When it comes to the reverse mortgage, there tends to be some common misconceptions. The truth is, reverse mortgages can be a valuable financial option for many people who are in retirement or looking to retire. When people think about a reverse mortgage, they often don’t think of the loan as a way to remain in their homes during retirement. In fact, in many cases, they often believe the opposite to be true.
HECM Misconception: The Lender Owns the Home
The most common misconception is that the borrower sells the home to the lender and is no longer on title to the home. This is not so. Lenders like One Reverse Mortgage are in the business of helping people live in the homes they love, they are not in the business of owning their homes. The borrower remains on title of the home throughout the duration of the loan – until they vacate the home or pass away.
HECM Misconception: Heirs are Left High and Dry
Another common misconception is that the heirs will not inherit the home. Actually, heirs have some options. Here’s how it works. Let’s say someone takes out a reverse mortgage and, after five years, passes away with $70,000 due on the loan. The home goes to the willed estate as usual and the estate decides what to do with the home and balance due. Let’s say the estate sells the home for $300,000. In this case the lender gets the $70,000 owed and the estate inherits the remaining $230,000. If the heirs wish to keep the home, they can purchase it and pay only $70,000. Already, they will have $230,000 equity in the home.
HECM Misconception: Proceeds are Taxed
Some of the worry around getting a reverse mortgage is that the proceeds that borrowers receive from the program are taxed. This also is not true. However, homeowners are still responsible for property taxes. It’s advised to seek a tax advisor for more information.
HECM Misconception: Borrowers are Forced Out
Finally, one of the biggest misconceptions of a reverse mortgage is that homeowners can be forced out of their home during the life of the loan. The HECM program was designed specifically for seniors to be able to live in their homes for the remainder of their lives – or as long as they wish to live in the home. By way of offering flexible payment options for borrowers, the reverse mortgage can be a flexible loan to have. All that is asked of the borrowers is that they continue to pay their homeowners insurance, required property taxes, and maintain the home according to the standards of the Federal Housing Administration. Only if there is failure to meet those set requirements, then a loan may default, resulting in foreclosure. To help prevent this from happening, HUD has implemented a number of measures to ensure clients are successful with their loans. The required counseling session early in the reverse mortgage process helps clients understand their options and their responsibilities as borrowers. The financial assessment reviews credit history to ensure the client is willing and able to fulfill the financial obligations of their loan. If they are not able to do this, they will either have some of their proceeds put into a Life Expectancy Set Aside to pay property taxes and insurance or they will simply not qualify for the loan.