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A Reverse Mortgage isn’t a guarantee against foreclosure

By
Real Estate Agent

A Reverse mortgage (RM) may be a welcome help to homeowners over age 62 who have sufficient equity in their home and want to stay there but can no longer afford their monthly payment. Or they may want to use their home equity to improve the quality of their life with additional monthly income or pay for a big ticket item ... and the borrower usually doesn't have to pay the money back (although their estate or heirs probably will). 

It sounds like a sweet deal - the mortgage(s) are paid off and you can either get a lump sum, a credit line, or monthly payments, (or some combination of the three), and you get to stay in your home for the rest of your life (even if the equity runs out) ... providing you don't default on the loan.

How can you default on a loan that doesn't have to be paid back, you ask? 

Any of the following can cause a default and raises the possibility of foreclosure if the borrower doesn't have the funds to pay back the loan in full:

  • Failure to pay property taxes, hazard insurance, or violation of any other borrower term
  • Allowing the property to deteriorate beyond normal wear and tear and not correcting the problem
  • Living elsewhere for more than 12 consecutive months
  • Permanently moving to a new primary residence

Money has run outWhile these items don't seem unreasonable, if the equity runs out, homeowners with low income may find it difficult to pay property taxes and make necessary repairs. To mitigate this problem, many local and state governments have programs to help seniors pay taxes or get money for repairs. For more information on resources by state, check out HECM Resources.

This is a greatly simplified discussion of one aspect of reverse mortgages and is meant to highlight an issue, not to explain how reverse mortgages work. While there are benefits to reverse mortgages, there are also high costs and it is in the borrower's best interest to have a complete understanding of what is involved before entering into one. 

For an in-depth discussion of RM's and how they work, alternatives to RM's, and resources to help make a decision, check out Reverse Mortgage Loans: Borrowing Against Your Home produced by the AARP Foundation. 

Comments(22)

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Sonja Babic
Sonja Babic/PRIME Realty NC, LLC - New Bern, NC
New Bern NC, PRIME Realty NC, LLC

Reverse mortgage sounds like a scam to me, can you explain what happens when borrower runs out of equity?

Lots of good info thanks!

Jan 12, 2009 07:06 AM
Retired Notworking
Tallahassee, FL

Sonja, I'm not an expert on reverse mortgages, but I believe that when the equity runs out, the borrowers don't get any more equity payments, but can stay in the house as long as they live, provided they don't default on the mortgage as stated above.

There is a group on AR that deals with reverse mortgages and can provide more information. Here is a good post that gives some examples of how it has helped seniors:   New Reverse Mortgage Program -- HECM for Purchase and another good one Are You Still Unsure About Reverse Mortgages?

Jan 12, 2009 09:21 AM
Lyn Sims
Schaumburg, IL
Real Estate Broker Retired

Never knew this stuff, thanks for the info. I think it's a great new product but we don't know all the disadvantages that could come up.  In fact you mentioned one of them, the heirs receive less of an inheritance.  I say TOUGH.  Heirs are complaining instead of worrying how Mom & Dad are feeding themselves each month.  Sad.

Jan 12, 2009 10:10 AM
Anonymous
Jerry Rutherford

The tenured payments set up to be paid to the qualified homeowners continues until the last person dies, sells the property, or is foced to move through illness, etc. It acts something like a joint life annuity. If a qualified person lasts until age 130, the payments continue. And since the loan is a non-recourse loan, nothing beyond the house value can be recovered by the lender.

Jan 12, 2009 10:10 AM
#6
Retired Notworking
Tallahassee, FL

Jerry, that's something I didn't know and sounds great. I thought once the equity was gone, the payments stopped. It's good to know that's not the case. Thanks for adding this information.

Jan 12, 2009 10:20 AM
Colleen Lane
Kennewick Richland (and West) Pasco WA Homes For Sale - Kennewick, WA
Realtor(r) 509.438.9344 www.LaneRealEstateTeam.com

I didn't have to read the article (but I did) to agree with you.  Reverse mortgages are especially cancerous to our senior citizens.

Jan 12, 2009 11:40 AM
Sonja Babic
Sonja Babic/PRIME Realty NC, LLC - New Bern, NC
New Bern NC, PRIME Realty NC, LLC

Colleen, thank you very much. Every time I see info about reverse mortgages there is a lot of small print and I never really took the time. Great Info

Jan 12, 2009 11:45 AM
Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC

Hi Colleen

With the popularly of reverse increasing this a very timely blog.  

Good luck and success

Lou Ludwig

Jan 12, 2009 11:57 AM
Mike Henderson
Your complete source for buying HUD homes - Littleton, CO
HUD Home Hub - 303-949-5848

They should take the annunity option.  They have to live there.  As long as they live there and are alive then they receive the payments.  If they don't have the money to make the payments then, how would they of not been foreclosed on without the payments they received?  The only one who is potentially getting screwed is the estate.

Jan 12, 2009 01:19 PM
Myrl Jeffcoat
Sacramento, CA
Greater Sacramento Realtor - Retired

Although Reverse Mortgages can be a valuable resource for seniors, your information is important for us to know and be awawre of.

Jan 12, 2009 01:52 PM
Retired Notworking
Tallahassee, FL

Mike, some seniors take out a reverse mortgage in order to avoid foreclosure because they can't make the mortgage payment, but it's still not a guarantee that they won't be foreclosed for some other reason.

 

Jan 12, 2009 11:05 PM
Scott Harrison
Sea Shore Realty - Virginia Beach, VA

Good Morning Collen,

What great information about RM's.  I would hope those people deciding to take a reverse mortgage completely understands the situations you point out can that can cause a default.  Many people do not fead the significant details of the contract and will be surprise if they violate them.  Thanks for the timely information.

Jan 12, 2009 11:11 PM
Sheila Santini
Waterfront and Boaters paradise Realtor! - Tarpon Springs, FL
GRI

Collen, As the universe always works to our advantage, I just had an investor client of mine want to go to a foreclosure auction on a home that has a reverse mtg note.  I was really confused at how that could be happening, Duh! I didn't think about the insurance and taxes etc. etc.  Thank you

Jan 13, 2009 04:19 AM
Tony Wangrycht
OneAmerica - Seminole, FL - Seminole, FL

Colleen, great info. The same holds true for most mortgages...fail to pay property taxes, insurance, homeowner fees, and yes, your mortgage holder can and will foreclose.

Jan 13, 2009 04:36 AM
Kelsey Barklow
Hurd Realty - Johnson City, TN
423/948-9154

My mother did a RM last year in California and because she waited so long (it took her 2 years to finally do it), her equity had gone down quite a bit. Her home was worth less so she got a lot less money. This may not be the best time for doing one. Maybe wait a year or two when home values increase again???

Jan 14, 2009 11:48 PM
Anonymous
Danell Merren

Great insight! With the lack of equity here in Michigan I personally have steered away from these products.

Jan 15, 2009 01:07 PM
#18
Russel Ray, San Diego Business & Marketing Consultant & Photographer
Russel Ray - San Diego State University, CA

I hadn't though about those but it certainly makes sense. Now if we could just get the banks to go after foreclosure homeowners who destroy their properties, we might accomplish something else positive. After all, destruction is not "normal wear and tear."

Jan 15, 2009 08:22 PM
Anonymous
Tom Domin

After thinking about your post...I wanted to add this comment (actually a question) to insure that your readers fully understand the Reverse Mortgage concept.

Do you really believe a "Lender" will allow a property to go into foreclosure and certainly not a "tax sale" when there is about 50% equity in the property? I know for a fact that "Reverse Mortgage Lenders" will live with this problem for years and only address it when forced to.

This is the real power of "equity" which we have all lost sight of in our current financial crises. Goodness, today you can even purchase a property with a Reverse Mortgage. 

Be positive about Reverse Mortgages. This a great opportunity for Realtor/Agents and not at all negative as was your post.

Tom Domin
 

Jan 15, 2009 11:40 PM
#20
Retired Notworking
Tallahassee, FL

I think it's important to have a clear understanding of the RM process and a trusted lender who can clearly explain the options, benefits, and consequences to help you make an informed decision.

Jan 19, 2009 11:27 AM
Joe Manausa - Tallahassee, FL
Joe Manausa Real Estate - Tallahassee, FL
Tallahassee Real Estate

This is great information Colleen. I've been asked about RMs in the past several months. I'll be able to send this link when they ask. Thanks!

Jan 21, 2009 09:35 AM
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