More and more senior citizens in the United States encounter problems with their reversed mortgages due to the huge economic downturn. Among the major criticisms of reverse mortgages is that these senior citizens do not fully understand the terms and conditions associated with such loans and as consequence, end up with a larger sum of debt they didn’t anticipate.
The United States financial sector have been trying to produce remedies and solutions to various problems with reverse mortgages, but the need for immediate cash seems to outnumber the efforts made to make the mortgagees understand the complexity of having reverse mortgages which results to influx of reverse mortgage applicants.
Before entering this lifetime mortgage, people first need to have a clear-cut understanding of what having reverse mortgage is all about starting from its definition, requirements and the major problems that come along with it.
What are Reverse Mortgages?
Before pinning down the problems with reverse mortgages, it is important to understand the basic definition which is a reverse mortgage is a form of equity release or lifetime mortgage. An equity release is a means of retaining use of one’s house or other material possession which has capital value, while receiving a steady stream of income, based on the value of the house.
With normal mortgages, the homeowner pays a monthly amortized payment to the mortgagor. After each payment is done, the homeowner’s equity on his/her property increases. Once the mortgage has been paid in full, the property is released from the mortgagor back to the homeowner’s sole possession. However with reverse mortgages, the homeowner does not have to pay monthly amortized payments to the mortgagor and instead receives a sum of money each month, which then increases the debt on the property.
In reverse mortgages, the amount to be borrowed is computed by the Federal Housing Administration (FHA) using a formula which considers age of borrower (the older, the better), current interest rate, and appraised value of the house. Therefore the more valuable the appraised value of the house is, the higher the loan amount will be, depending on lending limits. The homeowner will just receive the sum of money computed by the FHA monthly and does not have to pay any monthly dues except for taxes, insurance and maintenance.
The homeowner’s obligation to pay back the loan will only be due if the homeowner dies or leaves, or if the house is sold. At such time, the homeowner’s estate can choose to pay back the reverse mortgage or put the house up for sale to be able to repay. If the homeowner’s estate was able to sell the house for an amount higher than the balance of the loan that needs to be paid back, the excess automatically will belong to the estate.
However, if the house sold for an amount which is still not enough to pay off the balance of the reverse mortgage, the mortgagor/lender must take a loss and request reimbursement from the FHA. Unlike in conventional mortgages where other possessions can be affected due to inability to pay back the loan, there are no other assets that will be affected in unpaid reverse mortgages.
Eligibility for Reverse Mortgages
Now that there is a better understanding of how reverse mortgages work, it is important to pin down who and what are eligible to acquire such loans and from there, point out various problems that may arise with reverse mortgages.
Most important factor in considering eligibility by the FHA is that the homeowner must at least be 62 years. But before the applicant is approved of a reverse mortgage, the FHA must make them undergo counseling sessions to provide guidance and deeper understanding of what they are about to enter. These homeowners must also freely own the property. Ongoing mortgage balance can be paid off completely with the income from the reverse mortgage loan.
In addition, unlike conventional mortgages, there are no income or credit score requirements for a reverse mortgage. It is important to note that since reverse mortgages are usually due at death of the homeowner, this setup is particularly favorable for elderly persons who do not intend or are not able to leave a large estate to their heirs when they die.
Almost all types of houses are eligible for reverse mortgage application however, due to the influx of mobile houses, the FHA has set the rule that the house must be on a permanent foundation/land that is owned as well by the homeowner. In recent times, certain condominium and townhouse structures have been eligible as well.
Knowing the process behind and eligibility can then help pinpoint arising problems with reverse mortgages to help people understand and weigh their choices much better.
Problems with Reverse Mortgages
One of the major problems with reverse mortgages is the up-front costs. In conventional mortgages, lenders make money through interests in time. However with reverse mortgages, the applicant is required to pay the Housing and Urban Development (HUD) Mortgage Insurance that is usually amounts to 2% of the appraised value of the house on top of standard closing expenses such as points, prepaid interest, and legal fees. In addition to these, the homeowner needs to comply with FHA’s requirements which are to pay for real estate taxes, conventional homeowners insurance and home repairs.
Being the only eligible applicants, senior citizens often blindly proceed with reverse mortgages without fully understanding its complexity and possible consequences. Senior citizens who are often too trusting tend to be taken advantage of by some lenders whose only goal is to separate the elderly from their money. And in some cases, such consequences of these actions leave the remaining family of the homeowner with a greater amount of debt.
Reverse Mortgages also clash with the matter of Medicaid. Senior citizens who have already applied for reverse mortgages may find it difficult to apply for Medicaid since loans are considered as personal assets. In addition, low-income senior citizens who depend on Medicaid are not allowed to receive more from their monthly reverse mortgage income than they’re going to spend. Having excess amounts sitting in bank accounts makes them ineligible to qualify for need-based programs so it is very important to consult early on with a specialist regarding where the applicant stands.
All actions have corresponding consequences whether it’s good or bad. At such delicate age, these elderly people should focus on investigating all their options beforehand, properly consulting with a specialist, and weigh all pros and cons with the entire family to avoid these various problems with reverse mortgages.
With the economy on a dangerously bad place right now, the United States housing and financial sector can only expect an influx of problems with reverse mortgages alongside the rise in number of loan applicants. The government must completely ensure proper guidance and help to the senior citizens providing them with the best possible deal with their best interests at heart.
Proper guidance and counseling, presentation of all possible options and weighing down possible consequences are among the necessary major steps in avoiding having unnecessary problems with reverse mortgages which are the last things these senior citizens need to deal with.