Why Foreclosed Isn’t a Bad Word in a Reverse Mortgage

Colin GrubbJan 25, 2017

 

Seniors are often wary of reverse mortgages because they seem too good to be true:

“So I get monthly payments on the equity in my house indefinitely and never have to pay the loan back? Yeah right!”

Turns out it is true. Because reverse mortgages are FHA-insured, you or your heirs will never need to pay it back as long as you abide by the following conditions:

  • You keep up your basic home maintenance
  • You continue to pay your property taxes
  • You continue to pay your homeowners insurance

See, each year you are charged a 1.25% insurance fee. This fee protects the borrower if the lender is unable to make a monthly payment, but more importantly it protects the lender if the loan balance exceeds the value of the house.

So when you pass on or leave the property, even if your house is underwater, the government covers whatever is left on the loan balance after its sale.

Reverse mortgages are an excellent and safe financial tool for seniors to supplement their retirement income. In addition, so customers go into the agreement knowing all the facts, the government mandates seniors attend third-party counseling sessions in order to go into the agreement with their eyes open.

So why do reverse mortgages so often get beat up by the media?

The answer could lie in the definition of the word “foreclosure.”

2 Definitions of Foreclosure

In a traditional mortgage, foreclose means you have become delinquent and are forcibly ejected from your house.  The US foreclosure rate is currently .35%, which is the lowest it’s been since 2000.

The reverse mortgage foreclosure rate since 2009 is a whopping 4.2%! That’s more than 41,000 houses.

Of course this invariably conjures up images of thousands of sweet, grey hair seniors getting kicked out of their houses and being forced to live on the street. No wonder some media outlets think reverse mortgages are such a bad idea.

Well, according to the US Department of Housing and Urban Development, foreclosure of a reverse mortgage is a different thing entirely.

Firstly, a foreclosure could indeed mean the senior didn’t meet the above three responsibilities, were found in default of the loan, and removed from the house. But turns out this rarely happens.

Technically, foreclosure of a reverse mortgage means any transference of the home’s title to the bank. Far and away the most common reason for this in a reverse mortgage is that the borrower dies and no family members choose to pay off the loan and retain the house.

So to put it plainly, the majority of “foreclosures” due to reverse mortgages are because the person taking out the reverse mortgage has died. There is no eviction involved.

The bad press is mainly due to a different definition of the word foreclosure than most folks are used to.

Non-Borrowing Spouses

Before 2014, it IS true your spouse could very well be evicted from the house upon your death. This was usually because the spouse was not yet 62, the minimum required age to obtain a reverse mortgage.

HUD recently changed the rules to protect non-borrowing spouses (NBS). Now, if widow or widower assumes ownership of the property and continues to meet the initial obligations of the reverse mortgage they can remain there indefinitely regardless of their age.

As the borrower it is important to remember that the younger your spouse is at the origination of the mortgage, the less your monthly payment will be.

For a more detailed explanation of all the ins and outs of reverse mortgages, get a free information kit from our advertising partner American Advisors Group. They are the number 1 reverse mortgage lender in the nation.