reverse mortgages--are they a scam?
- InspectorBudgetLv 79 years agoFavorite Answer
No, not a scam.
But they are very expensive, for the homeowner, and for his/her heirs.
You have to do much research and due diligence before going for a reverse mortgage. If possible, avoid.
- 9 years ago
Reverse mortgages have received a bad rap over the years. However, they are now governed via FHA regulations and are excellent vehicles for older Americans with equity in their homes who find they need extra income.
- MRALv 49 years ago
By definition (Websters), a Scam is a fraudulent or deceptive act or operation.
Are reverse mortgages a scam? Definitely not. It is a government program, highly regulated by FHA and insured by the U.S. government. It is offered and funded by private banks and lenders, under the microscopic regulation and full backing of FHA/HUD. All the rules and requirements are laid out in black and white, both at the time of application and again at the closing. Once they sign final papers, the senior has 3 business days to cancel for no reason at all. All seniors are required to go through mandatory 3rd party counseling (which they pick themselves) before the application can even proceed. Anyone living in the home with the senior is required to sign off saying they are aware of the ramifications of a reverse mortgage, and are encouraged to go through the counseling as well.
Is it expensive? It can be. There are two programs available: 1) the Standard, which has standard FHA loan closing costs, and 2) the Saver, which has limited closing costs.
Is it more expensive than other FHA loans? - no. Like any other loan, FHA or otherwise, you may have an origination fee, appraisal fee, credit report fee, flood certificate fee, title company insurance and settlement fees, notary fee, recording fee, courier fee, and any local or state required fee (not related to the reverse mortgage). Unlike private loans, all the fees on a reverse mortgage are regulated and capped by FHA. Once the Good Faith Estimate is disclosed in the application, any change is highly restricted. No surprises at closing.
Why is an FHA loan more expensive than private loans? Because in a private loan, if you have at least 20% equity in your home (or down payment), you do not have to pay Private Mortgage Insurance (PMI). If you have less than 20%, you do have to pay MIP, same as FHA. In a regular FHA loan, you always pay a Mortgage Insurance Premium (MIP) because you only need 3.5% equity in your home (or down payment). With a reverse mortgage, you pay MIP because you do not have to qualify for the loan based on income or credit scores; you only need to be 62 years old or older. Also, with a reverse mortgage, you do not need to make monthly mortgage payments for as long as the home remains the primary residence of the senior. For these benefits and more, FHA charges an upfront Mortgage Insurance Premium (MIP), and an ongoing monthly premium.
Is MIP bad? Not if you are retired and can't qualify for a regular loan otherwise; not if you can't afford a monthly mortgage payment; not if you do not have any other source of income other than your home; not if you do not want to sell the home. There is a price to pay for any benefit, and FHA loans offer a lot of benefits - whether a forward FHA loan or a reverse. No one wants to pay a MIP (who wants to pay more than they have to), but they choose to do the loan anyway because it provides them a benefit that other lenders do not offer and they cannot get elsewhere.
So why do people get a reverse mortgage? Because the benefits offered to them make it worthwhile for them. Because they don't have to qualify based on income; because they don't have to make monthly mortgage payments; because it is a non-recourse loan; because they do not lose title to their home; because it is the only way they can tap into their home equity without actually having to sell the house and move; because they can't take the house with them when they pass away and they want to improve their quality of life now; because their retirement income / social security doesn't give them enough to live day to day, let alone pay for a regular loan from the bank; because the kids can still inherit the house, as long as they pay off the loan (same as with any other loan).
You tell me, then, does that make it a bad loan? Where is the fraud? Where is the deception? Only an heir who doesn't want to see the senior use the assets (their eventual inheritance) so that the senior can take care of themselves will complain; only a realtor who wants the senior to sell the house instead so they can make a commission now; only a person who hasn't talked with the senior to find out what they need and what they are trying to accomplish; only a person who hasn't taken the time to find out for themselves how it works and instead mouths out the latest negative headline-grabbing newspaper reports that are copied and pasted without any verification.
This doesn't mean there aren't loan officers that take advantage of seniors, but it doesn't make the program bad. Are all medicines good? all police officers good? all laws good? No, but it doesn't make them all bad.
Is it for everyone? Definitely not. And that is why you have to find out what the senior needs and wants and see if a reverse mortgage can accomplish that AND if it is the best way to do it.Source(s): I specialize in reverse mortgages (CA)