CAN REVERSE MORTGAGE FUNDS BE USED TO FUND ANOTHER INVESTMENT?

A reverse mortgage allows the 62+ year-old homeowner to refinance their home and receive the equity as a line of credit or a payout directly to them. Its purpose is to give seniors a chance to use the equity in their homes to help with living expenses, and it closely resembles a home-equity loan.

And it is a loan – it accrues interest and it must be paid off upon death or when the homeowner isn’t able to live in the home any longer. It could be tempting to think of taking that lump sum and investing it, but that is contrary to the intended purpose of the loan. The homeowner will likely lose access to the money, and wouldn’t be able to use it to supplement their living income.

In 2006, a few unethical lenders working with equally unethical financial advisors were caught taking advantage of seniors, forcing them to invest in specific ways. The Housing and Economic Recovery Act of 2008 made it illegal for reverse mortgage lenders to be affiliated with other financial or insurance products.

Loan officers who don’t have a lot of experience with reverse mortgages would be wise to talk with a closing attorney who does, so they will understand what borrowers can legally do with the money they receive.

REVERSE MORTGAGE BASICS

Reverse mortgages have been around since the late 1980’s. Almost all reverse mortgages are FHA insured and follow strict guidelines. The program was designed to keep seniors in their house as long as possible and to make the equity in the house available without selling it. There is a lot of mis-information on reverse mortgages. First, the lender does not take the house after a certain number of years. The lender may foreclose only if the borrower has moved out of the house, passed away, failed to pay taxes and insurance premiums, gone twelve consecutive months without living in the house, or has conveyed in interest in the property to another person or entity. (If there are two borrowers, both must move out of the house or pass away before a lender can foreclose).

FHA recently changed some of the guidelines for disbursing funds. Perhaps the most noticeable new rule is that the borrower may only receive sixty percent of the value of the house at closing in the first year of the reverse mortgage. After the first year, the rest of the funds may be accessed. FHA is currently proposing other changes, most notably that the borrower must be able to show an ability to pay the property taxes and insurance on the property.

A reverse mortgage closing is a little different than a forward mortgage. First, there will be two Promissory Notes and two Security Deeds. Unlike forward mortgages, lenders in a reverse mortgage must be able to make the payments or keep funds available in a line of credit for the borrower. If a lender fails and goes out of business, HUD steps in to make sure those funds will continue to be available to the borrower. The lender on the second Note and Security Deed is the Department of Housing and Urban Development because they will fulfill any of the lender’s obligations if the original lender is unable to. Second, the disclosures are much different because there are no payments being made by the borrower. Reverse mortgages may not be for everyone, but be sure to get information from credible sources prior to making a decision. The reverse mortgage might be an ideal solution for a lot of homeowners over the age of 62.