Written By: Glenn Michaels
As a mortgage underwriter, licensed mortgage loan originator and as a housing counselor it is amazing how many people do not understand the reverse mortgage program, HUD calls it the Home Equity Conversion Mortgage (HECM).
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The senior citizens have their view point. The children of the senior citizens have their view point and even lenders and real estate brokers have their view point.
In an effort to demystify the reverse mortgage program, below are many misconceptions and the real answers to the incorrect thoughts about the reverse mortgage program.
1. Under the terms of the reverse mortgage the lender owns the property.
This is probably the most common and most harmful misconception and prevents many would be borrowers from even seeking information about reverse mortgages. Just like a forward mortgage the property owner keeps the title to the property.
2. The reverse mortgage must repaid in monthly installments just like a forward mortgage.
Unlike a forward mortgage a reverse mortgage is repaid when the loan is due, typically when the homeowner passes away or when the homeowner can no longer live in the home the majority of the year (usually the homeowner must go into a nursing facility of some kind).
3. In order to qualify for a reverse mortgage you need to meet certain credit and income requirements.
The only requirements for obtaining a reverse mortgage are as follows: the borrowers at least 62 years of age and the property must be the primary residence. The lender does not care about the borrower’s credit or financial position.
4. Upon obtaining the reverse mortgage all of the funds are netted out to the borrower.
This is only a partial misconception, since all funds will technically become available to the borrower when the reverse mortgage is executed. However, the borrower can choose how he wants to receive them, whether as a lump sum payment, monthly payments, or a line of credit to be drawn from as the borrower desires.
5. A reverse mortgage will make one ineligible to receive certain government benefits.
Social Security, pensions and medicare programs will not be impacted. Certain need based programs could be potentially impacted if the reverse mortgage proceeds are used for anything other than monthly expenses.
6. When the home is ultimately sold (if the borrower dies, moves out) any leftover funds must go to the lender.
When the home is sold any funds leftover is distributed to the borrower or to their heirs.
7. If the home depreciates and the reverse mortgage is “underwater” the borrower is liable for the difference.
Reverse mortgages are non – recourse loans, so called because the lender is legally prevented from seeking any deficiency judgment against the borrower regardless of what happens to the value of the property.
8. Reverse mortgages are handled by the government.
Reverse mortgages are not a government benefit, and are not arranged by the government. The government’s role through HUD and FHA is to insure these loans against default.
9. Is it the responsibility of the lender to pay homeowners insurance and property taxes?
The borrower’s responsibility is to pay the homeowners insurance and property taxes. In addition the borrower is also responsible to maintain the property.
10. There are rules stipulating how reverse mortgage funds can be used.
Proceeds from a reverse mortgage can be used freely by the borrower for any purpose. While spending “frivolously” is certainly not advisable. Technically the borrower can do what they want to do with the funds.
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Hopefully I have straightened out the many misconceptions of a reverse mortgage.
About The Author
Glenn Michaels - As an NAMP® staff writer, Glenn Michaels is a mortgage underwriting instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
