Reverse Mortgage Myths and Misconceptions
Updated: Nov 14, 2019
Myth: If I take out a reverse mortgage, the lender will own my home. You retain title and ownership to your home, and you can choose to sell your home at any time you wish. The lender cannot force you from your home as long as you maintain your home, pay your property taxes and homeowner's insurance. The lender only has a security interest in your home in the form of a first mortgage or trust deed, just the same as in a regular forward mortgage.
Myth: My children or heirs will be responsible for the repayment of the loan. This is another common myth. The HECM is a non-recourse loan as long as you or your estate sells the property to pay off the debt. If you or your estate wants to retain the property, the balance must be paid in full.
Myth: I must own my home free and clear to qualify for a reverse mortgage. If you have a balance on your mortgage or home equity loan, and you have enough equity, a portion of the proceeds from the reverse mortgage may be used to pay off your existing loan, thereby eliminating your current house payment. You are then free to do whatever you wish with any remaining funds available to you from the reverse mortgage.
Myth: I must have good credit to qualify for a reverse mortgage. Your credit is not even a consideration when applying for a reverse mortgage, nor is income. The lender does run a credit report, but it's only to see if you have any outstanding bankruptcies or government debt, like back taxes. If you do, then those debts must be repaid from proceeds of the reverse mortgage at the time you close the loan.
Myth: Only the "cash poor" or needy seniors who failed to plan for retirement get a reverse mortgage. Although some seniors may have a greater need than others for the cash or monthly income, a reverse mortgage has become a popular financial planning tool. Long-term health care insurance and in-home health care are popular uses for reverse mortgage proceeds. A growing number of people who have no immediate need are taking out these loans so they have a financial cushion for future expenses.
Myth: By getting a reverse mortgage I would be living off borrowed money. The money from a reverse mortgage is already your money. It's just that it's trapped in your home and not accessible to you unless you take out some type of mortgage. All other mortgages, except a reverse mortgage, require you to make payments back to the lender, but with a reverse mortgage, you make no payments because no payments are required: You do not repay the loan for as long as you choose to live in your home. You are simply accessing money that is already yours through a government insured program, and best of all, it is a not considered a taxable event: Reverse mortgage loan advances are principal. Accessing principal is not taxable.
Myth: When a reverse mortgage comes due, the bank sells my home. At the time the last borrower permanently leaves the home the loan must be repaid. At that time, you or your heirs can either pay the balance due on the reverse mortgage, through a traditional refinance or from other assets and keep the home, or sell the home and use the proceeds to pay off the reverse mortgage.
Myth: If I outlive my life expectancy the lender will evict me. No matter how much money the lender pays out to you over your life time you will never be forced from your home. You could live to be 120 years and receive far more in payments from the lender than your home is worth, but you will never be evicted or forced to sell your home to pay off the debt as a result of your age. The house stands alone for the reverse mortgage loan balance. As an FHA-Insured program, the mortgage insurance premium that is included in the cost to obtain the loan is what covers the lender in case of any lender shortfall when the home is sold and the loan is repaid.
Myth: I will have tax consequences if I take out a reverse mortgage. Once investigated, you will find that since the income you receive from your reverse mortgage is actually your money in the first place; it is not considered taxable income. This is an asset—your principal—which you have accumulated through years of paying your mortgage with earnings that were already taxed before you made the payments to the lender. With respect to other tax considerations relevant to reverse mortgages, always consult your tax advisor. Additionally, a reverse mortgage generally does not affect your Federal benefits such social security or Medicare benefits.