Busting Reverse Mortgage Myths

Reverse mortgages have gotten a bad rep over the years.  Unfortunately, some unscrupulous lenders have given the entire process a bad name with cheesy tactics and a few bad apples trying to take advantage of seniors. 

But here’s the thing, a reverse mortgage is a legitimate type of loan that leverages the equity in a borrower’s home.  The most common type of reverse mortgage is called a Home Equity Conversion Mortgage, and it’s backed by the Federal Housing Administration (FHA).  Reverse mortgages allow seniors a way to stay in their home and receive payments from the bank, rather than making payments to the bank like a traditional ‘forward’ mortgage. 

I’d like to review some of the common misperceptions and myths associated with reverse mortgages.  

The bank owns my home

This is simply false.  A reverse mortgage is a loan.  There isn’t a change of title when a borrower has a reverse mortgage.  There are rules in place that govern how to repay the loan when a borrower leaves the home (either by moving or through death), but the bank never owns the home.  

The scenario for when a reverse mortgage becomes due and payable looks like this.  The most common scenario is that the last remaining spouse has passed away, so these options are based on that scenario:

1. The heirs sell the home themselves and repay the loan using the proceeds  
2. The heirs decide to purchase the home and pay back the bank to resolve the balance of the loan
3. The heir do nothing and choose to let the bank sell the home to repay the loan

It’s important to note that banks are typically not in the real estate business of buying and selling homes.  They are in the lending business, and a reverse mortgage is a loan at the end of the day.

I could owe more than my home is worth

A reverse mortgage is a non-recourse loan.  This means that the borrower can never owe more than the home is worth.  Borrowers pay an insurance fee during closing.  This fee helps reduce the risk to the bank if the home depreciates in value over time.  This means that even if the value of the home decreases when the loan is due and payable, the borrower (or heirs) can never owe the bank more than the value of the home.

My spouse will have to leave the home if I pass away

The fear of getting kicked out of your home is very real when it comes to a reverse mortgage.  Luckily, there are many rules in place that would prevent a living spouse from having to leave the home if their spouse passes away.  

The loan only becomes due and payable when the last living spouse either chooses to leave the home or passes away.  This part technically covers both spouses if they are over 55 years of age, live in the house full time, and are both on the loan.

In the chance that the spouse is not 55 years of age at the time of the loan closing, that spouse can be listed as a non-borrowing spouse.  As long as the spouse continues to meet the criteria below, this non-borrowing spouse would not have to leave the home and be able to defer the timeline for when the loan becomes due and payable.

1. The non-borrowing spouse was married to the borrowing spouse at the time the loan was closed, and they remained married for the duration of the borrowing spouse’s life
2. The non-borrowing spouse was disclosed as such in the Home Equity Conversion Mortgage (HECM) documents
3. Have occupied, and continue to occupy, the property securing the HECM as the principal residence of the non-borrowing spouse

If you are interested in learning more about a reverse mortgage - or have heard about something that you aren’t sure of - please contact the team at Equity Access Group.  EAG specializes in reverse mortgages, and they’d be happy to help you learn more about this type of loan.