A reverse mortgage can be a great help to an elderly person or couple. Property that has been lived in for many years, and which has acquired equity, can be a sudden source of income. For some elderly, a reverse mortgage can be their entire retirement income, providing a steady income, and helping them pay bills. For others, it can supplement other forms of income.
Benefits and Drawbacks of Reverse Mortgages
With a normal loan, a borrower takes out money from a bank and uses it to purchase property. With a reverse mortgage, the bank pays you from the equity in your home. For example, if you have $400,000 in equity in a property, and the bank pays you $1,000 per month, at the end of the year your equity would drop to $388,000.
This makes reverse mortgages a stable source of income. The borrower gets money, instead of having to pay it back. There are a few major problems with reverse mortgages.
The first problem is that non-mortgage fees must be paid. This includes things like property taxes, any fees or fines assessed by the city on the property, and in some cases, insurance. Failing to keep these fees current can lead to a default on the loan and foreclosure.
The other problem is because the equity is decreeing on the property, you are leaving less to your beneficiaries. You are essentially using what they would inherit on the property.
Death or Incapacitation
But for many couples, the more significant problem is what happens when the spouse who borrowed the money (the spouse whose name is on the loan documents) passes away, or must relocate to a nursing home. The loan documents declare the loan in default in these cases. The property can even be put in foreclosure.
This leaves non-borrowing spouses—those married to the now deceased borrower—in a difficult situation. The survivor now faces loss of income and eviction from their own property.
To stop that from happening, HUD passed guidelines that allowed the surviving spouse to assume the terms of the mortgage. The surviving spouse would then be the one to receive payments, and would also be obligated to comply with the terms of the reverse mortgage.
The problem is that to get that assumption, the surviving spouse had to pay fees that HUD required, or dig up paperwork that the surviving spouse often did not have. Worse, there were time restrictions for making payments and getting the information to HUD.
In a new policy, HUD has announced that many of these time restrictions would be eliminated, providing more time for grieving spouses to get HUD information it needs. Some requirements, such as the need to get proof of title, have been eliminated completely. Mortgage servicers also have to make a diligent effort to determine who and where non borrowing spouses are located, so that they can be contacted immediately after the death or incapacity of a spouse to see if they want to and whether they can qualify for an assignment.
Get help at every stage of buying or selling a home, or even if you want legal help with a refinance. Contact our real estate attorneys at The Law Office of Agnes Rybar LLC to help you with your real estate closing.