Getting a reverse mortgage may sound like the answer to a homeowner’s financial issues. Instead of the homeowner paying the lender every month as in a conventional mortgage, in a reverse mortgage, the lender sends a monthly check to the homeowner.
But not only are reverse mortgages complicated, they are also about to get harder to secure when a new rule goes into effect later this month.
A reverse mortgage is a special type of loan for homeowners 62 and older that doesn’t require monthly mortgage payments. A reverse mortgage allows homeowners -- who have either paid off their traditional mortgage or paid it down substantially -- access to the equity they have built up in their homes and to defer payment of the loan until they die, sell or move out of the home, according to a report by the Consumer Financial Protection Bureau, an independent agency of the U.S. government.
Borrowers are still responsible for paying property taxes and homeowner’s insurance, and because there are no required mortgage payments, the interest is added to the loan balance each month, the report states. This means the rising loan balance could eventually grow to exceed the value of the home, but the borrower -- or the borrower’s estate -- is generally not required to repay any loan balance in excess of the value of the home.
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Kelvin Collins, president and CEO of the Better Business Bureau of Central Georgia and the Central Savannah River Area, said his office gets a number of callers wanting more information about reverse mortgages.
“In all of my speaking on reverse mortgages, the only people I have found that it worked for -- and they are happy with what they’ve done -- are those folks who don’t have family members they are worried about passing the property down to. They don’t want to be a burden ... so when they pass away the lender can do with it what they want.”
Complaints usually come into his office after a homeowner who got a reverse mortgage has passed away or moved into a nursing home, and the family finds out the reverse mortgage has to be paid off before they can take possession of the property, Collins said.
Homeowners should involve their heirs in the decision, he said.
“It’s better to know up front than be surprised later,” Collins said.
Most reverse mortgages are handled by large national lenders.
“It’s a line of business that a lot of community banks just don’t get into,” said Rob Braswell, president/CEO of Community Bankers Association of Georgia. “It’s more of a niche market, and there are so many regulations with traditional mortgages, many community banks have even gotten out of those.”
Macon-based State Bank & Trust Co. “has elected not to engage in the reverse mortgage market at this time due to the unique nature of these loans,” Jim Guthrie, regional president of mortgage lending, said in an email. “We will continue to evaluate the needs and opportunities associated with these loan programs from time to time.”
FHA MORTGAGES REQUIRE COUNSELING
Nicole Caldwell, a grants manager with GreenPath Inc., a nonprofit consumer credit counseling agency doing business as GreenPath Financial Wellness with an office in Macon, said most all reverse mortgages are backed by the Federal Housing Administration.
Anyone who gets a FHA reverse mortgage has to go through counseling, and Caldwell is an approved counselor by the FHA. Her office, which used to be Consumer Credit Counseling Service of Middle Georgia before it merged with GreenPath this past November, has a dedicated reverse mortgage phone line: 888-860-4167.
The reasons people want to get a reverse mortgage vary.
“Some people may want extra cash to help with day-to-day expenses, or extra cash to take a vacation, or extra cash to help their kids,” Caldwell said. “Most of them don’t really know much about reverse mortgages except what they see on TV.”
As a counselor, Caldwell doesn’t recommend a person get or not get a reverse mortgage.
“Our job as a counselor is to educate them about what it is, how much it’s going to cost them,” she said. “We would actually just review their situation and what kind of factors they might want to be considering before they decide if they want to get a reverse mortgage.”
One requirement is that the home must be the borrower’s primary residence. If the borrower is in bad health and may be moving to a nursing home in the near future, then a reverse mortgage would not be a good idea because the lender can call the loan, and it would have to be paid or the property sold to satisfy the loan.
“Some people think it’s free money, but you are actually borrowing against your home,” Caldwell said. “Even though you may not be the person who pays it back when you die, your estate will have to deal with it.”
One reason why someone might get a reverse mortgage versus a home equity loan is that the borrower doesn’t have to make monthly payments as with an equity loan, she said. For some seniors on a fixed income, that might be difficult.
On the other hand, closing costs for a reverse mortgage are “considerably higher,” Caldwell said.
A new rule by the U.S. Department of Housing and Urban Development, called the lender financial assessment rule, goes into effect April 27.
The FHA will require lenders to do a financial assessment before giving loan approval that shows the borrower is able to meet all their housing obligations, such as paying property taxes, homeowner’s insurance and maintenance.
“So the lender will review the borrower’s credit report to see they have a positive cash flow,” Caldwell said. “If not, the lender will have to establish a set-aside, and that means they put money aside out of their reverse mortgage money and use that to pay any ongoing costs.”
So if the lender has to set aside funds, it means the loan amount will be reduced.
Caldwell said the new rule is a good thing.
“I think it puts more accountability on the borrower to make sure they keep up with what they are supposed to do,” she said. “That’s why counseling is so important to make sure clients understand they need to think about the future.”
To contact writer Linda S. Morris, call 744-4223.