Understanding the pitfalls of the reverse mortgage so that you know the limitations for your heirs and for you as the owner:
I’ve talked to a few seniors who got reverse mortgages, only to have nothing but regret afterward. Maybe they didn’t read the fine print in a brochure that the FHA requires you to read before you buy the loan. After receiving constant complaints about Reverse Mortgages, the government has changed the program, but there are still many dangers that you need to be aware of.
This article will cover the following reverse mortgage pitfalls:
What is a reverse mortgage?
How is a reverse mortgage different from a traditional home loan?
The limitations of a reverse mortgage
Homeowners Insurance and Taxes
When a reverse mortgage must be paid or foreclosed
Problems Heirs Have Associated With Reverse Mortgages
Can the heirs take over the reverse mortgage or does it have to be paid off?
When are reverse mortgages paid off?
What is a reverse mortgage?
A reverse mortgage is a type of loan open to people age 62 and older who own a home that is paid off or has a low balance, live in the home, and follow the terms of the loan.
The problem that many older people seem to complain about is that did not understand the very strict terms of the loan before signing on the dotted line. Some told me that the terms were so strict that it made life unbearable for them trying to live up to the guidelines and stay in their home.
How is a reverse mortgage different from a traditional home loan?
the The reverse mortgage is different from regular home loans in that it pays you out of the proceeds of your loan and is available regardless of your current income. The initial fees and cost of the loan, usually taken from the loan proceeds, are very high, much higher than a regular home loan. You are not required to make loan payments as long as all the signers of the loan are alive and living in the home. When the last signer on the loan dies or is away from home for a year, the loan has to be paid off. The amount of time given to repay the loan is short, so the heirs must act quickly..
The limitations of a reverse mortgage
The amount you can borrow depends on your age, the current interest rate and appraised value of your home, the sales price, or the FHA mortgage limits, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.
Keep in mind that borrowing costs are much higher than a conventional second mortgage, and once you get a reverse mortgage, you can’t get another loan on your home.
Homeowners insurance and taxes must be paid while you are in the home
With a Reverse Mortgage, you pay no monthly principal and interest payments and the lender pays you according to the payment plan you select. The payments will accumulate and add a balance to your house as a reverse mortgage loan that will be responsible for your heirs if they want to keep the house.
Like all homeowners, you still have to pay your real estate taxes, insurance and other conventional payments like utilities. If you fall behind on property taxes or other required payments, you could be forced to leave your home due to foreclosure.
With an FHA reverse mortgage, you can’t be repossessed or forced to evict your home because you “didn’t make your mortgage payment.” But, you could be forced to leave for many other reasons, some of them subjective, such as allowing the house to deteriorate unacceptably. The local property tax holder can foreclose if property taxes are not paid, as can the reverse mortgage company.
A reverse mortgage must be paid in full if it meets the following criteria:
1. When you die or sell the house.
2. When you fail to pay property taxes or hazard insurance or violate other obligations.
3. You move permanently to a new primary residence.
4. You, or the last borrower, do not live in the home for 12 months in a row.
5. An example of this situation would be if you (or the last borrower) had a stay of 12 months or more in a nursing home.
6. Allows property to deteriorate and fails to make necessary repairs.
A subjective assessment listed above is “violating other obligations” which are normally listed in the fine print. It is important to read all the information you can get from a non-seller before considering this loan. Another subjective assessment is if you “allow the property to deteriorate and fail to make necessary repairs.” This gives too much power to the lender to keep your house if he believes that the repairs are not necessary.
appropriate.
You can receive the money in different ways: In payments, lump sum, or a combination of payments and lump sum. It is better to receive the money in payments to avoid premature expenses.
Typical Senior Complaints of Reverse Mortgage Borrowers
The complaints I heard from the older people I consulted with were 1. They were uncomfortable with the amount of monitoring. 2. If the money is taken in a lump sum, there was a tendency to quickly spend it on unnecessary things. Remember, once the loan is taken, you cannot take another loan on the house. 3. Seniors have complained that after they get a reverse mortgage, the loan officer forces them to buy expensive insurance they don’t need and can’t afford, like long-term care insurance.
After you’ve done your research and read all the fine print about this loan, call a HUD counselor to make sure you get all the facts before you decide this loan is for you.
An alternative to a reverse mortgage is to sell your home outright, deposit the money in the bank, and have the bank send you a monthly check. to live, in an affordable senior apartment. Another option is a traditional second mortgage IF, you can get a low-interest loan AND easily pay the payments, and you can keep the payments if you are sick or disabled. You must have a responsible person to help you.
Complaints that the heirs of reverse mortgages have
The complaint some heirs have is that they failed to get the remaining equity out of the house when their elderly relative dies. Currently, some heirs have told me: 1. They did not know their parents had a reverse mortgage and therefore did not act quickly to obtain a mortgage to replace the loan or sell the house. 2. Another common complaint I’ve heard from heirs is that they weren’t given enough time to get a new loan to pay off the reverse mortgage or sell the house and therefore were repossessed.
3. A woman I spoke to who actually worked at a reverse mortgage company said a common problem was that no one in the family could qualify for a loan to pay off the reverse mortgage before the time expired: the mortgage company Reverse only gives you a set number of months.
Some stay in the homes for a few years, but with some it is only six months, it depends on many factors. At least one heir is supposed to take classes with the owner so he can get all the facts or the mortgage broker is supposed to give them all the necessary information. This doesn’t always happen.
Can the heirs take over the reverse mortgage or does it have to be paid off?
When a homeowner over the age of 62 applies for a reverse mortgage, the mortgage or principal payments and interest accumulate in an account over time. It does not have to be repaid as long as the person or persons who took out the mortgage are still alive and living in the house. The younger a person is when they apply for a reverse mortgage, the larger the balance will be when he dies if he lives a long time.
Consumer financing in reverse mortgages
But what about that balance that has built up in an account over time? Can the heirs inherit the balance and continue to live in the house rent-free while the balance continues to accumulate? Nope! The heirs are required to contact the company regularly and let them know that they are working hard to get a new loan to pay off the balance of the reverse mortgage their parents left behind or are working hard to sell the house.
If a balance remains after the home is sold and the reverse mortgage is paid off, the heirs will get the balance. If the reverse mortgage is large or has accumulated for a long time, even a small one, the balance could be large, leaving nothing to the heirs.
Avoiding the traps of reverse mortgages works best when:
The homeowner read the FHA bulletin on reverse mortgages and took the reverse mortgage class to understand the loan.
The owner has a responsible child with excellent credit who may qualify for a new loan or sell the home as soon as the last owner on the loan passes.
Sometimes it is better to take the money in installments, but if there are no responsible heirs, it may be better to take all the principal, put it away, live on a small withdrawal from the bank, and leave the rest to the heirs.
The responsible heir should contact the lender and stay in touch after the last owner passes away to understand how reverse mortgages are paid for.
Owner ALWAYS pays necessary taxes and insurance while at home. In addition, the owner must maintain the house.
Because interest and principal accrue while the owner is alive, there is always the possibility that all the principal may be used up and the heirs could get nothing, especially if the owner takes the loan early, say at age 62 and dies at 92.