact: If you have paid off all or a significant portion of your mortgage you will be able to obtain a reverse mortgage. The Reverse Mortgage must retain the first lien position, meaning that your existing mortgage must be repaid out of the proceeds of the loan. Then the difference, minus closing costs, goes to you. Statistics show that most people take out a reverse mortgage in order to pay off their existing mortgage.
False: Reverse Mortgages are only applicable to low-income borrowers or borrowers who have bought the house with a FHA mortgage.
Fact: There are no income or credit requirements on reverse mortgages. Borrowers must be 62 years of age or older and own all or the majority of their home.
To be eligible for the FHA Home Equity Conversion Mortgage the property must be a single family home or a 2-4 unit home with one unit occupied by the borrower. Some manufactured homes and HUD-approved condominiums are also eligible.
The borrower must demonstrate that he is ready and willing to maintain his Reverse Mortgage obligations (insurance, property taxes, interest payments) based on previous credit history
False: The lender can evict the borrower if the house’s value decreases or if the borrower outlives the worth of the loan.
Fact: The only reason that a borrower can be evicted is if he doesn’t adhere to the rules of the loan – maintaining the home and paying obligatory insurance, interest and property tax payments.
False: Reverse Mortgage income must be spent for specific, limited causes
Fact: The money that the borrower receives from his reverse mortgage is his, to do with whatever he thinks is best. Lenders suggest that borrowers speak to a financial consultant or attorney who specializes in senior financial issues to get some guidance on how to use their Reverse Mortgage wisely.
False: If the lender goes under, financially, the borrower loses his money and his house.
Fact: The Reverse Mortgage is insured by the Federal Housing Administration through the Department of Housing and Urban Development. This protects the borrower in case of lender default and protects the lender in case of borrower default.