Who Owns the Home in a Reverse Mortgage?
One of the most common misconceptions about getting a reverse mortgage is that the borrower will be handing his or her ownership over to the lender. This is simply not true.
In a Home Equity Conversion Mortgage (HECM), a type of reverse mortgage that is backed by the Federal Housing Administration (FHA) and regulated by the U.S. Department of Housing and Urban Development (HUD), there is no transference from the homeowner to the lender.
Reverse Mortgage vs Standard Mortgage
With an HECM, borrowers receive a mortgage that amortizes backwards, or in reverse (hence the name), providing them with money to use as they please. The money received by the homeowner is borrowed against the home’s equity, therefore, usually only homeowners with substantial equity are eligible for an HECM.
As the borrower receives money from the reverse mortgage, their equity decreases and the loan balance goes up. Because of this, HECMs are typically more popular for seniors who wish to stay in their homes (i.e. age-in-place) and who do not have heirs who wish to inherit the property.
In a forward mortgage, the opposite happens: the lender issues a mortgage to pay for the sale or refinance of a home and the borrower makes payments to the lender, building up equity as the loan balance decreases.
With either loan structure, reverse or forward, the homeowner always owns the home. The deed and title remains in the homeowners name and any equity in the property belongs to the borrower or his/her heirs.
Call Toll Free to Learn More (855) 367-4326
Request a FREE Info Packet!
Why do people associate Reverse Mortgages with giving up their home?
Where people tend to get confused about this is when they start exploring the options for the borrowers’ heirs and/or estate. You see, once the last surviving borrower on a reverse mortgage no longer uses the home as his or her primary residence (either by moving or passing away), the reverse mortgage loan must be repaid.
Typically, the borrower or their estate will sell the home to satisfy the Reverse Mortgage balance. Unfortunately, this makes it very likely that the home cannot be passed on to other family members, as the reverse loan debt must be paid off. The good news however, is that even if the home cannot sell for enough money to cover the loan balance, the borrowers’ heirs/estate are not responsible for paying the remaining balance. In fact, the borrowers’ heirs/estate are not held liable for paying any portion of the Reverse Mortgage debt at all. Instead, the FHA simply absorbs the loss when the home sells.
What about the risk of foreclosure?
As with any type of mortgage borrower, a Reverse Mortgage borrower faces the risk of foreclosure if the loan is not paid. Although Reverse Mortgages do not require the borrower to make payments throughout the life of the loan, the borrower must continue to pay their homeowners insurance premiums and property taxes. Failing to do so can make the loan be called due and if the borrower is unable to pay it off, they could face foreclosure and lose their home.
Several years ago, before the government started cracking down on unethical lending practices, there were groups of unscrupulous lenders who pushed Reverse Mortgages on vulnerable senior citizens without educating them of these risks. Sadly, many Reverse Mortgage borrowers lost their homes to foreclosure due to not fully understanding the terms of their loan agreement.
Today, the Federal government has implemented stronger regulation for Reverse Mortgages, making it a lot harder for the shady lenders to do business; however, scammers and unethical lenders do still exist.
If you are seriously considering a Reverse Mortgage, be sure to do your research and go through a reputable lending company.
For Further Reading and Research
Here at Alpha Mortgage Reverse Mortgage Division, we offer prospective borrowers a wealth of information in our Reverse Mortgage Learning Center and are more than happy to talk to interested seniors and provide clear and accurate information to help them make an informed decision.