The purpose of a reverse mortgage is to allow seniors who have homes with substantial equity to pull the equity out of their home and still be able to reside in the home for the rest of their lifetime without making mortgage payments. The difference between a reverse mortgage and a traditional conventional mortgage is the individual taking out the loan under a reverse mortgage does not have to make monthly mortgage payments. The lender only gets paid when the mortgagor dies, or in the event of the sale of the home prior to the mortgagor’s death.
No Personal Obligation to Pay a Reverse Mortgage
There is no personal obligation on the mortgagor to make payments with a reverse mortgage like there is in a traditional mortgage. The only method the financial institution has to collect under a reverse mortgage is from the sale of the home. The lender is therefore exposed to not being capable of having its loan repaid should the market conditions reduce the value of the home or the home be in poor condition. However, the lender can obtain insurance from HUD to protect it from the risk of the home not being worth the amount of the loan plus interest.
Underwriting Reverse Mortgages
The loans are underwritten by financial institutions based on a number of factors. The older the mortgagor is, the more money can be obtained in the mortgage. This takes into consideration the fact that the older the mortgagor is, the smaller his or her life expectancy will be. The shorter life expectancy allows the loan to become due and payable earlier in time.
In the event there are co-mortgagors on the loan, the loan is not called due until the second of the two mortgagors dies.
Problems with Reverse Mortgages
In recent years, when homes were owned by husbands and wives and one of the spouses was older than the other, the banks would convince the younger spouse to deed his or her share of the property to the older spouse. This action was taken so the underwriter would allow a larger amount of money to be borrowed in the mortgage based on the shorter life expectancy of the older spouse. The younger spouses were assured in the event the older spouse dies, they would be allowed to continue to reside in the house. Unfortunately, that is not what happened! When the older spouse, the mortgagor, died the surviving spouse was notified by the financial institutions the reverse mortgage was due and payable because the surviving spouse was not a party to the mortgage loan. Since the surviving spouse was also a senior, and had limited cash flow in most situations, he or she was unable to make the mortgage payments and therefore the house would end up in foreclosure.
HUD has recently dealt with this issue.
New HUD Policy
With regard to all reverse mortgages that are given by financial institutions after August 4, 2014, the new rule requires the non-borrowing spouse who had been married to the borrowing spouse (mortgagor), at the time of the closing, will be afforded protection by this rule and the financial institutions will not be permitted to bring foreclosure lawsuits against the surviving spouse or request payment of the mortgage upon the death of the spouse who was on the mortgage. The financial institution will not be entitled to bring a foreclosure proceeding until the surviving spouse also dies. It should be noted this rule only applies to parties who were actually married at the time the mortgage was taken out. In the event a reverse mortgage is taken out and then the mortgagor marries, that surviving spouse would not be included under this new rule and would need to either pay off the mortgage or have the house subject to being foreclosed upon.
