With baby boomers now well into their retirement years and many of them with elderly parents who are ready to move into a nursing home or assisted living facility, the likelihood of you listing or selling a home with a reverse mortgage is pretty good. About 700,000 of the loans have been made in the last decade or so, up from much smaller numbers before that, so you can see that the mortgages, which allow older home owners to extract the equity from their house, are a growing part of the residential real estate landscape. So, what do you need to know about them?
The biggest concern is that borrower continue to maintain the house. The lion’s share of reverse mortgages are federally backed by FHA, so there are minimum standards the borrowers have to meet to stay in good standing on their loan. For example, they have to continue to pay their utilities and property taxes, but they also have to keep the house in good repair. If they don’t. that could be grounds for the lender to foreclose on their loan.
But you could see a situation in which the elderly household has received all the proceeds of their reverse mortgage in a single lump sum. For lenders who offer fixed-rate reverse mortgages, the proceeds of the loan are provided in a lump sum. That’s so the lender doesn’t have to manage the interest-rate risk. For households in this situation, if they spend their money down quickly and are left with little income afterward with which to maintain their house, then when it eventually goes on the market it could be in poor shape. That will effect its potential on the market.
If the borrowers move out of the house to go into, say, an assisted living facility, the borrowers’ children might take over custody of the house and put it up for sale. Thus, if you’re listing or selling the house, you won’t be working with the owners but, in a sense, their surrogates. If the children grew up in the house they’ll be as familiar with the house as their parents, although if they haven’t lived in it for many years, they’ll have to get up to speed on its condition. At the same time, they’ll be trying to get a handle on their parents’ financial situation, which might not be entirely clear to them. Meanwhile, they might not have a full understanding of the reverse mortgage. Exactly how much equity is remaining in the house? That might not be as clear-cut as it seems, because the lender is charging interest against the loan every month. If the house sells for less than the remaining equity, are the children suddenly responsible for the difference? (No, that’s what the FHA insurance is for.) Only if the children switch gears and decide to keep the house do they have to come up with the balance if the equity in the home is insufficient to satisfy the mortgage.
In short, you can expect all sorts of perplexities surrounding a transaction in which children are selling the house and trying to sort things out themselves.
It’s with these matters in mind that we asked a reverse mortage lender and two executives of the National Reverse Mortgage Lenders Association to participate in a webinar with REALTOR® Magazine. They’ll be talking about the mechanics of paying off a reverse mortgage. And they’ll also touch on a program called HECM for Purchase, which is an FHA-insured reverse mortgage that can be used to by a house. HECM stands for home equity conversion mortgage, FHA’s name for a reverse mortgage.
The webinar is Thursday, June 28, at 3 p.m. Eastern Time. Register now for the event, called Reverse Mortgage Payoff Mechanics and HECM Purchases.
Speakers are Jerry Tomlin of Atlantic Bay Mortgage Group in Virginia Beach, Va., and Peter Bell and Steven Irwin of the National Reverse Mortgage Lenders Association.