Be Careful of the Reverse Mortgage Info Messenger

Posted by Xerine Raziel on December 19, 2008

I had the pleasure of speaking to a real estate agent yesterday. She wanted to discuss the reverse mortgage, in particular how it can be used as purchase money after January 1.

The realtor lady showed interest in the purchase program, but before getting needed answers, she decided to go into a long drawn-out story about a person wronged by a reverse mortgage company.

First things first… The rule is you must complete this article. You can’t just read what happened and then stop before I can explain. We can’t have you running about telling everyone else how horrible the reverse mortgage is.

Like most stories that may not be true the story is told second, third or fourth hand. In this case, the agent had a girlfriend, who’s friend’s father had a reverse mortgage on his home. After his passing the home made it’s way into the hands of the FOAFOAR (I’m going to use this acronym for the Friend Of A Friend Of A Real estate professional).

As it turned out the home had negative equity. The loan balance exceeded the value of the home. It’s a rare thing, but can happen in reverse mortgage world. At death the mortgage company required repayment of the entire loan.

After selling the property, the FOAFOAR still had to come up with an additional $40,000 to repay the bank the difference.

Did this happen? I seriously doubt it. The reason is reverse mortgages are known as non-recourse loans. This means in the circumstance of the FOAFOAR the mortgage company cannot come after the heirs for the difference.

In the circumstance of a deficiency or negative equity the borrower or estate conduct the sale of the property as follows….

A realtor will be hired to market the property at a fair market value. Yes, the bank will want to know this and will check comparable sold properties to be sure. The house will sell, and the bank will be repaid the sale price minus closing costs.

HUD makes the rules and the lender is entitled only to these proceeds from the sale of the home. If the loan balance exceeds the net proceeds, it’s tough cookies for the lender. They have to write it off and go on their merry way.

This is one of several myths flying about regarding the reverse mortgage. The reverse mortgage may be a strong tool for you to utilize, or a poor choice given your circumstance. But don’t assume you know until you really know. Call a professional or two first.