Reverse mortgage loans are a government benefit
Some borrowers believe erroneously that reverse mortgage loans are part of a government benefits program, similar to Medicare or Social Security, Canan says.
In the past, some lenders even implied that was the case to potential clients, "which gives a sense of security to borrowers," she adds.
But reverse mortgage loans are not a government benefit. They're private home loans, and lenders are businesses -- not government entities or affiliates.
While a borrower retains the title, the lender puts a lien on the home to secure the debt, says Brian Sullivan, spokesman for the U.S. Department of Housing and Urban Development, or HUD.
The Federal Housing Administration, or FHA, insures the majority of reverse mortgage loans, just as it does with conventional FHA home loans. And these reverse mortgage loans often are referred to as home equity conversion mortgages, or HECM loans.
What is a HECM?
A home equity conversion mortgage, or HECM, is FHA's reverse mortgage loan program, enabling seniors to withdraw some of the equity in their home if they need money. These loans come with fees, including an origination fee that ranges from $2,500 to $6,000. The National Council on Aging's booklet, called "Use your home to stay at home," offers more details.
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You can't lose your home to foreclosure
Yes, you can lose a home to foreclosure with a reverse mortgage. In fact, 1 in 5 seniors with reverse mortgage loans are expected to lose their homes to foreclosures, according to a 2015 report prepared for HUD by Integrated Financial Engineering Inc.
While homeowners don't have to make monthly payments on a reverse mortgage, lenders can foreclose if the borrower falls behind on property or flood insurance, property taxes or maintenance, Sullivan says.
In addition, a rule under consideration could add getting behind on the utilities to that list, says Odette Williamson, staff attorney with the National Consumer Law Center.
HUD is hoping to reduce the default rate, according to a study by Boston College in July. It said the department has responded by restricting initial withdrawals and introducing new underwriting criteria. "The combined impact of both policy changes could reduce property tax and insurance defaults by as much as 50 percent," the study’s authors wrote.
Even so, there are complications. Some jurisdictions allow low-income seniors an extension on property taxes, she says. But lenders still can -- and do -- mark the homeowner in default and begin foreclosure proceedings.
Also grounds for foreclosure: being absent from the home for a year.
Servicers annually ask borrowers to certify that they still live in their homes. But since homeowners aren't getting regular bills, they sometimes don't notice the requests or realize the importance, Williamson says.
If homeowners don't respond, the lender can begin foreclosure proceedings, she says.
And once that foreclosure steamroller starts, even if residency is quickly established, that doesn't automatically stop the foreclosure, Williamson says.
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A non-borrowing spouse can remain in the home
With a reverse mortgage, what happens if one spouse is on a reverse mortgage loan and the other is not, and the mortgage holder dies?
Reverse mortgage loans come due when the last borrower dies or moves.
Recently, HUD changed the rules. Now loans to married couples must be calculated on the age of both spouses, regardless of who's on the mortgage, which removes the incentive to leave a younger spouse off the paperwork, says Kevin Stein, associate director of the nonprofit California Reinvestment Coalition.
Another recent change: If the borrower dies or moves out, the "nonborrowing spouse" can ask to remain in the home if he or she can meet certain conditions, among them demonstrating within 90 days that the nonborrowing spouse has "good, marketable title or a legal right to remain in the property for life," Sullivan says. And the decision is up to the lender and loan servicer.
So how many non-borrowing spouses have tried this? Stein says that's what the coalition asked HUD.
What it learned: Since the change, 100 non-borrowing spouses have asked to stay in their homes. Of those, about a third were approved, about a third were denied and the remaining third remained "in limbo," Stein says.
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A reverse mortgage loan won't affect benefits
With finances, nothing happens in isolation. So, if you're considering a reverse mortgage, take a good look at how that cash flow could affect any benefits you're already receiving, says Amy Mix, supervising attorney for the Legal Counsel for the Elderly, an affiliate of AARP.
Sometimes, the critical factor isn't the total amount of the loan, but how much you receive and at what intervals. "The way you structure payments can affect benefits," Mix says.
For instance, a lump sum payout might make you ineligible for some benefits, while a line of credit would not, she says.
So make sure you crunch the numbers and factor that into your decision, Mix says.
There's no interest on a reverse mortgage
Even though you're not making payments, there's interest on a reverse mortgage, just like any other home loan. Think of it as the meter on a taxi, running quietly in the background.
"Sometimes a reverse mortgage loan is made to sound like it's free money, and it's not," says Barry Zigas, director of housing policy for the Consumer Federation of America.
With a reverse mortgage loan, instead of making monthly payments for 15 or 30 years and watching the balance drop, the balance keeps growing over the life of the loan, and comes due all at once -- when the last remaining borrower or eligible non-borrowing spouse on the loan either dies or moves. As payment, the lender takes possession of the home. Alternatively, the borrower's heirs can purchase the home by paying either the loan balance or 95 percent of the home's appraised value, whichever is less.
Borrowers can shop for a fixed-rate or adjustable-rate mortgage, just as with other home loans. And different lenders charge different rates, which is another reason it's important to shop around.
All loans and lenders are the same
With conventional mortgage loans, the choice of lender makes a difference. And that remains true with reverse mortgage loans.
Not only are terms, fees and loan amounts offered to homeowners different, but the way lenders treat borrowers can vary, too.
For instance, if homeowners fall behind on insurance or property tax, lenders are allowed to offer a five-year repayment plan for those unpaid bills.
But the decision is up to the lenders and servicers, HUD's Sullivan says.
The National Consumer Law Center's Williamson says not all of them will do it. "Some older adults are now in danger of being foreclosed on, even though they can afford to repay," she says.
To get a snapshot of a lender's reputation, you can review complaints filed with the Consumer Financial Protection Bureau, searching by the lending company's name online.