Reverse mortgage 101. Know the risks.
A reverse mortgage can be a useful tool to allow cash-strapped seniors to remain in their home. But it can be a trap for the unwary.
Reverse mortgages are home loans available to Americans age 62 or older. They allow residents to draw money or lines of credit based on the equity in their home. Borrowers do not have to pay the money back until they leave the home or die.
But some lenders have faced legal trouble for promoting the loans as risk free, when they are not.
One problem is that these mortgages are often taken out only in the name of the oldest spouse over age 62. When the borrower dies, the survivor becomes responsible for the loan, including payments for property tax, maintenance and insurance. Failure to recognize this responsibility can lead to foreclosure.
Seniors should be wary of claims that “You can’t lose your home” with a reverse mortgage. They can and do.
In lenders’ defense, an industry spokesman said the responsibilities owed under reverse mortgages are not much different than for residents who have paid off a traditional mortgage.
"If you have no mortgage and you don't pay property taxes, what happens? You lose your home," Peter Bell, president and CEO of National Reverse Mortgage Lenders Association, told Marketplace. "So that's not really the reverse mortgage at blame. That's the failure to meet a basic obligation of property ownership."
New federal rules restrict how much home equity can be tapped and raise some upfront costs for the loan.
Too Good To Be True?
In 2016, the U.S. Consumer Financial Protection Bureau fined three firms a total of $790,000 for deceptive advertising:
American Advisors Group – The top lender in the reverse mortgage industry was fined $400,000 for misleading seniors about home security under a reverse mortgage. According to the CFPB, two DVDs in an information kit included the dialogue, “Can I lose my home?” with the response, “No, you cannot lose your home.”
Reverse Mortgage Solutions – Fined $325,000 for stating that consumers with a reverse mortgage “would always retain ownership” and “can’t be forced to leave.” CFPB also found the company misled heirs into believing they would inherit the home after the loan holder’s death. Heirs can retain ownership only if they repay the reverse mortgage or 95 percent of the home’s assessed value.
Aegean Financial – Fined $65,000 for making similar claims as the others. It claimed in one ad: “If you are 62 years old or older and you own a house, we have good news for you; you qualify for a reverse mortgage from the United States Housing Department.” Reverse mortgages are commercial loans, not issued by the federal government.
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