Top Reverse Mortgage Mistakes to Avoid

Summary: Thinking of taking out a reverse mortgage? Take a look at the common mistakes that people make while getting these loans. You may want to avoid them.

Reverse mortgage could be one of the best retirement tools you could use to live a happy and peaceful life. Available to senior home owners of age 62 and above, reverse mortgages offer immense benefits to their borrowers.

The main benefit of reverse mortgage is that you get to live in your house until you die, without having to make any monthly payments. In fact a reverse mortgage can help you get a monthly income that can help you live comfortably in your home. Nevertheless, the upfront costs for reverse mortgages are much higher when compared to those of typical mortgages.

The main thing that you need to remember while taking out a reverse mortgage is that you will have to pay your property taxes, home insurance, and maintenance charges regularly without fail. Any missed payments can bring up the loan for repayment, which might force you to sell the home you are staying in.

Reverse mortgages are available to all senior home owners who are above 62 years of age. However, it may not be the right option for everyone. Here are a few common mistakes that people tend to make while taking out reverse mortgages. Being aware of them will help you avoid them and make life comfortable and hassle-free during your retirement.

Mistake #1: Not estimating or underestimating the reverse mortgage fees

Reverse mortgages can be very expensive when you consider their closing costs. Even the origination fee of a reverse mortgage can be double that of a typical mortgage. A lender of reverse mortgage, who might get in touch with you  might charge you the greater of $2,500 or an amount that is the sum of 2 percent of $200,000 and 1 percent of the home value exceeding this $200,000. Thankfully HECM has capped the origination fees at $6,000.  

HUD mortgage insurance is another thing you need to pay, while taking out a reverse mortgage. The amount comes up to 2 percent of your home value or the FHA lending limit, whichever is less, and has to be paid up front. And then there are also the appraisal fees, a variety of closing costs, and servicing fees that you need to pay for. The Total Annual Loan Cost Disclosure that you get from the lender should give you a clear idea of the costs you need to account for, while taking out a reverse mortgage.

Mistake #2: Removing younger borrower from title

This strategy might let you qualify for the reverse mortgage; but it sure brings about a bigger problem after you pass away. When this happens your younger spouse will have to repay the loan by selling your home, if no other arrangements have been made. A reverse mortgage is a good idea only if at least one of the borrowers is staying in the house permanently. If both of you have to move out of the house for a period of 12 months, in order to spend time in nursing home (because of poor health), the mortgage becomes payable in full. 

Mistake #3: Letting go of program eligibility

Taking out a reverse mortgage might not affect your Medicare and your social security benefits. However, it does have an impact on your supplemental security income and Medicaid benefits, especially if you opt to take it all out in a lump sum. Once you deposit the proceeds of the entire reverse mortgage into your account, you become ineligible for these program entitlements. You have to make sure you are able to spend the reverse mortgage payouts in the same month, to qualify for the Medicaid and SSI benefits. Consult your SSI administrator or financial adviser before you make any decision on taking out a reverse mortgage.

Mistake #4: Not finding out if you qualify for a reverse mortgage

Many senior homeowners apply for a reverse mortgage without finding out if they actually qualify. If you own a condo unit, there are little chances that you might qualify for a reverse mortgage. The FHA restrictions for Condos are far tighter when compared to those of single-family homes. If a majority of the condo owners in your development haven’t been paying their associate fees you might get disqualified from a reverse mortgage. The amount of reserve funds that the condos have also matter when it comes to qualifying for a reverse mortgage. You might have to take a look at the FHA requirements with regard to the number of investor-owned units and insurance.

Mistake #5: Falling Prey for Reverse mortgage scams

Many reverse mortgage lenders contact senior homeowners through reverse mortgage live transfer leads. Nevertheless, not all of these are authentic FHA-approved lenders. There are quite a few scam artists who are out there to steal your identity by posing as loan providers. If you have attended any of the investment seminars or have responded to any of the ads, there are chances that these scam artists might get in touch with you. 

It is important to verify the authenticity of a reverse mortgage lender before signing the deal. Make sure he is FHA-approved and consult a professional if need be. If a lender is assisting you in getting a reverse mortgage but charging an exorbitant fee, you may want to verify his credentials. 

When compared to the typical mortgages, reverse mortgages can be easier to qualify for. There are no credit or income requirements. Nevertheless, they are really complex in their structure. It is always better that you understand them clearly before taking any further step.