Reverse Mortgages – Does My Home Need to Be Free and Clear?

Recently I originated a reverse loan for a gentleman, Mr. Smith for the purpose of this article, who at first was very evasive about what he owed on his home. When Mr. Smith applied on my website he input that his home was free and clear. In our initial conversation he reiterated that his home was free and clear. Later, he reworded his statement and said that his home would be free and clear before we closed his new loan. That statement struck me as odd, so in my subsequent conversations I sought to discover exactly what he was talking about. What I ascertained was that although Mr Smith had a vast knowledge of reverse mortgages from his research, somewhere along the line he was given the wrong information about one aspect of the loan. He was under the misconception that his home had to be free and clear in order to get a reverse mortgage

Media coverage of reverse mortgages has grown tremendously in the past few years, yet even with the help of NRMLA (National Reverse Mortgage Lenders Association) there are still several misconceptions about the product. Mr. Smith’s plan was to have his son pay off his existing $162,000 mortgage prior to originating his new reverse mortgage. He was ecstatic to learn that was an unnecessary step. After it closed, he planned on repaying as much as possible to his son from the loan proceeds.

Mr. Smith didn’t qualify for enough money with the reverse mortgage to pay off his entire loan. He was lucky that his son had the money available to gift him the difference of about $19,000. Understand that with a reverse mortgage all liens against the property need to be paid first. If there is money left over then the borrower has the option to use the proceeds however they see fit. If there is a shortfall, like the case of Mr. Smith, the borrower will need to cover the difference at closing. That can be achieved by use of the borrowers own funds or gift. With a HECM (Home Equity Conversion Mortgage), borrowers cannot incur new debt to obtain their loan.

These misconceptions need to be cleared up because a lot of people who should be doing a reverse mortgage may not be doing one, simply because they had been given false information at some point in their research or conversations with friends and family. If Mr. Smith’s son did not have the financial wherewithal to pay off his dads loan, I’m very certain that Mr. Smith would have written off the idea of a reverse mortgage and perhaps would have lost his home. The lesson learned is to consult a professional reverse mortgage advisor to be sure all is understood about this product.

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