Most everyone has heard some negative things about Reverse Mortgages. There are articles in major newspapers aboutl people who were hurt by having a reverse mortgage. These articles may have you wondering. “Can I be hurt?”
There are 3 ways a reverse mortgage can hurt you.
- If the loan officer misrepresents the loan, misleads you, or just plain lies to you.
- If the loan officer makes the loan knowing that the borrower won’t be able to pay the taxes, insurance, and maintenance.
- Loan officer allowing the spouse to be taken off the title.
It’s not the reverse mortgage that hurts people.
It’s the loan officer who is “selling” you the loan who can hurt you.
The loan itself is just a contract — a written agreement between you and the bank. You might get a paper cut from it, but if it is misrepresented, if you are misled, or just lied to, you can really be hurt financially.
It’s important that you fully understand a reverse mortgage. You should get information in person, from someone you can trust, and someone you can easily contact even after the loan is completed.
HUD and FHA have made regulations to prevent reverse mortgages from hurting people.
The newest regulations are for 2014. However, FHA and HUD have increased the regulations repeatedly since 2001. Most of the stories about reverse mortgages hurting people were from loans made prior to the stringent regulations of today.
The new counseling rules, for example, require that borrowers answer questions to demonstrate that they understands the implications, and responsibilities. If the counselor feels that the borrower does not understand the reverse mortgage program, the certificate will not be issued. A reverse mortgage cannot be even started without a signed counseling certificate.
There are also new limits on the amount a borrower may draw from the loan during the first year. This was initiated in an attempt to make sure borrowers have saved enough money to continuing paying the property taxes, homeowners insurance, HOA dues (if any), and maintain the home. These are the same requirements as with any other type of mortgage. There have been cases where borrowers took all their money at first and and just spent it. If the obligations just mentioned are not maintained, the loan becomes due and payable, so it is important that you have money for those ongoing obligations.
New for 2014 are regulations about the rights of a spouse who is younger than 62. Now they are protected so they will be able to remain in the home as long as they want after the death of the older age-qualifying spouse. Click here for details.
New for 2015 are some financial and credit qualifications. The FHA insured Home Equity Conversion Mortgage underwriting will require the applicant to meet some minimal financial and cred benchmarks. These are not made to prevent homeowners from receiving a HELOC reverse mortgage, but rather determine the way to structure the loan to insure that the homeowner can stay in their home for the remainder of their life. This will help prevent foreclosures and seniors losing their home. Complete the contact form and I will go over the information needed with you.
All the fees are capped and regulated. HUD and FHA have strict regulations about maximum fees, interest rates, and disclosures.
There are rules to prevent bait-and-switch by guaranteeing the loan you receive is the same as the loan Good Faith Disclosures you were shown at first. If there is any reason that the loan needs to be changed, it is required that you sign a new disclosure to make sure you approve of the changes.
All that helps, but still some people can be taken advantage of by unscrupulous loan sales people.
3 examples where people were hurt:
Wife not on title
A husband and wife on title to their home need cash and call a bank about a reverse mortgage. The Loan Officer finds that the husband is over 62 and qualifies for a reverse mortgage, but the wife is only 58. She does not qualify, since you must be 62 or over. The Loan Officer suggests that the title be changed so that the wife is not on title, then the loan can proceed. The couple do as the Loan Officer suggests, the title is changed, and the loan funded.
Several years go by and the husband dies. The wife is not on title to the house and must go through costly probate to get title. When she does get title, she finds that the reverse mortgage is due to be paid in full because the husband has passed. She has no way to pay the amount due, and she can’t qualify for a new loan. She is going to lose her home.
Did the reverse mortgage hurt her, or was it the Loan Officer whose advice put them in this situation. He got his commission and she lost her home. How does he sleep at night?
NOTE: With the New Rules for 2014 this situation is prevented. Click here for details.
Not paying taxes
A couple had refinanced several times over the years, each time taking more money out to use for living expenses, trips, entertainment, etc. Finally they wanted to get a reverse mortgage to get out from under the payments. Seeing an ad on the internet, they called, got one of the telephone loan operators and started the loan application process over the phone. They found that they could get enough to pay off their current mortgage, but not much more.
They believed that would be good since, if they didn’t have the big monthly mortgage payment, they would have more money to spend each month. And spend that money they did.
Then property tax time came around. They didn’t have quite enough to make that big payment. They hoped they would save and pay it all when the second payment is due. That didn’t happen either. Then the taxes became delinquent, and the lender got notice.
One of the important provisions in a reverse mortgage is that the property taxes must be paid and there must be homeowners insurance in place. Those items are to be paid by the homeowner. The lenders get notice sent to them if these items are not paid.
The problem here was that the Loan Officer was just interested in “selling” them a loan when he should have been consulting with them about their financial situation. They weren’t told how important it was to save enough money each month so they would have enough money for the property taxes and insurance. They didn’t get the financial guidance that they should have received when taking on a financial product that would so greatly impact their lives.
Did the reverse mortgage hurt them, or was it the lack of financial guidance by the Loan Officer?
Being misled by the loan broker
A woman, whose husband recently passed, had accumulated about $50,000 in credit card debt and medical expenses as her husband’s health declined. She wanted to get these bill paid off, but really didn’t have the extra monthly income to reduce the balances through payments. She decided to look into using a reverse mortgage for the extra cash to pay down the bills.
She saw an advertisement on the television with a familiar actor recommending that she call to get more information about getting a reverse mortgage, so she called. The fellow on the phone was very helpful and easy to talk to. She told him about the $50,000 of bills she wanted to get paid off. He told her that would be no problem. The reverse mortgage easily covers that because she qualified for $250,000. He seemed like he knew the reverse mortgages well and wanted to help her. She agreed to begin the application process with him.
After the required HUD counseling, the woman was sent the application forms to fill out by FedEx. She filled in the blanks and signed all the pages just as the fellow on the phone told her to do. There was the required appraisal and then some time processing.
She received a call from the fellow who was helping her with the reverse mortgage telling her that the processing was done, and the loan was ready for the final documents to be signed. She told him that that would be good, and that she would only need $50,000 to pay her bills. At this point, the fellow on the phone told her she would have to take the whole $250,000, the full amount for which she qualified. She accepted what he said and agreed to complete the loan.
A traveling notary brought documents to her home. She signed everything just as she was instructed to by the fellow on the phone at the loan company.
She ended up with a reverse mortgage loan balance of $250,000. After paying her bills, she has $200,000 in a bank account earning virtually no interest, and a loan for $250,000 accruing interest, reducing the equity in her home.
The fellow on the phone at the loan company lied to her. She didn’t have to take the whole amount at the loan closing. She could have only taken the $50,000 she needed. The remainder of money that she qualified for could have remained un-borrowed in a Line of Credit. Her loan balance would have been only $50,000 plus the loan costs, and the equity in her home would be much more. In addition, the Line of Credit would grow at an interest rate ½% greater than the loan rate. This would give her access to even more cash later in her life when she may need it.
The fellow on the phone at the loan company lied to her because the commission is greater on the loan he sold her than the commission on the loan that was right for her circumstances.
To insure that you are not taken advantage of and that you get the right Home Equity Conversion Mortgage for your situation have a no-obligation, confidential in-home consultation. Use the Contact Form at the Right.
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