Dabbling in Reverse Mortgages

The thought of moving crosses my mind from time to time, but I love our home. It’s the perfect size, I like the neighborhood, and we have made it ours. If there was anywhere I would want to move, it would literally be a mile up the road into another neighborhood we frequently walk. It’s an older neighborhood where the homes are filled with character. Beautiful woodwork, hardwood floors and detailed molding- I just love the features of an older home, but it does come with a price. It tends to be more expensive in this neighborhood with higher taxes. Often, a lot of these homes don’t have central air and haven’t been updated over the years so that can leave a large initial investment on top of the purchase price for the buyer. So buying in this neighborhood wasn’t something we thought would happen for many years. We just can’t justify us spending that much on a home when we have so many other things going on- especially because there is nothing wrong with where we live now.

That was until a number of weeks ago when Vince and I noticed a home that was completely overgrown in this neighborhood. Our timing was perfect, we were on our walk and the foreclosure company was at this house getting pictures and whatnot. We took a walk through the property (not allowed in the house) and loved it. My initial thought was this would be a great place to flip. It has so much potential. The more we looked at it though, the more we could picture ourselves living here. Moving wasn’t a thought at this point, but at the same time if we could get it at the right price and fix it up it would be a perfect forever home.  

So we decided to move forward and at least get some more information on it. We spoke to our realtor and he couldn’t find where it was actually in foreclosure yet (which is a good thing!) and there were no back taxes on it. So the next step was to locate the owners. We had to do some investigative work, but we were able to track down their number and they were kind enough to speak with us. It was their mother’s home who had passed. According to them, their mother took out a reverse mortgage on the home and now the bank owns it. The bank was supposed to take care of the property, but instead it has been left in disarray. This was all new to us since we have never dealt with reverse mortgages, so we decided to get our lawyer involved.

Here we learned that a reverse mortgage is a loan granted to individuals 62 and older who have considerable equity in their homes (50% and more). The loan is basically taking the equity out of the home and providing the owner with either a lump sum of money, fixed monthly payments, or a line of credit. Essentially in a reverse mortgage, the house is collateral for the loan. So it sounds a lot like a line of credit. Unlike a line of credit though you don’t need to have an income or good credit to qualify, and you won’t make any loan payments while you occupy the home as your primary residence. Pretty crazy I think.

So once the owner passes, the entire loan balance becomes due and payable. Since this is a loan, each month that the balance goes unpaid, interest is tacked onto the balance. Federal regulations stipulate that the loan cannot exceed the home’s value and the borrowers, and if it does the home’s estate will not be responsible for the paying the difference between the loan’s balance.

So the question is if the owner is taking a loan out and no payments are required until death then who pays the bank back when the owner passes? Based upon what we have read and been told, if the estate or children have money they can pay the balance off. In the situation we are experiencing, the balance of the reverse mortgage is more than the estate or children have. Our lawyer also mentioned that sometimes these reverse mortgage lenders require the borrower to take out insurance to cover the debt when they pass. Unfortunately, this wasn’t the scenario for us. So the last option is the bank can sell the house and collect its money. This is where we currently are which can take some time. In the meantime, no one is maintaining the home so it will just continue to get worse. Doesn’t seem like a great process.

There are also a lot of scams associated with reverse mortgages. People take advantage of the older generation for personal gain. I read where if the house is deeded in one of the spouses name and not the other, and that individual is the only borrower of the reverse mortgage and they were to die first, then their spouse would have to come up with the money or move. It’s just a complex loan and both our laywer and this woman’s family have told us to steer clear of reverse mortgages. So it’s an unfortunate situation. Prior to this, I was clueless on reverse mortgages. It was never something I had dealt with or really seen.

So given the information we have, and what we were prepared to spend, we decided to make an offer. We made an offer to cover the debt owed on the property. Now it is just a waiting game. I’m not exactly sure how long the reverse mortgage company will take to get back to us, but I’m guessing a number of weeks. So we will see. I’m a big believer that everything happens for a reason, so if it is meant to be it will happen. Stay tuned!