Advertising may make getting a reverse mortgage sound like a no-brainer for seniors on a lean budget, but there are a few things to consider before taking one out. Most reverse mortgages are insured by the Federal Housing Administration (FHA). The official name for an FHA-insured reverse mortgage loan is a Home Equity Conversion Mortgage (HECM, pronounced "heckem").
Some situations considered typical when you have a regular mortgage can cause your HECM mortgage to go into default, which means that the lender can call your HECM loan due and payable. Here are three examples of situations that can jeopardize home ownership and/or cause HECM payments made to you to stop.
Renting Out All or Part of Your Home
You've got more home than you really need, and figure you can earn a little extra cash renting out that bonus room over the garage. Unfortunately, HECM occupancy requirements prohibit renting out all or part of the mortgaged home and require HECM borrowers to occupy the mortgaged home as their primary residence. Borrowers are not allowed to have more than one primary residence.
If financing a two- to four-unit residence with a HECM mortgage, borrowers must occupy one of the units as their primary home. These occupancy requirements do not prohibit homeowners from travel, but according to FHA guidelines, using a HECM-mortgaged home as a rental property, boarding house (renting part of your home) or as a bed-and-breakfast facility are prohibited.
Borrowing (More) Against Your Home
Once you've taken out a HECM, you cannot borrow any more against your home -- a home equity loan or a HELOC, for example, are out-of-bounds. Adding additional financing after closing on a HECM loan reduces your home equity, which is what the lender is counting on having to pay off your reverse mortgage. This jeopardizes your HECM lender's interest in your home and is considered a default under the terms of your reverse mortgage.
However, you ARE allowed to refinance a reverse mortgage or increase your reverse mortgage line of credit, because you aren't adding more creditors to the mix.
Filing Bankruptcy Causes HECM Payments to Stop
According to the National Reverse Mortgage Lenders Association (NRMLA), filing for bankruptcy protection is not considered a default on your HECM loan, but payouts will cease.
• Servicers are obligated to monitor their loans for any bankruptcy filings. They will find out if you file.
• All payments to you (but not mandatory disbursements for property charges and maintenance) will be suspended upon borrower filing for bankruptcy.
• Disbursements can only resume once BK is discharged and the servicer’s attorney approves resumption of disbursements
If you have a reverse mortgage loan that is not an FHA HECM loan and file bankruptcy, you could be subject to foreclosure under the terms of your reverse mortgage. Please contact your mortgage servicer for details.
What About Adding a Person to the Title?
Private (non-government) reverse mortgage lenders might call in your loan if you add someone else to your home's title. Check your loan terms to make sure. HECM borrowers can add a non-borrower, such as a younger spouse, to the home's title after closing. However, once the borrower no longer occupies the home as his or her primary residence, the loan becomes due and payable. Anyone else on the home's title will have to either repay the reverse mortgage or vacate the property so it can be sold (they will receive their portion of any remaining proceeds after the HECM has been repaid). Adding someone to the home's title doesn't put their rights ahead of the lender's.
Reverse mortgage loans can be a useful financial tool for seniors desiring to maintain a comfortable standard of living, but discussing your plans with a financial advisor or real estate attorney can help with deciding if a HECM mortgage would work for you.