Reverse Mortgage Horror Stories…And How to Avoid Them
Bring up the topic of reverse mortgages in a group of people and someone is almost sure to chime in with, “I’ve heard so many terrible reverse mortgage stories,” or “I read about seniors who took out reverse mortgages getting kicked out of their homes,” and more. There are a lot of misconceptions about reverse mortgages, but there is also truth to the fact that this program isn’t a one size fits all solution for every older homeowner.
The Dangers of Reverse Mortgages
With any debt it is important to fully understand its implications, and a reverse mortgage is no exception. Before deciding to take out this specialized type of home financing it’s crucial that all borrowers know the benefits, drawbacks, what will be responsible of them, and what could happen in different scenarios.
Here are a few potential realities that could occur after taking out a reverse mortgage, what some might consider those “horror stories” people refer to, as well as some ideas for contingency planning so that all parties are prepared should such a situation arise.
The Homeowners Might Not Be Able to Stay in the Home
While the goal of the reverse mortgage product is to enable aging homeowners to remain in their own homes as long as they would like, even until death, the reality is that this is not always possible. Some seniors choose to move out of their homes some time after taking out reverse mortgages, either to move closer to family, to downsize to a home that will be easier to maintain or more accessible as they age, or for any number of other reasons. In other cases older homeowners must move due to declining health in order to get the level of care they need.
Once all borrowers on the reverse mortgage are no longer living in the home as a primary residence the loan becomes due, and the amount borrowed as well as interest charges and other fees must be repaid. Sometimes the property must be sold in order to repay the loan. It is possible that a homeowner might need to enter an assisted living facility, nursing home, or live with a family member for some period of time in order to recover from an illness or injury, but once recovered would prefer to return to his or her home. If the senior lived away from the home long enough to no longer satisfy the primary residence requirement (generally 12 consecutive months) the loan may have come due and the homeowner may have had to sell the property.
Thinking through these scenarios it’s important to look at how the cost of short or long term care would be handled. Are there other assets, services (such as those provided to veterans), or insurance policies that would make these expenses manageable? Is the homeowner comfortable with taking on the risk of not being able to keep the home in some situations, however unlikely they may seem at the time the loan is applied for?
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A Non-Borrower May Be Required to Leave the Home
When a reverse mortgage comes due because the borrower is no longer living in the home or has passed away, in many cases the home must be sold in order to pay off the loan. If someone other than the borrower is living in the property they may be forced to make other living arrangements. This could be a child, grandchild, other relative of the borrower, or a roommate, if they are not listed as a borrower on the loan.
For non-borrowing spouses, the HUD has updated its rules, allowing them to stay in the home. Read our related article, Reverse Mortgages and Surviving Spouses for details on the change.
Before moving into the home (or before the reverse mortgage is finalized if he or she is already living there) the non-borrower should fully understand that he or she may no longer be able to live in the home once the homeowner is no longer living there, and have a plan for finding another place to live.
The Home Could Be Foreclosed On
The reverse mortgage will not become due until all borrowers are no longer living in the home as a primary residence, meaning that the bank or lender will never foreclose on the property due to lack of payments ahead of that time. This does not mean however that the home is free of any risk of foreclosure. The homeowner is required to pay any property taxes due. If they are not paid the government agency to which they are due can often initiate foreclosure proceedings. If property owners association dues or utility dues are unpaid the parties owed those funds can often place a lien on the home.
To avoid this situation careful financial planning is critical. Will the amount borrowed through the reverse mortgage combined with any other income and assets be sufficient to cover monthly living expenses as well as property taxes, insurance on the home, POA dues, medical expenses, and to maintain the property? What if a large expense pops up such as the home needing a new roof? What if one or more borrowers lives to be 80, 90, or even over 100 years old? If the answer is no, even in the less extreme versions of this scenario, than a reverse mortgage is not likely to solve the financial problems currently facing the homeowner, and other options need to be considered. Seniors facing financial hardship may be able to find assistance through local government agencies, charitable organizations, or through family members.
Much of life is unpredictable – no one can say with certainty how long someone will live, what their financial picture will look like a few years down the road, or how long they will be able to live independently. An important part of the process of deciding to take out a reverse mortgage involves thinking through a diverse set of scenarios and ensuring that there is a plan should any of those circumstances occur. It may be helpful to have this conversation aided by a financial planner specializing in planning for retirement and working with aging clients. In addition, before a reverse mortgage application can be finalized all borrowers are required to work with a HUD approved reverse mortgage counselor.
Through this process it could be decided that a reverse mortgage is a good financial tool, or that it is not right for a particular borrower. Whatever outcome this thoughtful planning and consideration of how to approach a variety of late in life and end of life situations is extremely beneficial.