We all worry about the ones we love. That's just part of being a family. Reverse mortgages are all but worry-free, since they were carefully crafted by lenders and government agencies to consider all the little things that could go wrong and nip them in the bud before they can sprout. There are several myths and concerns that many adult children have for their parents when considering a reverse mortgage. We spoke to several adult children whose parents were considering reverse mortgages or who were looking into the loans for their parents, and asked them to share their biggest concerns. We're going to attempt to set your mind at ease here, with the most common fears answered in the following list:
^ Your parents won't be forced to live in an unsafe home. The idea of your parents living in some sort of condemned structure actually couldn't be further from the truth. Because of Federal Housing Administration (FHA) laws, your parents' home must be safe and sound. During the appraisal, your parents find out everything that may potentially be wrong with their home. Every reverse mortgage requires an appraisal, so there's no way to skip this step. What's more, Fannie Mae won't even lend to people whose home needs more than 15 percent of repairs. In any reverse mortgage, all repairs have to be made prior to the loan closing, or the lender withholds a reasonable amount of the loan total so that your parents have that money in reserve to make repairs after loan closing. No lender wants to invest in an unsafe house; your parent will not be left in a dilapidated shack. You can help by making sure that your parents complete the mandated repairs within a year of closing the loan.
i The bank will never take your parents' home. Throughout this book we repeat one of the most important facets of the reverse mortgage: The bank/lender has no authority to take your parents' home away. None. Nada. Zilch. Zip. The home is your parents' and no one else's. This myth stems from the fact that many people choose to sell their homes in order to pay back the loan when they move out (or their heirs sell it when parents die). Lenders can demand loan payment in full if your parents fail to hold up their end of the bargain (paying their property taxes and keeping up home maintenance), but this happens so rarely, it's almost not worth mentioning. Even so, they still can't seize the home. Your parents are secure in their home, which remains theirs until they want to sell.
i The money won't run out. If your parents choose a monthly tenured payment — one which continues at the same sum each month for the life of the loan — their lender must continue to keep paying them indefinitely. If they hold the loan for 3 years, 7 years, or 20 years, your parents are entitled to receive payments until they move or upon their death. However, if your parents choose a term loan, line of credit, or a lump sum and use it all up, that will be the end of the line. They need to consider carefully how long they plan to stay in their home and how much money they need. You can help with this by offering to go over their current budget and/or bank transactions to see how their money is being spent, and whether or not a reverse mortgage could feasibly cover their expenses. See Chapter 2 for even more information on assessing your parents' budget as well as their needs and wants.
i They won't have to make up the difference if their home depreciates in value or the loan value exceeds the value of the home. One of the greatest benefits of this loan is that your parents never ever owe more than their home is worth. If the loan balance comes to $180,000 at the end of a 17-year loan and their home is only worth $150,000, $150,000 is how much they owe. It's a wonderful system, ensuring no out-of-pocket expenses and no fear that they may have to sell any of their treasured items or live in a refrigerator box under the freeway because the loan tapped them out.
i The lenders can't touch your inheritance. As we say in the above bullet, your parents only owe as much as their home is worth. That means that unless your parents spend it before it gets to you, your liquid inheritance is safe. They may sell the home to pay off the loan, or they may choose to leave you the home and use other savings and investments to settle loan costs. Either way, you won't be left empty-handed through any fault of the lenders. If your parents blow it all on little porcelain figurines, well, that's another story.
1 Your parents won't be cheated out of a fair loan value if lending limits rise after their loan closes. In Chapters 5, 6, and 7 we discuss the limits of each loan product — amounts that the loans simply will not exceed, no matter the actual value of the home. For example, in 2004, the upper limit for a Fannie Mae loan was $333,700. In 2005 that figure changed to $359,650. It's likely that these limits will continue to increase as the years go by. Seniors who have obtained a reverse mortgage may be able to refinance it in the future and obtain additional funds as a result of those increased lending limits.
1 They will be protected if their home is destroyed. In 2004, Florida saw devastation in the wake of hurricane after hurricane. Because parts of Florida are considered a sort of Mecca for seniors, home destruction is a very common concern. Reverse mortgages require you to keep up homeowner's insurance; if the destructive force is covered under insurance, the home will be rebuilt and your parent can continue to live there and receive reverse mortgage payments as per usual. If the home was ruined by a force not covered by insurance, disaster relief funds (such as those from the Federal Emergency Management Agency) will often help to repair or rebuild the home. If all else fails and there is no way to save the home, lenders will consider the loan due, since the senior is no longer living in the home. But! While there may not be a home to sell to pay off the debt, there is property to cash in on. In many areas, the greatest value is in the land, not the home itself. If selling the land is not enough to pay off the reverse mortgage, it becomes the lender's problem, not your parents'. Again, your parents can have no liability beyond the value of their property. If their loan total comes to $89,000 and what's left of their home is only worth $5,000 then that's all they'd have to repay. Such circumstances are rare, but the provisions are there just in case.
1 No one will enter a mentally unfit senior into a loan. Many adult children worry that their parents may run off and get a reverse mortgage, when they know that their parents are simply not capable of making such a huge financial decision, whether from Alzheimer's, dementia, or plain senioritis. In almost all cases, the counselor is able to determine that your parents don't quite have the wherewithal to fully understand a reverse mortgage. If your parents were somehow sly enough to fool these highly trained professionals (or just having an
"on" day), the originator has another crack at making sure your parent can handle the loan. They're testing (not literally) for understanding of reverse mortgages, as well as general cognizance and orientation. An originator faced with a senior who, in their opinion, can't be held responsible for this loan would likely ask them if they have any family or financial advisors who may like to sit in on their meeting. This would enable the originator to talk to the family and get a feeling for how well the senior functions. It's a basic tenet of any good originator or counselor to know their client well enough to assess their mental faculties.
Keep these reassurances nearby so that when a friend or family member brings up any of these common concerns, you will be at the ready. They can also guide you and your parents through some fears you may have had. Chances are good that your parents have thought of most of these potential issues as well.
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