Pitfalls

I seldom quote the New York Times (NYT), but they recently did a nice piece highlighting some of the pitfalls of reverse mortgages. This type of mortgage provides a stream of income to homeowners who are at least 62, and this money does not have to be paid back unless you move, sell the house, or pass away.

When the homeowner dies, the survivors are supposed to be offered the option to settle the loan for a percentage of the full amount, according to federal law. In reality, some lenders are threatening foreclosure if full payment is not made, and often, the threats begin within a few weeks of the homeowner’s passing. But the author of the NYT article said some lenders didn’t wait even that long, leaving the homeowner’s heirs feeling they are “plunged into a bureaucratic maze as they try to get lenders to provide them with details about how to keep their family homes.”

In defense of the lenders, they know that a foreclosure will take several months, so if it appears there will be a need to foreclose, some mortgage companies begin the process as soon as the homeowner passes away, in order to protect their interest. Of course, that’s little consolation to the heirs.

A Key Point: How Many Borrowers Are on the Loan?

If you enter into a reverse mortgage and then leave, for example, to go into assisted living for more than 12 months, the fate of your home will depend on whose name(s) appear on the mortgage. When there is only one borrower and he or she is gone for an extended time, the lender might deem this similar to “moving out,” even if the homeowner intends to return.

The ideal person for a reverse mortgage may be someone who lives alone, does not plan to leave the house to heirs, and would like some current extra income. Just be sure you understand that if you leave for more than 12 months or if you pass away and your survivors can’t or won’t pay the balance on the mortgage with other funds, your house will likely be sold to pay it off.

Nobody should enter into this type of loan without extreme caution and sound professional guidance. Most reverse mortgage lenders are upstanding and will do their best to keep you from making a mistake. But as in any industry, there are also some predatory and unethical or even illegal lenders. Bottom line, sign nothing without consulting a trusted advisor.

Common Questions and Answers

What if you are unmarried and the only borrower on the reverse mortgage when you enter a long-term care facility?

According to the federal Consumer Financial Protection Bureau, when the last surviving homeowner moves out of the house permanently, the loan must be paid off or the house reverts to the lender. You may move into a nursing home or live elsewhere for a period of time. But if that time is more than 12 months, it is generally counted as a permanent move.

What if you are married, but you are the only borrower on the reverse mortgage when you enter a long-term care facility or pass away?

If your absence is longer than 12 months, even though your spouse lives there, if his/her name is not on the reverse mortgage, the loan must be paid off, which generally means the house must be sold and your spouse will need to move. The same is true for your children, relatives or roommates who may live with you.

What if you are a co-borrower with your spouse (or someone else) and you are absent for 12 months or more?

In this case, your co-borrower (and anyone else living with you) can continue to live in the home. Then again, if you are absent – for whatever reason – for more than 12 months and your co-borrower moves out or passes away, your heirs must either sell the house to pay off the loan, pay it off with other funds, or let it revert to the bank.

To find other answers to other questions like these, log onto consumerfinance.gov, and type in “reverse mortgage.”

Do you have a complaint about how your reverse mortgage has been handled? Visit this website and follow instructions for filing a complaint. https://help.consumerfinance.gov/app/mortgage/ask.

Professional Advice

Before you decide on a reverse mortgage, talk to a counselor from the federal Department of Housing and Urban Development (1-800-569-4287) or log onto https://entp.hud.gov/idapp/html/hecm_agency_look.cfm to find help.

Key Takeaways You Need to Know

• The ideal candidate for a reverse mortgage may be the senior who lives alone, wants some extra income now, and does not plan to leave the house to heirs. When you, move out, or leave for 12 months or more, the lender can sell your house.
• If you have heirs who hope to own the house someday, a reverse mortgage is probably not a good idea, unless the heirs have the ability to pay off the loan balance.
• If you are the only borrower on the reverse mortgage and you leave for more than 12 months for any reason, the house will be sold and anyone who lives with you, including your spouse, will have to leave.
• You should sign nothing without extreme caution and the guidance of an independent advisor.

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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