Reverse mortgage is surrounded with many misconceptions, mostly due to lack of proper knowledge but also due to unfortunate instances with borrowers in past. But presently, reverse mortgage, with Home Equity Conversion Mortgage (HECM) a government backed product and stricter norms reverse mortgages have become much safer options for senior citizens. Some of the common misconceptions related to Reverse Mortgages and their reality are covered here:
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Lender owns the house
- Reality: Borrower owns the property till he either sells, moves or dies. Of course as a borrower you have to take care of your taxes and insurance
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There is no estate left
- Reality: It depends upon how you plan your reverse mortgage. In some cases people pay their loans, some do not. You can always name your house to anyone, who will have to ofcourse take care of loan repayments in that case or keep the balance amount in case of sale.
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I won’t qualify as I have bad credit score
- Reality: Credit score is of no value in reverse mortgage as you own the house. You cannot be denied reverse mortgage on this basis as its not even considered. Lenders do run credit reports to identify if you have unpaid dues to the government (e.g taxes) which can be paid through this.
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I can be denied reverse mortgage if I do not meet certain income criteria
- Reality: Income is not a criteria for reverse mortgage at all. You can have a steady source of income or no income at all, this does not impact your eligibility to apply for reverse mortgage
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My home must be debt free to qualify
- Reality: Your home need not be debt free for you to be eligible for reverse mortgage. In many cases reverse mortgage is taken to pay other debts! In case of debt, firstly, part of the reverse mortgage sum is spent towards paying the debt and rest is free for use.
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This is only for desperate seniors
- Reality: Reverse mortgage is used as a financial product to meet various requirements of different kinds of people. Some use the money for vacation planning, some for health, others for renovation and payment of debt.
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Depreciation in home prices can causes problems
- Reality: reverse mortgage loans are non-recourse loans, thus the lender cannot seek any money because of depreciation of the house value.
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Reverse mortgage is through government
- Reality: The role of the government in reverse mortgage is to ensure there are no defaults, these are not “government benefits”
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Lenders play insurance and taxes
- Reality: Homeowners Insurance and property taxes are paid by the borrower. Infact failing to do so leads to breach of terms and conditions of reverse mortgage.
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Payments by lenders are inflexible
- Reality: The payment options are flexible. Borrower can choose from 5 different ways to get paid suiting their convenience
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I will not qualify for Govt. assistance if I go for reverse mortgage
- Reality: Reverse mortgage does not impact your social security and medicare benefits. However it can impact Medicaid which is primarily for low-income individuals. To be eligible for Medicaid one has to have no more than USD 2,000 in countable assets (USD 3,000 for couple). While the payments of reverse mortgage do not count, but if they are not spent and more than USD 2,000 kept in a bank then in a month they will be considered as an asset and thus person no remains eligible for Medicaid. Thus borrower has to be careful to ensure this situation does not occur, which can be done by proper planning and choosing right payment option with the lender.
It is clear that reverse mortgage is surrounded by many misconceptions which can cause issues even for genuine people willing to borrow through reverse mortgage.