For several years, reverse mortgages were marketed as the “best tool ever” for retirees to be able to tap into their homes’ equity while continuing to reside at home.
To understand reverse mortgages, it is important to first understand traditional mortgages. Traditional mortgages are written documents that create a legal right to possess real estate if a promise to pay (promissory note) is not honored.
For instance, someone borrows money from a lender. The lender agrees to loan the money to the borrower, but the lender also gets written permission from the borrower that the lender can acquire the borrower’s house if the borrowed money is not paid when due. The written permission to acquire the house if the loan is not repaid is a traditional mortgage.
Some people use savings to buy the houses within which they will live. However, most Americans borrow money to buy or build their houses, and those loans are secured by mortgages. Therefore, mortgages have become known as non-threatening components of typical, day-to-day real estate transactions.
A reverse mortgage is not exactly the opposite of a traditional mortgage. A reverse mortgage is an agreement where a lender agrees to loan (pay) a borrower a certain lump sum of money or a certain amount of money every month. In the mean time, the person getting the money (the borrower) can continue to live in his or her house. The lender agrees to wait to be repaid until the borrower (the person getting the money) dies, moves away or does not pay taxes or insurance on the house. The lender then sells the house and uses the sale proceeds to reimburse the lender itself for all those monthly payments or the lump sum that was first paid to the house owner.
As a result, a reverse mortgage is less like a real mortgage and more like a land contract. The lender makes a payment or series of payments to a homeowner, and the lender eventually acquires ownership of the house, which date of ownership acquisition is when the borrower dies, moves away or fails to pay taxes or insurance. The “lender” in a reverse mortgage is really the “buyer” in a land contract.
Federal law requires that people considering reverse mortgages be at least 62 years old and either have their homes fully paid off or nearly paid off.
Specifically, reverse mortgages can be foreclosed (with the lender acquiring the property to sell to pay the loan) if the owner dies, if the owner sells the house, if the owner moves out (including to a nursing home or assisted living facility) or if the owner falls behind on real estate taxes or homeowner insurance.
The biggest challenges of reverse mortgages deal with house owners’ companions/dependents/spouses who live in houses when reverse mortgages are foreclosed upon. The law only provides those companions/dependents/spouses up to four months after the owner’s death/move to submit a ton of paperwork (and often a large amount of money) to try to keep the house.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.