Reversed Mortgage Pitfalls and How You Can Avoid Them

When many people hear about a reverse mortgage and what it entails, a lot of times it really sounds too good to be true. So one of the first questions they begin to think about is, “What are the some of the reverse mortgage pitfalls I need to know about?”

In other words they want to know what the downside of obtaining a reverse mortgage might be.

What might be the disadvantage is of obtaining a reverse mortgage?

Although I wouldn’t necessarily call it a disadvantage or even a pitfall of a reverse mortgage, there are some disadvantages to being too young in order to get a reverse mortgage. To qualify for a reverse mortgage you must be at least 62 years of age or older. So that would be a disadvantage of someone looking to get a reverse mortgage who is not old enough to qualify.

Another problem one might come across or consider to be a pitfall could be that of the fact that you cannot rent a home and receive a reverse mortgage loan. You must live in the home for the entire time of the mortgage. That doesn’t mean you cannot from time to time live somewhere else.

However, if the borrower has not lived in the home for 12 consecutive months, the loan would become due. That could create a huge problem. So it is important to know from the very beginning that if you are going to get a reverse mortgage on your home, you will need to live in a home until either the day you no longer are living, or you have decided to pay off the loan by selling your home.

Another thing that people who want to get a reverse mortgage on their home each understand is that they are still responsible for paying all property taxes and hazard insurance. If the borrower fails to pay their taxes or discontinues to pay for homeowners insurance, then the loan will become due.

Although no one likes to think about death the fact is the reverse mortgage continues until the death of the borrower. If there is more than one borrower it would be due upon the death of this last borrower.

Another concern many people have when considering a reverse mortgage is what would happen if the value of the home suddenly drop below the amount that was owed on the home. A reverse mortgage loan is sometimes referred to a non-recourse loan. What exactly is a non-recourse loan? This type of loan is a home loan that a lender can only seek the repayment of the value of the home.

Let’s pretend someone purchases a home and it is valued at $400,000. At the age of 62 they decide to get a reverse mortgage and qualify for $300,000. Now let’s pretend that a few months after receiving the loan in full the value of their home drops down to $275,000 and for some reason they need to sell their home.

It would be a serious reverse mortgage pitfall or disadvantage if the homeowners had to come up with the extra $25,000 beyond what the home was worth on the market if it was sold. However, the wonderful thing about a reverse mortgage is that the bank can not pursue the homeowners for anything more than the final sale of the home. Therefore if the bank loan $300,000 but the house only sold for $275,000 the bank could not go after the owner or borrowers for the $25,000 lost due to the value of the home dropping below the value of the loan.

So you will never go more than the home is worth. This is very important to note because if the borrower has aired to their estate who do not wish to keep the home they will not be required to pay more than the home is worth upon loan maturity.

However, this could also be considered a pitfall or a disadvantage in the sense that let’s say your children inherit a home where the value is less than the actual loan amount, and they wanted to keep the home, they would be responsible for the full amount owed on the home.

Because a reverse mortgage never has to be paid during the life of the borrowers, that could mean a lot of money to be repaid. From everything that I have read is the only pitfall or disadvantage regarding a reverse mortgage that I could think of.

Of course the best way to really understand all the advantages and disadvantages when it comes to your personal circumstances is of course to talk to a professional qualified reverse mortgage counselor. It is not expensive to talk to reverse mortgage counselor. Many times it is free depending on where you live. And at most you should never have to pay more than $75-$100 for a consultation.

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