Home Equity Conversion Mortgage a.k.a Reverse Mortgage
Seniors ages 62 and older may decide on a reverse mortgage, also known as a home equity conversion mortgage or a “backwards mortgage.” A reverse mortgage is a type of home equity loan where seniors tap the equity they have built up over the years. No monthly mortgage payments are required for a reverse mortgage. However, homeowners are still responsible for paying taxes and insurance and they must keep up with repairs.
According to Carlos Fontanez of Realty Warehouse, people with a reverse mortgage run into difficulty when they either do not realize that they are responsible for insurance and taxes, or they can’t afford the payments. “Unfortunately, if homeowners owe on these expenses, the bank can foreclose and evict them from their home,” he said. “It is my job to help people with a reverse mortgage who are threatened with foreclosure.”
Reverse Mortgage Requirements
When seniors apply for a reverse mortgage, lenders look at every situation on a case-by-case basis. Typically the homeowner must have at least 40 percent equity in the home and live in the house for more than 6 months of the year. Once they obtain the loan, seniors can stay their home for as long as they wish without making payments. The amount of money available in a reverse mortgage depends on the market value of the home, the amount of equity, current interest rates and the age of the applicants.
What Happens with Reverse Mortgage
Carlos Fontanez explained that just because homeowners are not paying monthly payments, it does not mean that the bank is not charging interest on the loan. “Every month, principal and interest payments accrue, but payments are not due until the homeowner moves out or passes away,” he said. “If the homeowner dies, the heirs have 12 months to decide whether to keep the house and pay off the loan or sell the property.”
Sometimes Carlos receives a call from an heir saying that the house is in foreclosure and ‘underwater’ where more is owed on the reverse mortgage than the house will produce in a sale. The house may be also be in disrepair. “Every situation is different, but a short sale can be the best solution for a property that has a reverse mortgage and is facing foreclosure,” he stated. “In a short sale the buyer pays a discounted price and the bank accepts less than what is owed on the mortgage.” Carlos stressed that all the heirs must all agree in order for a short sale to work.
“With a short sale, the loan is satisfied, the senior can relocate to a more suitable residence or the heirs can sell and walk away with money when Realty Warehouse purchases an option to buy,” he continued. “The lender also comes out ahead by selling a property that needs a lot of work and no longer commands the value it once had.”
This blog is for informational purposes only, subject to change.