Biggest Reverse Mortgage

Mistakes

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By: Barbara Eisner Bayer  

Barbara Eisner Bayer has written about mortgages and personal finance for the past 15 years for Motley Fool, Daily Plan-It, and Nurse Village, and is the former Managing Editor of Mortgageloan.com and Credit-land.com. She splits time between a beachfront condo and a mountain retreat, which leaves her with double the pleasure and double the headaches of homeownership.

Published: October 1, 2009

Before you take out a reverse mortgage on your home, make sure you’re not committing one of these common but costly mistakes.

Your home is your castle. As such, you want to remain in it as long as possible. That’s why it makes sense for house-rich seniors to explore all avenues of tapping the equity they’ve built up. One of those avenues is a reverse mortgage.

It’s only available to homeowners 62 or older, there are no monthly payments, and the upfront costs are significantly higher than for conventional mortgages, home equity loans, and home equity lines of credit (HELOCs). The stakes can be higher too. Leave your home soon after signing the paperwork on a reverse mortgage and thousands of dollars go down the drain.

Mistake #1: Falling for reverse mortgage scams

The popularity of reverse mortgages has exploded over the past decade. About 112,000 loans insured by the U.S. Department of Housing and Urban Development were originated in 2008, a 1,300% increase from 1999. The proliferation of reverse mortgages has made them ripe for exploitation, warns the FBI. A con artist may assist you in acquiring a reverse mortgage, but for a huge fee that, in some cases, may be as high as the loan amount itself. Or he may funnel proceeds into unauthorized or inappropriate investments. Other scams involve fake loans or identity theft.

Victims of reverse mortgage scams are often targeted at investment seminars or via advertisements. Be vigilant. If you want to explore a reverse mortgage, contact a lender approved by the Federal Housing Administration, part of HUD. These lenders offer what’s called a home equity conversion mortgage, or HECM for short, which is insured by the FHA. As a further safeguard, at least one hour of third-party counseling is required before you can take out a HECM.

Mistake #2: Overlooking asset ramifications

Some aging homeowners avoid applying for a reverse mortgage because they’re afraid it will have a negative impact on Social Security or Medicare benefits. That’s not the case. Social Security is based on your work history. Medicare is the federal government’s health insurance program for the elderly. A reverse mortgage is considered a “loan” rather than “income,” and as such it shouldn’t affect benefits. It’s a good idea, though, to contact the Social Security Administration about your specific circumstances.

However, a reverse mortgage could affect benefits from Supplemental Security Income and Medicaid, government assistance programs aimed at low-income and disabled individuals, including the elderly. Both programs have income and asset restrictions. In general, the trick is spending any payout from a reverse mortgage in the month that it’s received. At the end of each month, you’re not allowed to be over your Medicaid and SSI asset limit ($2,000 for singles, $3,000 for couples). If you are, your eligibility may be jeopardized. Consult your SSI administrator, a financial adviser, or an eldercare specialist.

Mistake #3: Counting on your condo

Condominium dwellers seem to have the best of both worlds: Homeownership without the burden of mowing the lawn, painting the exterior, patching the roof, and so on. But when it comes to a reverse mortgage, some condo owners may find themselves ineligible. The FHA has tighter restrictions on condos than it does on traditional single-family homes. As a result, an otherwise well-qualified HECM applicant who owns a condo could be approved initially, only to be turned away later because the condo development doesn’t meet FHA standards.

The rules require that condos have significant reserve funds. What’s more, if a high number of condo owners are delinquent on their association fees, the entire condo development itself will be disqualified regardless of any individual’s financial state. The FHA also restricts the number of investor-owned units, and has toughened insurance requirements. In senior-rich areas like South Florida that are still recovering from hurricane damage, many condominiums don’t meet these requirements. That means some condo owners will be forced to find another source of funds.

Mistake #4:  Ignoring the alternatives

Because a reverse mortgage is so expensive, it should be considered as a last resort. Origination fees for a HECM can go as high $6,000. (The cap is $2,500 for homes valued at less than $125,000.) Then there are third-party closing costs including surveys, inspections, appraisal, title insurance, recording fees, and so on. There’s also an upfront mortgage insurance premium as well as monthly premium payments. Don’t forget your HECM lender may also charge a monthly service fee of up to $35. While all of these costs can be rolled into the reverse mortgage, the end result is less cash in your pocket and a bigger debt for your heirs.

That’s why it’s critical to consider alternatives such as a HELOC, a personal loan, or perhaps even lifestyle changes like part-time work or roommates. FHA-approved counselors are supposed to discuss alternatives with homeowners seeking HECMs, but when the Government Accountability Office went undercover to find out if counselors were fulfilling this requirement, it discovered many weren’t. Seven out of the 15 counselors the GAO met with covertly didn’t discuss alternatives to reverse mortgages.

Barbara Eisner Bayer has written about mortgages and personal finance for the past 15 years for Motley Fool, Daily Plan-It, and Nurse Village, and is the former Managing Editor of Mortgageloan.com and Credit-land.com. She splits time between a beachfront condo and a mountain retreat, which leaves her with double the pleasure and double the headaches of homeownership.