Myths of Reverse Mortgage

By W. L. Pulsipher, CSA

 What is it about Reverse Mortgages that instills fear in some Senior Americans?  This feeling is real even when the American Association of Retired Persons (AARP) and nationally syndicated columnists like Robert Bruss continue to praise them in their literature.  The answer may be like that old axiom says “a little bit of knowledge can be a dangerous thing”, and the fact that many seniors consult friends and relatives who proclaim they know, but in reality are grossly misinformed themselves.

Since the Reverse Mortgage can be a valuable and safe tool for Senior Americans, we will endeavor to correct the major misconceptions connected with them and allow the Senior Citizen to make an informed decision on the use of the Reverse Mortgage.

The first and foremost misconception is that of safety.  Many seniors react to the suggestion of a Reverse Mortgage by saying “that’s where you take my home”.  The fact is that the home MUST be in and REMAIN in the name of the borrowers only.  Since the Reverse Mortgage is a mortgage, a lien is placed on the property like all other mortgages.  This assures that the lender will eventually be repaid but for only the amount owed which is principle, interest, and closing costs, again just like any other type of mortgage.

Another fact is that about ninety-five (95) percent of Reverse Mortgages done are the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) version.  This guarantees the full protection of the United States Government through use of the required two (2) percent insurance fee paid on all FHA Reverse mortgages.

The remaining, about five (5) percent of Reverse Mortgages, are Proprietary Reverse Mortgages which are guaranteed by private lenders that insure their safety.

The next most heard misconception is that Reverse Mortgages are much costlier than other mortgages.  The truth is that closing costs average only about one (1) percent more than if a regular FHA mortgage were obtained on the same property.  Robert Bruss says “Amortized over at least five (5) years, these fees are quite reasonable”. If you compared the Reverse Mortgage to many other conventional mortgages, the Reverse Mortgage could actually be lower in cost due to the fact that conventional mortgages can charge more than the two (2) percent origination fee allowed on all FHA Reverse Mortgages. Conventional mortgages often charge these higher fees through the use of yield spread premiums obtained by requiring higher interest rates. This practice is not allowed in a FHA Reverse Mortgage.

Another cost factor is, of course, the interest rate.  The FHA Reverse Mortgage interest rate is based on either the one (1) year Constant Maturity Treasury (CMT) or recently the London Inter Bank Offered Rate (LIBOR) instead of the prime rate which most conventional mortgages use as their base.  This gives the FHA Reverse Mortgage an interest rate lower than most adjustable conventional mortgages and with less fluctuation.

Another common misconception, related to the first one mentioned, is that the home goes to the lender after the loan becomes due at death or when the last survivor permanently leaves the home.  This also is NOT the case as value or equity left after payment to the lender goes to the estate or heirs of the borrower.  This is exactly the same procedure followed with regular conventional mortgages.

The Reverse Mortgage is “Non-Recourse”, and means that if the borrower or estate does not pay the balance when due, the lender's remedy is limited to foreclosure and the borrower or estate will not be personally liable for any deficiency resulting from the foreclosure. This is true even if the home value decreased or the borrower lived to an extremely old age.

Also misunderstood are the requirements for obtaining a Reverse Mortgage.  Since no re-payment is made as long as one (1) surviving borrower remains in the home, there are NO income or credit requirements.  Even bankruptcy does not disqualify as long as it has been discharged.  Another requirement is that both spouses must be sixty-two (62) or older with no upper age restriction.  The only other requirement is that the borrowers alone must own the home with no others on the deed.  The home may also be in a Revocable Trust as long as the eligible borrowers are the primary trustees. Another eligible property is a Life Estate as long as the grantee meets all the requirements of age and occupancy. Of course, the grantor (deed owners) must agree to the Reverse Mortgage.

All property types are Reverse Mortgage eligible except Manufactured (Mobile) homes built before June 15, 1976 and Cooperatives (Co-ops). Co-ops will be eligible in the future when FHA approves the administrative procedures.  Even homes with existing mortgages that can be paid from the equity can obtain Reverse Mortgages. The rising number of home foreclosures brings another opportunity for the Reverse Mortgage to solve this problem by saving the home when usually there is no other mortgage solution. This can still be done when the foreclosure process has begun.

Our last myth to dispel is that a Reverse Mortgage is taxable and affects Social Security and Medicare.  That is NOT the case.  Reverse Mortgage proceeds are not taxable because they are not considered income but are, in fact, a loan.  And since the United States Government sets Social Security, Medicare, and FHA Reverse Mortgage rules, they have all been made compatible.

It should be noted that Supplemental Security Income (SSI) and Medicaid may be affected if you exceed certain liquid asset amounts.  A Reverse Mortgage Advisor will show you how to make these programs compatible so getting a Reverse Mortgage will not affect these benefits.

Now that the myths of Reverse Mortgage have been removed, a person may ask, how can I get more detailed information?  Is your local bank the answer?  Nationally syndicated columnist Robert Bruss says “most banks do not offer Reverse Mortgages”.

The American Association of Retired Persons (AARP) has provided more literature than anyone else on this subject and it is very positive.  They have two (2) publications, “Home Made Money” (52 pages) and "Reverse Mortgage Loans - Borrowing Against Your Home" (44 pages) which are excellent.  The Federal National Mortgage Association (FannieMae) also offers a publication titled “Money from Home” (96 pages) and the “Home Equity Conversion Mortgage (HECM) Consumer Fact Sheet” (4 pages) that is helpful. The National Council On Aging (NCOA) completed a study in 2005 called “Use Your Home to Stay At Home” (104 pages) plus two booklets “A Planning Guide for Older Consumers” (20 pages ) and “A Guide for Homeowners Who Need Help Now” (24 pages). All these and other publications may be viewed and downloaded at www.AmericanReverse.com on the World Wide Web.

The American Bar Association (ABA) publishes a book “Reverse Mortgages – A Lawyer’s Guide to Housing and Income Alternatives” (292 pages). The ABA passed a resolution supporting Reverse Mortgages in August of 1995.

If you would like to get specific information on a Reverse Mortgage for yourself or a family member, you can find a lender in your State, Puerto Rico and in Canada  at www.AmericanReverse.com on the internet.

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