Here's how to avoid reverse mortgage lending traps: Via ForbesAdvisor
That’s partly why the government has recently cited some reverse mortgage lenders for deceptive and misleading lending practices, which have led to senior homeowners losing their homes in some cases. For instance, last month, the Consumer Financial Protection Bureau cited American Advisors Group for allegedly misleading people with “inflated and deceptive home estimates to lure consumers into taking out reverse mortgages.
” The CFPB, responsible for overseeing consumer financial protection laws, declined to comment on the consent order. In a statement, AAG said, “The matter involves direct mail pieces that included third-party home value estimates. AAG cooperated fully in this investigation, has already begun to take steps to address CFPB’s concerns, and is pleased to resolve the matter.” This is the second time the CFPB accused AAG of deceptive advertising. In late 2016, the agency cited AAG and two other reverse mortgage lenders—Reverse Mortgage Solutions and Aegean Financial—in a consent order for a wide variety of misleading claims. And earlier this year, the CFPB reached a consent order with Nationwide Equities Corporation for sending deceptive reverse mortgage mailers to hundreds of thousands of older borrowers. First, let’s break down what a reverse mortgage is and how it works to help you determine whether it’s a good, or bad, fit for you.allow homeowners who are 62 years and older to convert a portion of their home equity—the current home’s value minus the remaining mortgage balance—into cash in the form of a loan, or a line of credit. Typically, homeowners will receive their funds monthly and are not obligated to repay the loan as long as they live in the house, or until you or your heirs sell the house. This is one way of tapping equity without selling the home. Once the borrower moves out or is deceased, the loan must be repaid. Sometimes, the property has to be sold in order for the loan to be repaid. This also means the heir to your home will have to do it. However, there are other ways to repay what’s owed, including refinancing the reverse mortgage into a traditional mortgage and repaying the amount in installments. The most popular reverse mortgage is called the Home Equity Conversion Mortgage , which is the only government-insured reverse mortgage available. Borrowers can access HECMs through lenders approved by the Federal Housing Administration As home prices and equity have soared in the past year overall, homeowners 62 years and older also saw a bump in their home equity as well, up 3.4% to $9 trillion in the first quarter 2021 from the previous quarter. And as people use reverse mortgages to fund their retirement, the number of reverse mortgages has grown the past few years. There were 49,207 HECM reverse mortgages issued for the fiscal year ended Sept. 30. That volume surpassed all of the HECM loans in 2020, which hit 41,859. In 2019, the total number of HECM loans was just 31,274.Although accessing home equity without having to repay it can be tempting, there are risks . This is especially true if you don’t understand the terms of your loan or your lender is misleading.Reverse mortgage terms differ among lenders and product types, so it’s important for borrowers to understand the rules that govern their specific mortgage. Among the most pronounced drawbacks of a reverse mortgage are the rules around the homeowner’s tenure and when the loan has to be paid back. For example, lenders require the borrower to live in the home in order to postpone repayment. However, if there’s a medical emergency and the borrower has to stay in a hospital or facility for an extended period of time, some lenders will require the owed amount to be paid in full. Otherwise, they can seize the property. “I tell my clients if you have to go to an assisted living facility for 15 months, tell your kids to bring you home for a night so you don’t break that rule,” says Michael Harrell, owner of the Michael Harrell Group, a reverse mortgage company in Dallas. Another common landmine for seniors is not paying property taxes. This can also result in the property being seized. Some seniors can be confused about what exactly they have to pay, especially when they’re signing a 200-page document, says Ingrid Evans, an attorney who has represented seniors in elder abuse cases. Evans says that borrowers who are married should also make sure their partner is protected. She says there have been cases where homes have been seized by reverse mortgage lenders when a spouse dies and the living spouse is not on the title of the house.There are many paths that might lead to homeowners needing a reverse mortgage: from wanting to access their home equity in case of an emergency or being in a financial pinch if they’re depending on a fixed retirement income. Whatever the case, Harrell says that all good candidates for reverse mortgages have one thing in common: they have a plan for the loan and they’re financially responsible. In other words, they won’t get into a reverse mortgage only to spend all their equity on vacations and other nonessential expenses. “Reverse mortgages are sweet loans, but it’s definitely not for someone who is going to blow through the equity,” Harrell says. “I tell all my clients not to touch the money, to leave this money in the line of credit because their expenses are not fixed—but their income is. That money should be used in emergency situations.” For example, homeowners who had home equity lines of credit during the financial crisis might recall that banks were freezing lines of credit at the time. This could be worrisome for folks who need that money available in case of emergencies or unexpected expenses. The benefit of HECMs is that the lender can’t reduce or freeze your line of credit. Finally, not having to pay the monthly mortgage payment can be a huge relief for homeowners on a fixed income.Reverse mortgage applicants must also understand the high closing costs and ongoing fees that often come with the loan. However, not all lenders charge the same fees. There are many lenders that do not charge ongoing service fees. Additionally, some lenders will reduce their origination fee, so negotiating is worthwhile.Upfront mortgage insurance premium
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