How Can Someone Lose Their House With a Reverse Mortgage?
Avoiding a reverse mortgage nightmare is simple, because they are a very safe loan program made exclusively for seniors, but they weren't always this safe. Data from the CFPB published in 2012 shows that about 10% of all HECM defaulted due to non-payment of taxes and/or homeowners insurance. Due to this staggering statistic, the government realized an opportunity to strengthen the program and make it safer for Americans; so in 2015, they implemented the Financial Assessment requirement. Prior to this, borrowers just had to be old enough and have enough home equity to get a reverse mortgage. Nobody checked if they had enough income to actually maintain the home and property charges. Starting in 2015, part of the reverse mortgage application process now includes reviewing income, debt and property charge payment and credit history. A 2020 study done by the Federal Reserve Bank of Philadelphia states that these changes (and a few others) brought the default rate down to 2.2%. These changes have been very beneficial to the safety of the program. Even though HECM reverse mortgages are an FHA loan backed by the federal government that have been around for over 30 years, some people still fear the worst reverse mortgage nightmare: losing their home. Let's get the important information out of the way, first thing:
There are 5 ways someone can experience a reverse mortgage nightmare and lose their home:
- Not paying their property taxes
- Not paying their homeowner insurance
- Not paying their HOA fees (if they exist)
- Letting the home fall into disrepair (broken windows, leaking roof, non-working plumbing, vegetation consuming the home and causing real, significant damage... things like this)
- Leaving the home for more than 365 consecutive days. The home needs to remain your primary residence.
When you get a reverse mortgage, you agree to continue to pay your property taxes, homeowners insurance and HOA fees (if you have them, not everyone does) on time and in full, and you agree to maintain the home as your primary residence in livable condition up to FHA standards. HECM are FHA loans. All FHA loans have these same requirements and standards, so these aren't reverse mortgage specific ways to lose your home. Anyone with an FHA loan, traditional or reverse, could lose their home by triggering one or all of these events. It's very important to avoid a reverse mortgage nightmare at all costs.
Now, doing one or a few of these things doesn't guarantee you will experience a reverse mortgage nightmare and lose your home, but it does make it a possibility. These situations are called "maturity events" by the reverse mortgage industry. In our experience, the reverse mortgage servicing companies want to avoid the bad press that naturally comes from foreclosing on seniors, so historically, they will do everything they can to avoid actually foreclosing in these circumstances. They want to work with the homeowners, so, if you or a loved one have a reverse mortgage and find yourself teetering on the edge of a reverse mortgage nightmare possibly triggering one of these events, reach out to the servicing company and explain the situation. Ask them for guidance and grace. There may be options available to help avoid the worst possible thing that could happen as a reverse mortgage nightmare: losing your home.
If you live in Washington or Oregon and already have an FHA loan, whether it be reverse or not, and want to discuss options to avoid a maturity event, give us a call. We may have resources or options to avoid a reverse mortgage nightmare before it starts.
How to Avoid a Reverse Mortgage Nightmare- Myths and Facts
Myth: Reverse mortgages are a scam.
Fact: Reverse mortgages are a legitimate financial product that is regulated by the government. They are insured by the Federal Housing Administration (FHA), which means that the government is backing the loan.
Myth: The bank takes ownership of your home.
Fact: You still own your home when you have a reverse mortgage. You are simply borrowing against the equity in your home, just like you would with a traditional mortgage. You continue to live in your home and maintain ownership until you decide to sell it or pass away.
Myth: You have to make monthly payments on a reverse mortgage.
Fact: You do not have to make monthly payments on a reverse mortgage. Instead, the interest on your loan accrues over time and is added to the balance of the loan. You can choose to make payments if you want to, but it is not required.
Myth: You can owe more than your home is worth.
Fact: So, this one is a kind of a trick question. The loan balance CAN actually grow to be more than your home value, but the important word here is OWE. The FHA has put safeguards in place to prevent a homeowner or their estate from ever having to pay back more than the value of the home at maturity event. So, even if your loan balance exceeds the value of your home, the homeowner or their estate are only required to pay back the value of the home upon maturity event. Any additional balance accrued is covered by the mortgage insurance that is part of the loan charges. This is called a non-recourse feature.
Myth: You can't get a reverse mortgage if you have an existing mortgage.
Fact: You can still get a reverse mortgage if you have an existing mortgage. In fact, many people use a reverse mortgage to pay off their existing mortgage and eliminate their monthly mortgage payments.
Myth: You can't get a reverse mortgage if you have bad credit.
Fact: Your credit score is not a factor in determining whether you qualify for a reverse mortgage. Instead, the amount of equity you have in your home and your age are the primary factors that are considered.
Myth: You have to use the money from a reverse mortgage for specific purposes.
Fact: You can use the money from a reverse mortgage for any purpose you choose. Many people use the funds to pay for healthcare expenses, home repairs, or to supplement their retirement income.
Myth: You lose your right to your home when you get a reverse mortgage.
Fact: You still have the right to your home when you get a reverse mortgage. You can live in your home for as long as you like, and you maintain ownership until you pass away or choose to sell your home.
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 standards. However, the rules regarding these types of properties can be more restrictive, so it is important to work with a local broker who has experience in these areas.
Myth: Your heirs will be responsible for paying back the loan.
Fact: Your heirs will not be responsible for paying back the loan unless they choose to keep the home. If they decide to sell the home, the loan will be paid off from the proceeds of the sale. If the loan balance exceeds the value of the home, the FHA insurance will cover the difference. If your heirs want to keep the home, it might be possible for them to refinance the loan into their name. If they are 62 or older, they may even be able to finance it into a reverse mortgage for themself.
Don't Worry About a Reverse Mortgage Nightmare- Get Educated and Avoid Them!
A reverse mortgage nightmare can probably be avoided if you get properly educated and know what your obligations are. Most of the worry about reverse mortgages comes from misinformation, stories of days long past, or inexperience with the loan. New things are scary, and we get that. Our job is to provide you accurate and timely information, excellent service and earn your business through trust.
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