What are Reverse Mortgages and Should I Consider Applying for One?

close up shot of word reverse mortgage

Potential Pitfalls to be
Aware of with Reverse Mortgages

Due to the increased living and health care expenses that older Americans face, a reverse mortgage may seem like an attractive financial product as a means to help you stay in your family home. For the unwary or unsuspecting, there are traps and pitfalls to be mindful of when considering whether a reverse mortgage is the right option for you and your spouse.

Reverse mortages—also known as “home equity conversion mortgages”— are loans that provide seniors age 62 or older with the ability to borrow against their home without requiring them to repay the loan during their lifetime. However, seniors who take out these loans can still be exposed to the risk of losing their homes to foreclosures during their lifetime. Even worse, a widowed spouse of a reverse mortgage borrower can also find himself or herself at an even higher risk of foreclosure.

Borrowers must be careful to examine the structure of the loan for hidden provisions that benefit the Lender. For example, reverse mortgage companies often counsel couples to remove the younger spouse’s name from the deed so that the older spouse is the only “borrower” on the mortgage. Reverse mortgage lenders have been known to counsel applicants that the removal of one spouse—the non-borrowing spouse—from the deed is just a legal technicality and will have no impact on either spouse’s ability to remain in their family home for the rest of their lives.

Unfortunately, at the death of the borrowing spouse, the non-borrowing spouse still faces the challenge of living in a “tangle title” property, in which the non-borrowing spouse continues to live in the home he or she considers to be his or hers but does not have his or her name on the deed.

Widowed non-borrowing spouses can often find themselves kicked out of the property tax discount or rebate program when the payment of those taxes is critically important for avoiding reverse mortgage foreclosures. Additionally, widowed non-borrowing spouses are also routinely denied for home repair grants and loans due to lack of title. This is an important issue because reverse mortgage companies generally include a requirement in their agreements that the property must be kept in good repair. Therefore, when the house falls into disrepair, the Lender will seize the opportunity to foreclose.

There is also no loss mitigation option for widowed non-borrowing spouses. When a reverse mortgage borrower fails to pay property taxes or homeowner’s insurance, this can lead to foreclosure. Two loss mitigation options exist as provided by the federal government regulations:

  • First, the borrowers can enter into an income-based repayment plan to reimburse the servicer over time for property charge advances and remain in the home; and
  • Second, the borrowers who are at least 80 years old and who have “critical circumstances” (i.e., terminal illness) can avoid foreclosure by submitting medical documentation to support their “at-risk” status; this status allows the reverse mortgage servicer to delay foreclosure proceedings until after the borrower’s death.

These options are not available to the non-borrowing spouse. Non-borrowing spouses whose spouses were previously in repayment plans still have limited timeframes to pay off hundreds or thousands of dollars’ worth in advances. For a low-income senior whose household income has likely decreased due to the death of their spouse, this new reality is often not financially sustainable.

As always, we are available to answer any questions and assist you with any Elder Law issues affecting you or your loved ones. Please contact our office at (610) 933-8069.

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For assistance developing a comprehensive estate plan or nursing home asset protection plan in Pennsylvania, please contact Douglas L. Kaune, Esquire at (610) 933-8069 or email him at dkaune@utbf.com. Doug’s entire practice is focused on elder law, Medicaid application, estate planning, trust planning, estate administration and protection of clients’ assets from nursing home spending and estate and inheritance taxation. Unruh, Turner, Burke & Frees, P.C. is a full-service law firm which has three convenient office locations in Phoenixville, West Chester and Paoli, Pennsylvania. The firm primarily services clients in Chester, Montgomery, Delaware, Philadelphia, Bucks and Berks Counties, but can represent clients throughout Pennsylvania.