Reverse Mortgages and the Elderly
Reverse mortgages are loans in which a homeowner borrows money against the value of his or her home. These types of mortgages are designed for, and only available to, elderly homeowners, and as such, they involve unique requirements and risks. Learn more about reverse mortgages, their benefits, and what to be wary of below.
Reverse Mortgage Explained
A reverse mortgage is a loan in which the borrower obtains a lump sum, monthly payments, a line of credit, or some combination of these options. Typically, the loan becomes due after an agreed-upon period or when the borrower passes away. The amount that can be borrowed is based on the value of the borrower's home. Generally, the borrower must meet all of the following criteria:
- At least one listed homeowner is aged 62 years or older.
- The home must be the homeowner(s) primary residence.
- The home must be all or mostly paid off.
If a homeowner meets these requirements, he or she may obtain a reverse mortgage. There are three types, and each has its specific requirements and terms.
Features and Risks of Reverse Mortgages
Depending on the type of mortgage, a homeowner may be able to use the borrowed money to pay for home repairs, to pay off a traditional mortgage, to pay for medication, to ensure a consistent monthly income, to take a long-desired vacation, or perhaps even to purchase a house. For example, if a homeowner finds that his or her income from savings or Social Security payments isn't enough, a reverse mortgage may be a useful way to increase monthly income.
By their nature, reverse mortgages involve unique risks. An elderly homeowner may have diminished decision-making capacity, be unable to fully understand the terms and obligations of these loans, be unusually susceptible to deceptive advertising, or face financial pressure to pay for things such as medication. Potential borrowers should be aware that:
- Foreclosure may occur due to a failure to pay property taxes or homeowners insurance, as these obligations remain the borrower's responsibility once the loan is obtained.
- Once the last surviving homeowner passes away, the loan becomes due; the heir or estate administrator typically has only 30 days to determine whether to pay the loan, to sell the house or to allow the home to be foreclosed.
- Reverse mortgages typically involve high fees and costs, with compounding interest.
For a more detailed explanation of issues to be aware about, read Findlaw's article on the features of reverse mortgages.
Reverse mortgage regulations continue to develop. After a lawsuit was filed, the U.S. Department of Housing and Urban Development issued new rules allowing a surviving spouse of a homeowner-borrower to continue to live in the home if the homeowner-borrower passes away. This new rule applies to federally-insured reverse mortgages obtained on or after August 4, 2014. Previously, if a homeowner-borrower passed away, and his or her spouse was not listed as a borrower, the loan became due and the surviving spouse could be forced to move out.
Also effective August 4, 2014, only one spouse is required to be 62 years old or older in order for a married couple to qualify for a reverse mortgage. Previously, both spouses had to be 62 or older.
According to the Consumer Financial Protection Bureau, over half of states have enacted their own reverse mortgage laws. In Texas, for example, a 2013 proposition created new lender disclosure rules in an effort to ensure that borrowers are aware of the conditions and consequences of reverse mortgages. In California, a 2014 law requires lenders to provide potential borrowers with a self-evaluation questionnaire that also informs the borrower of the need to fully understand the mortgage terms. Another California law, enacted in 2012, precludes insurance brokers and agents from participating in reverse mortgages, unless certain stringent conditions are met.
Getting Legal Advice
Reverse mortgages are complex and can involve high fees and significant risks. It's vital for potential borrowers to be aware of their rights and their obligations under these loans. If you or someone you know may be considering a reverse mortgage, it's important to seek legal advice from an experienced real estate lawyer.