December 20, 2008
Be Wary of Reverse Mortgage Folklore
I had the pleasure of speaking to a real estate agent yesterday. She wanted to discuss the reverse mortgage, in particular how it can be used as purchase money after January 1.
The realtor lady showed interest in the purchase program, but before getting needed answers, she decided to go into a long drawn-out story about a person wronged by a reverse mortgage company.
Now, in an effort to put the kibosh on the horrible results of a reverse mortgage going viral and thus wrecking my business, I need you to keep reading past the next few paragraphs. You might stop reading and tell your friends about this horror. And they might believe you.
The real estate agent had a friend, who had a friend, who had a father (Strange how rumours get started) who obtained a reverse mortgage on his home. The father passed away and the house willed to the FOAFOAR (which is much easier than saying Friend Of A Friend Of A Real estate agent)
It’s a bit of a rareity but the home was valued less than the mortgage amount. It can happen with drastically falling values. Naturally, when her father passed away the mortgage company called the entire note due.
To repay the reverse mortgage lender the FOAROAR sold the property and had to come out of saving an addition 40 thousand dollars to cover the deficiency.
Now, I have doubts about the validity of this story. I have doubts about any story told through a chain of three people, but look…. HUD prohibits mortgage companies from doing what the FOAROAR said it did. The term is “non-recourse”. It means a mortgage company cannot come after the borrower or heirs for a deficiency.
If there is negative equity at the time the home is to be sold, either voluntarily by the borrower or after death by the heirs, the process is the same.
The home will be sold at a fair market value. The lender knows this because it requires the borrower or family to hire a licensed realtor to list and sell the home. When the house finally transfers to the new owner, the lender is repaid the price minus closing costs to sell the home.
This net figure is the maximum amount the bank has a right to extract, and can’t come back after the borrower or borrower’s heirs for the remaining balance of the loan. The bank eats the difference, and is reimbursed by FHA mortgage insurance.
This is one of several myths flying about regarding the reverse mortgage. The reverse mortgage may be a strong tool for you to utilize, or a poor choice given your circumstance. But don’t assume you know until you really know. Call a professional or two first.
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