I have a long driveway at my home. Frequently, guests who are backing out in reverse drift left or right and tear up some grass.
What is it about driving in reverse that causes people to get so confused and go off track?
They often can’t figure out which way to turn the wheel to take them in the direction they want to go.
The same could be said for reverse mortgages. Lots of people don’t fully understand how this type of lending product works, and the resulting confusion can leave them with a lot of regrets.
Reverse mortgages were largely created for seniors who are cash-poor but house-rich — they have a lot of equity in their homes. The idea was to allow seniors to remain in their homes by borrowing a portion of their equity to supplement their incomes.
To qualify for a reverse mortgage, you have to be 62 or older. But unlike traditional home loan products, there is no monthly payment. The loan isn’t due until the borrower moves, sells or dies.
The overwhelming majority of borrowers get a reverse mortgage through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program.
I recently wrote about the loan product, and many readers had questions and concerns.
One wrote: “It is recommended that the prospective borrower seek the guidance of a counselor. How independent are these counselors? My late cousin had obtained a reverse mortgage to supplement her limited pension. My impression was that the ‘counselor’ essentially presented my cousin with the different options of receiving the reverse mortgage (lump sum, monthly, etc.) rather than the associated costs, requirements and risks.”
Counseling is not recommended, it’s required by the Department of Housing and Urban Development. Borrowers have to use HUD-approved housing counselors, who discuss not just how a reverse mortgage works and its eligibility requirements but the financial implications of getting this type of loan. They also are supposed to talk about alternatives. Their job is to help guide people to make their own decisions about whether the product is right for them.
Counselors are allowed to charge for reverse-mortgage counseling, but the agency must tell borrowers about the fee before charging it. Fees are typically about $125, but some agencies charge less. Agencies are also required to waive the counseling fee if a borrower can’t afford it. You can pay the fee directly to the agency or out of your loan proceeds.
Speaking of alternatives, another reader wrote: “A home equity line of credit can serve the same function as a reverse mortgage at much lower costs, and with the potential of being able to withdraw a larger percentage of equity than with a reverse mortgage. Am I missing something?”
The problem with a line of credit for cash-strapped seniors is that they may not qualify for the loan and they have to make monthly payments. The appeal of a reverse mortgage is that no monthly payment is required.
Here’s something you should keep in mind. I received a heart-wrenching note from one senior in Florida whose husband had taken out a reverse mortgage. She had signed over her rights to their home to her husband so that he could get a higher mortgage amount. She was 57 at the time. He was 62.
Some people, who married later in life, never add the spouse to the deed to a home that one spouse owned previously, said Jean Constantine-Davis, senior attorney with AARP Foundation Litigation.
“More commonly, the younger spouses are talked into quit-claiming their interest in the home by mortgage brokers to generate higher draw on equity,” Constantine-Davis said. “The couples virtually never understand that under the terms of the mortgage, when the borrowing spouse dies, the surviving spouse will be foreclosed on and evicted.”
That’s what happened to the Florida reader.
“They assured me there would be no problem in adding my name back when I turned 62,” she wrote. “They failed to tell us that would require qualifying for a refinance.”
Now they can’t afford to refinance.
“We do not have the funds and I have lived in fear of my husband preceding me in death and my being homeless,” she wrote.
It’s exactly this type of situation that has led the Washington law firm of Mehri & Skalet and the AARP Foundation Litigation to file a class-action lawsuit against HUD on behalf of widowed homeowners. There are still outstanding issues to resolve in the litigation, but in the meantime, HUD has changed the rules for newly originated mortgages.
The reader was hopeful the new rule would take away her fear.
I’m afraid it won’t. Now non-borrowers won’t have to leave their homes when their spouses die as long as they continue to reside in the home and meet other requirements. But the rule applies only to reverse mortgage contracts made on or after Aug. 4.
I’ll say it again: Do a lot of homework before getting a reverse mortgage, because you may end up stuck in a bad situation.
Readers may write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or firstname.lastname@example.org. To read previous Color of Money columns, go to postbusiness.com.