December 20, 2008
Folklore and the Reverse Mortgage
A realtor called me the other day. I was marketing the new reverse mortgage purchase money available after the first of the year.
She was sincerely interested in the program, but first decided to vent with an amazing story of pain, agony and just downright horror relating to the reverse mortgage.
First things first… The rule is you must complete this article. You can’t just read what happened and then stop before I can explain. We can’t have you running about telling everyone else how horrible the reverse mortgage is.
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)
As it turned out the home had negative equity. The loan balance exceeded the value of the home. It’s a rare thing, but can happen in reverse mortgage world. At death the mortgage company required repayment of the entire loan.
After selling the property, the FOAFOAR still had to come up with an additional $40,000 to repay the bank the difference.
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 a deficiency exists at the time of repayment of the reverse mortgage, either the borrower or heirs go through the same drill.
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.
HUD makes the rules and the lender is entitled only to these proceeds from the sale of the home. If the loan balance exceeds the net proceeds, it’s tough cookies for the lender. They have to write it off and go on their merry way.
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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