Reverse mortgages are some of the most misunderstood financial products available. The competition in the lucrative retirement market has sometimes caused the providers of other types of retirement products and investments to misrepresent reverse mortgages. Many financial pundits also caution seniors away from entering into a reverse mortgage.
Below are some of the common myths associated with reverse mortgage and the truth about how these products actually work.
Myth: A reverse mortgage means a lender now owns my home.
One of the biggest misconceptions is that once you sign the mortgage contract, you are turning over ownership to the lender. This myth would have you believe that you simply sold your home to a lender and that company is letting you live in it, with interest.
In this regard, a reverse mortgage is no different than a regular mortgage. You still own your home and maintain all rights as the property owner. That also means you remain responsible for property taxes, insurance, maintenance, homeowner association dues, utilities and other expenses.
Myth: The lender can force me out of my home.
This is related to the first myth in that it assumes the lender obtains property rights. Many people believe the lender can sell the property at any time and evict the homeowner. But this is not accurate. Homeowners can continue to live in their houses for as long as they wish. The only requirements are that taxes and insurance are paid, and the property is well maintained.
Myth: My reverse mortgage debt will transfer to my heirs or will be paid for by my estate.
The truth is that reverse mortgages are non-recourse loans. This means none of your other assets are at risk. A reverse mortgage places a lien on your home, and it is the only asset a lender may use to pay back the loan. All other assets are off limits, and your heirs or your estate will not be forced to pay off the debt. In fact, these loans are set up so that you will never owe more than the value of your home when the loan is paid.
Myth: Only homeowners with no mortgage balance can take out a reverse mortgage.
What is true is that you cannot maintain a conventional mortgage and a reverse mortgage simultaneously. But having principal remaining on your conventional mortgage will not prevent you from applying for a reverse mortgage. What will happen is that you will be required to use some of the reverse mortgage proceeds to pay the remaining balance on the conventional mortgage. Many seniors do this as a way of eliminating a large monthly payment, which helps their retirement income stretch further.
Myth: I need a good credit report to obtain a reverse mortgage.
This is a false assumption people believe since a reverse mortgage is technically a loan. However, since there are no monthly payments, a person’s credit has nothing to do with his or her ability to repay the loan. The loan will be repaid by the proceeds of selling the house once the homeowner has vacated it. For some reverse mortgages, you will need to have financial counseling, which explains this type of arrangement as well as other options. You may also be required to have a financial assessment, which ensures you can pay property taxes, insurance and other expenses related to maintaining home ownership.
Myth: I have to pay income taxes on reverse mortgage funds.
You will not be taxed on any of the funds provided by a reverse mortgage. This is considered a loan that you intend to repay, and for tax purposes, it is treated the same as other types of loans.
Myth: Reverse mortgages are government benefits.
Reverse mortgages are not a government benefit. The loans are made by private lenders. The U.S. Department of Housing and Urban Development has established the rules for federally insured reverse mortgage and insures them against default. But you are not receiving a government loan or benefit.
Myth: Only low-income seniors qualify for the reverse mortgage.
There are no income requirements to obtaining a reverse mortgage. The only requirements are that all signees on the loan be age 62 or older, that the home being used be the borrower’s primary residence, and that the property meets FHA standards.