December 20, 2008
Reverse Mortgage Myth Busted
I received a phone call from a local real estate professional. She called in response to an ad I placed detailing how seniors can buy a home using the reverse mortgage to fund the purchase.
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 father of a friend of a friend of the realtor who told me (see the problem already?) had a reverse mortgage on his home prior to passing away. After his death the home was willed to the FOAFOAR (friend of a friend of a realtor).
Well, more money was owed to the lender, at the time of his death, than the home was worth. According to the realtor the mortgage company required repayment of the entire amount owed.
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.
Did this happen? I seriously doubt it. The reason is reverse mortgages are known as non-recourse loans. This means in the circumstance of the FOAFOAR the mortgage company cannot come after the heirs for the difference.
In the circumstance of a deficiency or negative equity the borrower or estate conduct the sale of the property as follows….
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.
Per FHA rules this net amount is what the reverse mortgage lender can get from the borrower or heirs. It can’t get the remaining balance, if one exists. It’s not a great deal for the lender. It must write off the difference as a loss.
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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