Old age and lack of cash could give you serious headaches when it comes to making ends meet. A reverse mortgage allows a senior property owner to stay in the house for as long as possible and use the equity for cash. In order to qualify you need to be 62 or older. With a reverse mortgage you don’t make any payments, it’s the lender who pays you. Nevertheless, such loans are a lot more expensive than home equity lines of credit (HELOCs) and home equity loans.
90% of the reverse mortgage market consists of loans backed by the FHA. If you are considering such a loan product, you need to go through financial counseling with the Home Equity Conversion Mortgage program (HECM). These counseling sessions will help you learn a lot. However, in order to make a smart choice there are 4 major traps that you need to keep an eye for with reverse mortgages.
1. Beware of Reverse Mortgage Scams
In 2013, about 59,000 reverse mortgages needed to be guaranteed by the U.S. Department of Housing and Urban Development. Given the high popularity of these mortgages, scammers have diversified their strategies to target potential borrowers.
Here are some alarm bells. Don’t turn a deaf ear to them!
The scammer helps you get the reverse mortgage, but they charge a fee that is as high as the funds that you get. Always check these fees with your attorney, housing counselor or tax advisor to get a professional opinion on this deal that you are offered.
Beware of investments! Scammers often push borrowers to invest the money in an annuity or some fund. If anyone suggests that you fund such an investment, contact a trusted tax or legal advisor for professional help.
They “find” reverse mortgage for you for a fee. Never pay a fee to “find” a reverse mortgage. The list of approved lenders is available with HUD.
Identity theft is a huge threat! Your personal information could be used by criminals to obtain a reverse mortgage on your property. Regularly check your credit report to protect yourself against identity theft. If new loans appear on your credit report, look into the matter right away!
Free lunch or dinner offers! Do not accept offers like these! Scammers use “gifts” as a strategy to make you buy what they are pitching.
2. Don’t let negative thinking stand in the way!
There are many homeowners who show reluctance to apply for a reverse mortgage for fear that this might negatively affect their Medicare or Social Security benefits. This is not true. Work history is the only one that influences Social Security. As for Medicare, this is a federal government program to provide health insurance to the elderly.
The benefits that you receive from these agencies are not influenced by a reverse mortgage, because this is considered a “loan” not “income”.
Exceptions. In case you receive a Medicaid or Supplement Security Income (SSI), the funds that remain unspent every month could be considered an asset. In order to understand your specific circumstances, it is best to address your SSI administrator, an eldercare specialist or a financial advisor.
3. Counting on Your Condo
You may not qualify for an FHA reverse mortgage program if you live in a condo. The Federal Housing Administration only approves condo loans for those buildings that meet its specifications.
You may also be turned down by FHA for a condo reverse loan if the building:
- Has too many rental units.
- Has a lot of owners behind on their condo dues.
- Doesn’t have enough reserves.
Without FHA approval on the condo, you will not be able to get a reverse mortgage.
4. Failing to Explore the Alternatives
You should not consider a reverse mortgage as your only option; in fact this should be the last resort. A reverse mortgage comes with high costs and fees; why pay them if you can find a cheaper solution to your cash problem? The home value influences the origination fees for an HECM:
- If the home is valued below $125,000, the fee is capped at $2,500.
- 2% of the home’s value is charged for a property valued at $125,000-$200,000.
- 1% of the value is charged for properties above $200,000.
- Overall, the origination fee is capped at $6,000.
Other costs add up to this list:
- Closing costs that include appraisal, credit checks, recording fees, surveys, inspections, and title insurance.
- An upfront mortgage insurance premium of 0.10% or 2.5% of your home’s value. If you take more than 60% of your home’s value in the first year of the loan, you’ll pay the higher fee.
- An annual mortgage insurance premium of 1.25% of the mortgage balance.
- A service fee ($30-$35) that is charged monthly.
Instead of paying these costs at closing, you could roll them into the reverse mortgage. Unfortunately, this will lead to less cash in your pocket and a more cumbersome debt for those who inherit your property (as they will have to pay off the reverse mortgage lender).
Consider other options before turning to a reverse mortgage: a home equity line of credit, a personal loan or some lifestyle adjustments. You could get housemates or a part-time job. Before getting a reverse mortgage, you should be informed on your options, this is the purpose of the financial counseling requirement for homeowners who seek HECMs.
However, not all FHA counselors do their job as they should. As revealed by an investigation conducted of the Government Accountability Office, 7 out of the 15 counselors that were covertly met did not discuss the alternatives to reverse mortgages.
Don’t rely on the required financial counseling program alone. Do your homework well before deciding on a reverse mortgage!