4 Reverse Mortgage Misconceptions Debunked
When people think about FHA-insured reverse mortgages, or Home Equity Conversion Mortgages (HECMs), it is not often that they think of it as a way for people to remain in their homes after retirement. In fact, they often believe opposite to be true. Reverse mortgages can be used to help seniors remain in their homes by helping them pay off the balance remaining on an existing mortgage.
Reverse mortgages have undergone several important changes over the last few years, but for the masses who still are not familiar with this product, there are still many questions. A reverse mortgage can be used to help struggling homeowners stay in their homes by paying off the remaining balance on their existing mortgage. Understanding the product and its key components is the best way to know if this product is right for you.
Misconception 1: The Bank Owns Your House
Just like a forward mortgage, a HECM is a lien on your house. You will own your house, until you choose to sell it or another maturity event occurs. Additionally, the loan amount is an amount predetermined by both your current age, the value of the home and the current interest rate.
Misconception 2: If I Don’t Make Monthly Mortgage Payments, My Heirs Will Have To
Since you do not make monthly mortgage payments on a reverse mortgage like you do on a normal, forward mortgage, people make the incorrect assumption that after the borrower dies, their heirs will have to pay back the value of the loan and all interest accrued. However, the mortgage insurance on this type of loan prevents borrowers from owing more than 95% of the fair market value of their home, no matter how much the balance on the FHA-insured reverse mortgage is. One way of repaying the loan is to sell the borrower’s home and repay the loan through the profits of the sale. Another way, and probably the most popular, is for the heirs to walk away from the borrower’s home and let the lender be responsible for selling the home and dealing with repayment. If either the lender or the heirs wind up selling the home for less than the owed amount on the loan, the federal government will step in and make up the difference, deferring responsibility from the heirs. The final, and least common way, is for the heirs to pay the value of the loan (or 95% of the home’s value) and retain the home.
Misconception 3: Reverse Mortgages Affect Social Security Payments
The fact is, a reverse mortgage payment is not considered income, so receiving payments from a lender will not alter your Social Security or Medicare benefits, because these are considered entitlement programs. However, getting an FHA-insured reverse mortgage can affect need-based benefits such as Medicaid and Supplemental Security income.
Misconception 4: Your Credit Score Can Hurt Your Ability to Get a Loan
Your credit score is not taken into account when determining your ability to receive a reverse mortgage. In fact, the only things taken into account are the age of the youngest borrower, the appraised value of the home and the current federal interest rate. You also do not have to own your house free and clear, your house just simply has to have enough equity to qualify or will have to bring additional funds to close. Your reverse mortgage loan officer will notify you if this is the case.