Myths and Facts of Reverse Mortgages
Reverse mortgages have been around for over 30 years and have gone through many revisions and improvements to the program. Because of this, and the unfortunate glut of misinformation that has permeated throughout the years, there are still a lot of myths and misconceptions surrounding them. As a Certified Reverse Mortgage Professional, it is my goal – and more importantly, my obligation - to ensure that you are provided with the facts and information necessary for you to be able to make an informed, confident decision about whether a reverse mortgage is right for you.
Part of your fact-finding process is discerning Fact from Myth. Hopefully the information below can provide some added clarity for you.
Myth: Reverse mortgages are a scam
Fact: Nothing could be further from the truth. Reverse mortgages are a legitimate financial product that has been around for decades and is heavily regulated by the federal government. The most utilized of these programs is the Home Equity Conversion Mortgage, commonly referred to as HECM. These loans are insured by the Federal Housing Administration (FHA), which means that the government is backing the loan. Additionally, these loans are also insured by utilizing private Mortgage Insurance that provides safety and security to both the lender and the borrower and their heirs.
Myth: The bank shares ownership of your home and assumes ownership when you pass away.
Fact: When it comes to home ownership, there is no difference between a regular, forward/convention loan and a reverse mortgage. As the homeowner, you still retain 100% full and complete ownership of your home. With a reverse mortgage, you are simply borrowing against a portion of the equity in your home, just like you would with a traditional mortgage. You continue to live in your home and maintain full and complete ownership, along with all ownership rights.
Myth: You have to make monthly payments on a reverse mortgage
Fact: With a reverse mortgage, you can choose to make full or partial payments if you want to, but it is not required. Most people opt to defer their mortgage payments until a life event occurs (sale the home, move away from it, or pass away). Monthly payments are not required to be made on a reverse mortgage. When opting to defer, the interest on your loan accrues over time and is added to the balance of the loan.
Myth: You can owe more than your home is worth
Fact: Let me be very clear about this: You – or your heirs - cannot be held personally liable should a scenario come into play where your loan balance exceeds the value of the home. A reverse mortgage has several safeguards in place to ensure that this cannot occur. One such safeguard is that your payoff obligation can never exceed the value of your home, even if the value of your home decreases over time as the loan balance grows. Additionally, a reverse mortgage is a non-recourse loan. This means that you, or your heirs, can never be personally liable when it comes to the repayment of your loan.
Myth: You can't get a reverse mortgage if you have an existing mortgage
Fact: As long as there is sufficient qualifying equity in the home, you can get a reverse mortgage even if you have an existing mortgage. In fact, many people use a reverse mortgage to pay off their existing mortgage to eliminate their monthly mortgage payments and, in doing so, effectively give themselves a usable monthly “raise”.
Myth: You can't get a reverse mortgage if you have bad credit
Fact: Unlike convention "forward" loans, a reverse mortgage is not credit score driven. In fact, there is not a “minimum credit score” requirement. However, while your credit score is not a factor in determining whether you qualify for a reverse mortgage, it does come into play conducting a financial assessment, which helps to determine one's ability to handle the home's basic financial obligations. Because this loan requires both “capacity” and ‘willingness” to pay your other property obligations, such as property taxes, home insurance, and HOA fees when applicable, your history of paying your obligations is definitely still taken into consideration. When the lender has concerns about the ability pay these obligations, based on past credit issues, a Loan Expectancy Set-Aside (LESA) may be required. This is similar to an impound account, only funds are collected – or "set aside" - at closing to ensure these obligations get paid on time by the loan servicer. this is similar to an impound account on forward loans, only the amount collected is enough to cover these expenses for a longer term.
Myth: You have to use the money from a reverse mortgage for specific purposes
Fact: The built-up equity in your home belongs to you and is your money. You can use the money from a reverse mortgage for any purpose you choose. Whether it be to pay off an existing mortgage, as previously covered, pay for healthcare expenses, home repairs or improvements, gift to children or others, travel the world, or to supplement retirement income. The choices are unlimited, and they are yours alone to make.
Myth: You limit your rights to and options for your home when you get a reverse mortgage.
Fact: You retain complete and full ownership rights when you get a reverse mortgage. You are able to live in your home for as long as you keep it as your primary residence, and you have the ability to deed the home to your heirs should you pass away. You can also elect to refinance or sell the home whenever you want to, and this requires no prior lender approval or notification. there is one restriction: you cannot add a second loan to go behind a reverse mortgage.
Myth: You can't get a reverse mortgage on a condominium or manufactured home
Fact: You can get a reverse mortgage on a condominium or manufactured home, as long as it meets FHA criteria or jumbo lender requirements (Note: you cannot purchase a manufactured home with a reverse mortgage at this time with a HECM). Because the rules regarding these types of properties can be more restrictive, it is important to work with a lender who has experience in these areas, and this should be discussed very early in your process. If you live in or are thinking of buying a condominium, it is important to check to see if the home is FHA-approved. If it is not, it might be possible to obtain a 'spot approval" (speak to your loan officer about this).
Myth: Your heirs will be responsible for paying back the loan
Fact: Once a life event has occurred and the home is willed to your heirs, they will have a few options when it comes to the home and the loan. Again, this is no different than if there was an existing conventional loan in place. Should they desire to retain the home, then they would need to refinance, since the reverse mortgage is not an assumable or transferable loan. The reverse mortgage will be paid off from the proceeds of the refinance, or from the sale of the home, if this is the decision of the heirs.
The heirs will have an initial 6-month period to sell or refinance the home, with two additional 3-month options made available to them if requested.
Important: If a situation occurs where the loan balance exceeds the current value of the home, the FHA insurance will cover the difference. Additionally, in the instance of selling the home, the maximum amount due on the current loan prior to the mortgage insurance covering the difference, is 95% of the current value or sales price. There are no negative consequences to the heirs if this should occur.
Another option the heirs have is to simply turn the home back over to the lender, again without any negative consequences to them.
Myth: A Reverse Mortgage “matures”, or is considered due, after 30 years or when the borrower turns 95, whichever comes first
Fact: As long as the terms of the contract obligations of the loan are being met timely payment of property taxes, home insurance, HOA dues when applicable, and maintaining the home in decent condition), and the owner is still occupying the home as their primary residence, they can remain in the home until a life event occurs. There is no ‘expiration or maturity date” when it comes to the duration of a reverse mortgage.
Myth: Reverse Mortgages are Expensive
Fact: The HECM reverse mortgage expenses are similar to other FHA “forward” loan transactions. The largest expense is the “up-front” mortgage insurance premium. The initial mortgage insurance premium charged is 2% of the property's value or max claim (whichever is less). The current max claim is $1,089,300. The mortgage insurance renewal is 0.50%, charged annually on the loan’s outstanding balance, Thus, on a $300,000 loan amount, the Up-front MI fee is $6,000. The other transaction fees are typical of other loan types, such as appraisal, escrow, title, insurance, and recording fees. The lender can also charge an origination fee.
The jumbo or proprietary loans do not have the MI fees and, as such, their closing costs are less. One trade-off of this is that their rates are typically higher (basically, the lender's MI expense is factored into the rate).
One fee that is specific to the reverse mortgage is the Counseling fee. A counseling appointment is required of all occupying borrowers, or those on title, A list of counselors will be provided, and you also have the ability to find your own (however, prior to doing this, please check with the lender to ensure that they have been vetted by the lender as being legitimate)
The counselors are trained specifically for this purpose and serve as an advocate for the borrower to ensure that they fully understand the program and that the lender has explained it thoroughly. Their fees will vary, depending on the counselor. And typically range between $125 and $175. The counseling appointment can be conducted over the phone, via skype, or in-person, depending on your preference. The counselor will require payment up-front or at time of service. The counseling certificate is good for 6 months. Should that time elapse, another appointment will be required.
Important: Counselors have no affiliation with any lender and the lender is not allowed to recommend a specific counselor to you. The list you will be provided with is generated through HUD and is not an internal list compiled by the lender.
Additionally, an official loan process cannot begin until the counseling appointment has been completed and a certificate generated by the counselor. Some state regulations also require an additional wait period after the counseling appointment prior to the lender initiating the official loan process.