I got a call from a 65 year old woman, Ann, inquiring about a reverse mortgage stating she owed over $20,000 in back taxes and was facing tax forfeiture in just a few short months. Ann had no other debt and her home was worth more than $300,000. Based on her situation, she wouldn’t qualify for a conventional or “forward” mortgage. Someone had suggested the reverse mortgage a solution to her situation.
I explained that a reverse mortgage is a mortgage with special terms for those 62 and older. As an FHA insured loan HUD oversees the Home Equity Conversion Mortgage or HECM providing protections like no other financial option. With the HECM there are no income or credit score qualifications *(see updated information below) and no monthly payment requirements. The home would remain hers with the title in her name. And the reverse mortgage funds could pay off her tax debt and she could leave the remaining funds in a Line of Credit with a growth rate for future needs including paying her property taxes going forward. Or if she chose she could receive monthly payments, a lump sum or a combination of these options.
I went on to explain that the loan would be due and payable when the home was no longer her primary residence or on her 150th birthday. If at the time the loan was due and payable the home was sold for more than the loan balance she or her estate would receive the difference in funds. Or if the loan balance was higher than what the home could be sold for, as a non-recourse loan she or her estate would not have to come up with the difference, the FHA Mortgage Insurance covers the difference.
She of course wanted to think about it. During a follow-up conversation she said she had talked with her brother who told her she shouldn’t do the reverse mortgage because they are bad. When I inquired why he thought they were bad, she didn’t have a response. I asked if her brother could come up with the funds to pay her back taxes… “Maybe.”
I reiterated the details and benefits of the reverse mortgage emphasizing that the funds could pay the back taxes and she would have funds in a line of credit for her future taxes and that she wouldn’t have to make monthly mortgage payments. (Borrowers are still responsible for paying property taxes and property insurance.) I also offered to meet with her and her brother to educate them on the details and facts of the reverse mortgage.
A couple weeks later during another follow-up conversation, she was still hesitant because of her brother’s advice. I again inquired if her brother could come up with the funds for her back taxes… “No, he doesn’t have that kind of money!” With an inquiry if she had another way of coming up with the funds for the back taxes… no she didn’t. And her brother didn’t want to meet to learn the details and facts of the reverse mortgage. I explained that if the county foreclosed on her home she would be losing around $280,000 in equity.
Time was getting down to the wire in order for us to have time to process the reverse mortgage so I did one more follow-up call. She said her brother warned her not to do the reverse mortgage because they were “bad” and expensive. I reviewed the costs explaining they compare to a conventional mortgage other than the FHA mortgage insurance. And even beyond that the benefit of the reverse mortgage outweighed the costs… saving her home from foreclosure and the loss of around $280,000 in equity.**
Listening to her brother who did not know, and was unwilling to learn the details and facts of the reverse mortgage, Ann had lost her home and a lot of equity. With all the benefits and protections, the reverse mortgage would have made a huge difference in the quality of her life.
It was sad and unfortunate that she listened to the unwise advice of “Don’t do a reverse mortgage, they are bad.”
Next time you hear “Reverse mortgages are bad” or “Don’t do a reverse mortgage” or “One should wait until their 70’s to do a reverse mortgage” remember this story and how the reverse mortgage could have made a difference.
*In April 2015 a Financial Assessment was implemented to determine borrower’s ability and willingness to pay property taxes and insurance into the future. This safeguard help make the reverse mortgage more sustainable so borrowers can remain in their home.
**Property taxes are levied and collected by counties. When property taxes are past due after a certain amount of time (redemption period) they go into tax forfeiture. In most counties across the US, to get their money quickly, the county issues a tax lien certificate or a tax deed and will conduct a sale where the tax lien certificate or tax deed are sold at auction often for only the taxes, penalties and interest due. The winning bidder receives a legal claim to the tax debt or tax lien certificate. The property owner has the opportunity to pay off the debt and reclaim the property. If the owner does not pay back the certificate then the investor often gets the entire property for only the taxes, penalties and interest due.
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