The Reverse Mortgage Option
What is a “Reverse Mortgage”?
A reverse mortgage (sometimes called a Home Equity Conversion Mortgage or HECM) is a type of loan that uses home equity as collateral and is available only to those 62 years of age or older. A reverse mortgage can be a valuable financial resource, particularly for those whose wealth is tied up in a primary residence.
With a reverse mortgage, the borrower receives cash for the equity in their home but is allowed to continue living in the home without making payments on the debt. The loan funds can be received as a lump sum, in regularized payments, as a credit line, or through a combination of these methods. The money owed to the lender only becomes due when the last surviving home owner passes away or no longer permanently resides in the home. The vast majority of reverse mortgages are insured by the federal government and borrowers must meet certain requirements to qualify. The Federal Housing
Administration requires that the borrower:
- Be 62 years of age or older
- Own the property outright or be close to owning the property outright
- Occupy the property as a principal residence
- Not be delinquent on any federal debt
- Have financial resources to continue to make timely payment of ongoing property charges such as
property taxes, insurance and Homeowner Association fees, etc…
- Participate in a consumer information session by a counselor approved by the Department of Housing and Urban Development (This is a recent addition to the qualification requirements.)
Reverse Mortgage Payoff Options
Prior to 2008, HUD rules allowed payoff of reverse mortgages by either payment of the full loan amount or by payment of 95% of the home’s market value. In 2008, however, HUD began “interpreting” this rule to make the 95% of market value option only available for “arm’s length transactions.” i.e. It was not available to spouses or heirs of borrowers who may have inherited the home. Following the collapse of the housing market in 2008, this presented a serious problem for many families. In the pre-2008 housing bubble, a reverse mortgage borrower may have received a large amount of cash based on an inflated home value. When the bubble burst, however, spouses and/or heirs were faced with a loan pay-off that far exceeded the greatly reduced value of the home. A number of lawsuits followed HUD’s 2008 “interpretation,” and in 2011 HUD reversed course and began allowing surviving spouses and other heirs to retain the home by paying the lender 95% of the market value.
Unfortunately, not all lenders are fully informing borrowers about the option to pay off the loan at 95% of market value and are pressuring spouses or heirs to pay the full amount of the loan. Borrowers and their families should read their reverse mortgage documents carefully and be aware of their rights.
Recent Reverse Mortgage Developments
HUD recently addressed a problem faced by married couples who only had one spouse listed on the home’s title and mortgage documents. In these cases, when the title holding spouse passed away, the other spouse was forced to either sell the home or pay off the loan. HUD recently clarified that for all reverse mortgages initiated after April 25, 2014, “non-borrowing” spouses will be allowed to remain in homes provided that the non-borrowing spouse:
- Was the spouse of the borrower at the time of loan closing and remained the spouse of the borrower for the borrower’s lifetime
- Was properly disclosed to the lender at origination and specifically named as a Non-Borrowing Spouse in the reverse mortgage documents; and
- Occupied, and continue to occupy, the property securing the reverse mortgage as their principle
Alternatives to a Reverse Mortgage
Using a reverse mortgage is not a decision to be taken lightly. In fact, they are often referred to as a “loan of last resort.” Reverse mortgage origination fees can very high and borrowers often face additional closing costs, service fees and mortgage insurance premiums. Additionally, loan proceeds received by borrowers continue to accrue interest as long as the borrower remains in the home.
All reverse mortgage applicants are now required to consult with an FHA approved counselor before finalizing the loan. However, even before consulting with a financial counselor, prospective reverse mortgage borrowers should consider alternatives, such as:
- Refinancing: Could you refinance your home through a traditional mortgage or a home equity line of credit?
- Other cash resources: Do you have life insurance with a cash value that you no longer need. Do you have other investments that could be converted to cash?
- Relocating: Could you move to a locale with a lower cost of living or could you downsize your current home?
- Sharing your home: Could you share your home with a family member who could help with the finances?
- Selling and renting: Could you sell your home and rent another house or apartment?
A reverse mortgage can be a valuable tool for seniors needing to tap the equity in their primary residence. They are, however, a relatively expensive option and impose serious limitations on homeowners. Prospective borrowers should carefully weigh their options before committing moving forward with a reverse mortgage.
Barry M. Meyers
Elder Law Offices of Barry M. Meyers