The only time a reverse mortgage is not a worry or an issue is when a homeowner wants to stay in a home, can afford all taxes, insurance and any unforeseen and normal maintenance.
Reverse mortgages are beneficial to borrowers because holders don’t have to repay the loans unless they sell their homes or move, so the term “default” seems contradictory. Unpaid insurance bills and taxes, however, are considered to be in default.
Lowered home values make it hard for anyone, retirees especially, to rely on home appreciation to support retirement.
Diving home values make it even harder to hard to sell a home or take out a home-equity line of credit. Falling home values reduce the amount of cash a retiree could pull for a reverse mortgage.
So the key to a successful reverse mortgage are sorting through the complicated terms that can only truly be clarified by an attorney to land on the side of the homeowner.
Incredible closing costs can turn a good deal sideways. Cash-strapped seniors who use savings to pay for those closing costs can easily fall behind on tax and insurance bills.
Those holding reverse mortgages may no longer have any equity, because their home has dropped in value which ultimately makes it harder to sell the home.
There is currently some debate over one specific type of reverse mortgage, the Home Equity Conversion Mortgage (HECM).
The HECM is designed so that borrowers can never be upside down in the home although the loans rise over time. However, spouses of deceased reverse mortgage borrowers sometimes have to repay the full outstanding HECM balance, even if the home’s value is dropped.
A prior rule said a borrower could sell a HECM property for 95 percent to 100 percent of its appraised value. However, rule changes state that a non-signing surviving spouse would only be able to be rid the HECM by repaying the full loan balance. It also changed to mean that a third-party buyer could purchase the property for as little as 95 percent of appraised market value.
This means that many spouses or heirs who want to purchase the property have been unable to do so because they cannot obtain financing to exceed the current value of the property.
Heirs of deceased HECM holders have a right to purchase a property for its current value, but have on occasion been told to pay off the full mortgage balance.
When this situation or any other arises with a property you have inherited, or if you have a parent or relative with a complex real estate legal situation it’s time to consult with an attorney.
Eric and Roddy Lanigan are committed to helping clients achieve results while efficiently resolving complex business and financial legal issues.