Reverse mortgages are used by underprivileged senior citizens who own their homes and need a cash income. Home repairs, emergency medical bills and living expenses are examples of what can trigger the need for a reverse mortgage. While a reverse mortgage plan does put a lien on the home, the process typically protects the home from other creditors placing liens on it because it is not worth the trouble.
Reverse Mortgage Versus Equity Loans
The primary difference between a reverse mortgage and an equity loan is there are no payments due for the life of the reverse mortgage. Interest on the loan can be paid if the homeowner desires, or it can be deducted against the home's value throughout the life of the loan. With no income or credit requirements, reverse mortgages are among the easiest loans to qualify for. The homeowner only needs to be at least 62 years old and own the home, mobile home, condo or co-op in question.
The funds are paid out through a chosen combination of monthly payments, a lump sum or a line of credit. Decisions about how much money is provided depend on the homeowner's age, the home's value and the current rate of interest at the time of the loan.
Lenders providing reverse mortgages secure their interest by placing a lien against the home. This lien typically supersedes all other liens that come along later, and in some cases the lien actually prevents additional liens from being placed on the home. If there are liens against the property when the reverse mortgage is applied for, cash from the reverse mortgage must pay off such obligations as part of the reverse mortgage approval, with the balance remaining available to the homeowner. The lender does not collect on the loan until the homeowner no longer resides in the home, by death, move or sale. At that point, the lender's lien takes first position in collection of the entire lien amount before any proceeds are divided elsewhere.
Protection Against Other Liens
While a reverse mortgage has no legal way to prevent additional liens from being placed on the home, in many cases, the reverse mortgage maintains first-lien standing for the life of the loan. When the house is sold, the reverse mortgage loan is paid before others can collect. Reverse mortgage loans are typically written for 150 percent of the home's value; therefore, additional creditors have little chance of seeing a return against a lien they may place. It is not cost effective for them to spend the time and money achieving lien status just to collect nothing when the house is vacated. Most creditors that discover a reverse lien on a debtor's property write the debt off as noncollectable.
If a creditor decides to move forth with the lien process, it cannot cannot garnish the proceeds from the reverse mortgage. This leaves the homeowner with an income, the reverse mortgage lender with protection and the creditor with no recourse.
- National Care Planning Council: An Overview of Reverse Mortgages
- Federal Trade Commission Consumer Information. "Reverse Mortgages." Accessed Mar. 10, 2020.
- National Reverse Mortgage Lenders Association. "Senior Housing Wealth Reaches Record $7.14 Trillion." Accessed Mar. 10, 2020.
- U.S. Department of Housing and Urban Development. "How the HECM Program Works." Accessed Mar. 10, 2020.
- American Advisors Group. "What is a HECM for Purchase Loan?" Accessed Mar. 10, 2020.
- Federal Deposit Insurance Corporation. "Reverse Mortgages: What Consumers and Lenders Should Know." Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau (CFPB). "What Happens to My Reverse Mortgage When I Die?" Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau (CFPB). "How Much Will a Reverse Mortgage Loan Cost?" Accessed Mar. 10, 2020.
- U.S. Department of Housing and Urban Development. "HECM Counseling Fees." Accessed Mar. 10, 2020.
- U.S. Department of Housing and Urban Development. "Home Equity Conversion Mortgage Program (HECM) Fact Sheet." Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau (CFPB). "How Much Money Can I Get With a Reverse Mortgage Loan, and What Are My Payment Options?" Accessed Mar. 10, 2020.
Candace Webb has been writing professionally since 1989. She has worked as a full-time journalist as well as contributed to metropolitan newspapers including the "Tennessean." She has also worked on staff as an associate editor at the "Nashville Parent" magazine. Webb holds a Bachelor of Arts in journalism with a minor in business from San Jose State University.