Folklore and the Reverse Mortgage

Posted under real estate

I received a phone call from a local real estate professional. She called in response to an ad I placed detailing how seniors can buy a home using the reverse mortgage to fund the purchase.

She was sincerely interested in the program, but first decided to vent with an amazing story of pain, agony and just downright horror relating to the reverse mortgage.

Now, in an effort to put the kibosh on the horrible results of a reverse mortgage going viral and thus wrecking my business, I need you to keep reading past the next few paragraphs. You might stop reading and tell your friends about this horror. And they might believe you.

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).

Well, more money was owed to the lender, at the time of his death, than the home was worth. According to the realtor the mortgage company required repayment of the entire amount owed.

The property eventually sold to repay a portion of the money owed the lender. The lender forced the FOAFOAR to pay the remaining balance of forty-thousand-dollars.

Now, I have doubts about the validity of this story. I have doubts about any story told through a chain of three people, but look…. HUD prohibits mortgage companies from doing what the FOAROAR said it did. The term is “non-recourse”. It means a mortgage company cannot come after the borrower or heirs for a deficiency.

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.

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