Reverse Mortgages- Understand the Requirements

Over the years there has been a lack of understanding about Reverse mortgage, and there is a lot of misinformation being passed around. There are three main qualifications for getting a reverse mortgage:

1. The borrower(s) must be at least 62.
2. He/She/They must live in the house.
3. It must be their primary residence.

In addition, they must maintain the house in good repair (meeting FHA standards), pay property taxes, and have adequate homeowners insurance. These last two requirements are no different from what any homeowner must do if another type of mortgage is held, or even if there is no mortgage at all. If you own a home, you pay the property tax. Period. Ditto for the insurance, if you’re smart.

The media has written extensively about reverse mortgages in recent years as more baby boomers reach 62 and the popularity of the program has grown. Often, the writer raises a cautionary flag by pointing out the obvious. If the taxes aren’t paid, you may have to leave the home. But wait … didn’t you know this already?

Here is an excerpt from an article written by Jane Bryant Quinn for the AARP Bulletin:

“All these guarantees make the loans sound as safe as [spokesman] Fred Thompson promises. But there’s something he overlooked. You can keep the house only as long as you can pay your property taxes and homeowners insurance. If you run out of money and let these bills slide, you’re in default, and the bank can foreclose on your house.”

Yes, Jane. We know. That’s the way it is with any mortgage.

The actual borrower, some writers also point out, must live in the house. If that person dies or leaves to go into a nursing home, then the non-borrowing spouse might be required to sell the house and move out. But this happens only if that spouse was not a co-borrower on the reverse mortgage, and the only reason for this occurring is if that spouse was not yet 62 when the reverse mortgage was taken out.

Another point raised is that lump sum withdrawals have a way of being spent, leaving no money for paying taxes or insurance should the need arise. What is the difference between this and not having access to the equity in the first place? If the homeowners did receive a lump sum, they may even have decided to invest it and it may be worth more than before. So this too seems like a somewhat dubious caution. Plus, no one ever has to take out a lump sum; the homeowner can choose to access the money over time.

Benefit Linc makes a point of explaining to clients that it is better if both spouses are at least 62, with both listed as co-borrowers on the reverse mortgage. This ensures that there will not be a problem should one of them die or move out. The mortgage continues as before and the surviving spouse can remain in the home until they too are ready to leave.  Grandma will definitely not be kicked to the curb!

In general the AARP article is accurate, but to label something as a potential danger when it actually occurs because of failure to follow requirements that have been disclosed in advance seems like a s-t-r-e-t-c-h to me.

To read the whole article in the AARP Bulletin, go to http://www.aarp.org/money/estate-planning/info-03-2012/risks-of-taking-reverse-mortgage-early.1.html