Telling The Truth About Reverse Mortgages

Over this past year, the nation’s two largest reverse mortgage providers, Wells Fargo and Bank of America, opted out of the industry, leaving some seniors considering their options with one glaring question in mind: “Are reverse mortgages bad?”

On Tuesday night during a lecture at the Hampton Bays Public Library, mortgage broker David Bailey simply replied, “No.”

He explained that the two banks are no longer providing the Federal Housing Administration’s reverse mortgage program, the Home Equity Conversion Mortgage, because many seniors were failing to make their property tax and homeowner’s insurance payments, resulting in foreclosure.

“Unfortunately, what you hear in the papers is that a person lost a house due to reverse mortgage, which is untrue,” said Mr. Bailey, owner of The Mortgage Outlet in Sayville.

Reverse mortgages allow people age 62 and older to tap into their home equity—likely their largest asset—without having to make any payments or give up their title, Mr. Bailey said. Instead, the bank pays the borrowers, though they’re still responsible for paying taxes and insurance.

Those who take out a reverse mortgage can draw the mortgage principal in a lump sum, receive monthly payments over a specified period of time, use it as a revolving line of credit, or as a combination of the above. The obligation to repay the loan is deferred until owner dies, the house is sold, the owner stops living on the property or if he or she breaches the provisions of the reverse mortgage (failing to maintain the property in good repair, pay property taxes, keep up insurance, etc.).

“You’re converting part of the equity of your house into hard, cold cash,” Mr. Bailey said. “People assume that once you do a reverse mortgage, the bank owns your house. That is a total lie and misconception. It’s a regular loan, and when you sell the house, whatever is owed on the property, you pay back to the bank.”

While reverse mortgages are not for everyone, the benefit to some homeowners is the option to forgo regular mortgage payments, Mr. Bailey said. Instead, if there is an outstanding mortgage, it is paid off with the proceeds from the reverse mortgage, he said.

To qualify for a reverse mortgage, the youngest borrower on the property must be 62 years or older. If not, that individual must be deeded off the property, which Mr. Bailey does not recommend. If the person on the reverse mortgage dies and the younger individual is not on the deed of property, ultimately, the property will be sold, he said.

Also, the property must be the primary residence—not a second home, a vacation home or an investment property, Mr. Bailey said.

“Every year, you’ll get a certificate in the mail to make sure you’re still living in the house,” he said. “If you go down to Florida six, seven, eight months out of the year, that’s fine. They understand you’re coming back here. But if you don’t return the certificate, you have major problems.”

Reverse mortgages aren’t granted based on income or assets, but Mr. Bailey said that come October, some banks will be qualifying homeowners based on those factors to be sure they can repay the outstanding taxes and homeowner’s insurance, given the problems other banks have encountered. Credit scores will still remain off the table, he said.

“The only thing they concern themselves about are federal debts and student loans,” he said. “The main reason for that is the federal government is giving you money. If you haven’t made payments on other loans the federal government’s given you, they’re not going to extend more credit to you.”

A basic line of reverse-mortgage credit is called an “adjustable house mortgage,” which allows homeowners to start off with a very low balance and then, as time goes by, draw on those funds as needed for future benefits, Mr. Bailey explained. The benefit is retaining greater equity in the home, as opposed to losing it as quickly as possible, which is called a “fixed-rate reverse mortgage.” This type is advantageous to those who want to take all of the money out at once in order to pay off large debts.

For instance, say a property’s reverse mortgage cap is $400,000, Mr. Bailey said. The line of credit would begin at $10,000, but a fixed rate user would have to take out the $400,000 all at once, he said.

“I’ve seen some people looking to sell their house up here in New York and move down to Florida,” he said. “They take the fixed rate amount of money out and go and buy a house for cash down in Florida while waiting to sell their property up here.”

From there, an individual can use a standard reverse mortgage—which is the original form dating back to 1987, Mr. Bailey said. There is an up-front, 2-percent cost of the appraised value of the house. It is a mortgage insurance premium guaranteeing that an individual, or heirs, will never owe more on the property than the property’s worth, he said.

“So should you pass away 30 years down the road, and you owed $800,000 on the house, and the house is only worth $400,000, [your heirs] only have to pay back the $400,000 that the property’s worth,” Mr. Bailey said. “That’s the guarantee from the FHA that none of the heirs have to worry about this. It’s a non-recourse loan. There’s no recourse on any other parties out there.”

A saver reverse mortgage does not charge the 2-percent fee, but an individual will not get the same amount of money out, Mr. Bailey explained. A standard reverse mortgage holder will generally receive between 10 and 15 percent—or $50,000 to $75,000—more, but a saver dodges the immediate, high closing cost, he said.

Before an application can be filled out, the applicant is required to sit down with a federal Housing and Urban Development (HUD) counselor, which will cost about $200, he said.

“They want to make sure you understand the product and that there’s no pressure,” he said of the HUD counselors. “They want to make sure the senior going through the process doesn’t have any sort of dementia, that they understand what’s going on. The biggest problem we’ve had in our industry is that caregivers take advantage of the senior that’s on the property itself.”

But the most important step is determining the senior’s needs for a reverse mortgage, Mr. Bailey said. Small house repairs don’t usually warrant a reverse mortgage, he said.

“I’ve talked individuals out of doing reverse mortgages if it doesn’t make sense,” he said, adding that a potential borrower needs to look at the numbers and make sure they add up. “It doesn’t make sense for someone to pay $30,000 in closing costs to get $4,000 in line of credit.”