Many seniors consider reverse mortgages, also known as home equity conversion mortgages, as a way to receive monthly payouts after retirement. Turning your home equity into a funding source may be a good idea, depending on your financial situation. This path can help you live in your current neighborhood and afford living expenses. It can also help you with surprise expenses such as medical expenses and rising maintenance costs. However, reverse mortgages can seem complex to someone getting started.
The fear on top of every homeowner’s mind is losing their home because of this type of loan or a similar financial product. Reverse mortgages happen to be very generous with homeownership, but there are a few ways a reverse mortgage can result in foreclosure. So while these financial products can help many retirees, it’s important to understand the risks before you get started.
Ways You Could Lose Your Home with a Reverse Mortgage
Worried about falling behind on loan payments? That’s not the reason people with reverse mortgages lose their homes. In fact, the payouts from a reverse mortgage can eliminate the stress of having to make an on-time payment each month. However, there are some ways you can lose your property if you aren’t careful.
Not Using the Home as a Primary Residence
You can only use a reverse mortgage on your primary residence. Real estate investors cannot take out reverse mortgages on multiple properties to accumulate more cash flow, and you can’t even take out a reverse mortgage on a vacation home. If you move out of the home, the lender can demand that you pay the reverse mortgage balance. That can mean selling the home or having it end up in foreclosure.
Not Paying Property Taxes
You won’t have to worry about mortgage payments, but that doesn’t mean your monthly payments go away. You will still have to pay property taxes each year, and falling behind on them can result in foreclosure. A reverse mortgage makes property taxes and other expenses easier to pay off, but you have to stay on top of them. Unpaid taxes can prevent you from getting a reverse mortgage in the first place. It’s important to repay those debts if you have them and stay on top of your taxes to maintain reverse mortgage payouts.
Not Paying Homeowner’s Insurance
Skipping homeowners insurance presents the same risk as avoiding your property taxes. If you fall far enough behind, you may lose your home. This risk is always present, even if you do not have a reverse mortgage. A reverse mortgage does not create these risks, but the proceeds from your monthly payouts can make it easier to stay on top of your monthly expenses.
Not Maintaining the Property
If the lawn isn’t adequately mowed and there’s mold all over the place, the property isn’t sufficiently maintained. When a borrower passes away, their heirs don’t have to repay the reverse mortgage balance. Financial institutions don’t want to be left with the bag if the property is poorly maintained, so they use this contingency. If you get a reverse mortgage, make sure you invest in your property to keep it in good condition. You don’t have to go over the top with cosmetics and functionality. Mowing the grass and addressing issues as they arise will help you avoid any problems with the bank.
Fraud and Scams
Reverse mortgages from legitimate lenders can provide you with an extra financial cushion. However, some scammers pretend to provide reverse mortgages and end up running away with your funds. Before doing business with a mortgage lender, check their online reviews. Scammers also like to create a false sense of urgency to get a reverse mortgage and may ask for a wire transfer. Also, if something sounds too good to be true, it probably is. Some scammers give you a home appraisal that’s far above what you can get from a traditional appraiser. Some homeowners want to go with the inflated but unrealistic home value, and the scammer will use that opportunity to steal your funds when you try to get a reverse mortgage. Most legitimate lenders are approved by the Federal Housing Administration.
The presence of scammers doesn’t mean reverse mortgages are bad. On the contrary, this financial product can help people who want to keep up with the rising cost of living. It just means bad actors will try to trick victims into believing they are legitimate.
Your Obligations as a Reverse Mortgage Borrower
You won’t have to repay a reverse mortgage in your lifetime. Still, financial institutions expect you to fulfill a few obligations to continue receiving monthly payouts or opt for a lump sum payment instead.
Reverse mortgage lenders require borrowers to undergo counseling approved by the HUD before taking out a reverse mortgage. This counseling helps homeowners recognize the risks and rewards of reverse mortgages instead of approaching this financial product blindly.
Living in the House
You cannot use a reverse mortgage for a vacation home or rental property. You must live on the property and treat it as your principal residence. In addition, you can only have one reverse mortgage instead of having a reverse mortgage for each of your properties.
Paying Dues and Taxes
A reverse mortgage turns your home equity into monthly payouts, and you won’t have to worry about mortgage payments. However, you are still responsible for property taxes, home insurance, HOA, and other expenses associated with homeownership. You can use the proceeds from a reverse mortgage to make those expenses more manageable, but if you fall too far behind on them, it can force your home into foreclosure.
Maintaining the Property
The bank, credit union, or online lender you use for the reverse mortgage has the incentive to keep the property in good condition. The borrower isn’t obligated to repay the reverse mortgage, and heirs don’t have to repay it either unless they want to hold onto the property. However, financial institutions require homeowners with reverse mortgage owners to adequately maintain the property. That means having sufficient internal functionality and external appearance. Each lender has different requirements for maintaining the property, but if you are making necessary repairs and getting your lawn mowed, you should be in good shape.
Are There Protections for Reverse Mortgage Borrowers?
Reverse mortgage borrowers enjoy several protections that shield their cash flow and make them less vulnerable to financial losses. Here is a list of protections you can expect:
- Limits on how much you can access in the first year: Most lenders do not let you access all of your available home equity in the first year. This restriction acclimates you to using home equity for the first time, and if you use the funds ineffectively, you have a safety net for year two. You cannot borrow more than 60% of the principal limit. If mandatory obligations and 10% of the principal limit yield a higher number, that’s how much you can borrow during the first year.
- You do not have to repay the debt while you are alive: If you run out of home equity, you don’t have to sweat out returning mortgage payments. Lenders do not collect repayment until the borrower passes away. Your heirs are not responsible for paying more than the home’s value. If the home is worth $800,000 and the reverse mortgage debt goes up to $1 million, your heirs are not responsible for the $200,000 difference. The heirs can either repay the debt and acquire the home or let the bank take the property.
- Allocating funds for other expenses: During the financial assessment, the lender will look at your credit score, income, and other financial details to assess your application. This assessment helps the lender make an informed decision on your application’s status. While a low credit score and income won’t restrict you from getting a reverse mortgage, a lender may forcibly allocate a percentage of the reverse mortgage funds to cover property taxes, insurance, and other necessary costs, so the borrower abides by the rules of the reverse mortgage.
Where to Get a Reverse Mortgage
A reverse mortgage is for people approaching retirement or who have already retired. These people need extra cash to cover living costs when they walk away from their jobs. A reverse mortgage from a reputable lender can provide a financial safety net and let you keep your current home.
Top Flite Financial is a full-service mortgage lender and a leading originator of these Home Equity Conversion Mortgages (HECM) backed by the federal government. Accredited with an A+ by the Better Business Bureau, Top Flite Financial offers reverse mortgage loans, allowing you to keep ownership of your home while getting the cash you need to cover expenses such as medical bills, m mortgage payments, or to finance other ventures. To qualify, you must be over 62 years old and have a sizeable amount of equity in your home.
If you think a reverse mortgage could be a good solution, complete this online form to request a free consultation with a Top Flite reverse mortgage expert.