Perhaps more than any other consumer financial product, there is a tremendous amount of misinformation surrounding reverse mortgages. Listed below are ten of the most common misconceptions, printed side-by-side with the truth.

1. Under the terms of a reverse mortgage, the lender owns the property.

This is probably the most common – and most harmful – misconception, and it prevents many would-be borrowers from even seeking information about reverse mortgages. In fact, a reverse mortgage is a loan – just like a conventional mortgage -and the borrower keeps the title to the property. Ultimately, the property may be sold in order to repay the mortgage, but at no point while the reverse mortgage is outstanding does the lender own the property.

2. A reverse mortgage must be repaid in monthly installments, just like a conventional mortgage.

Unlike a conventional mortgage, a reverse mortgage is repaid only when the loan is due, typically when the borrower moves out or passes away. The downside of this structure is that interest will continue to accumulate (aka increase) for as long as the loan remains outstanding.

3. In order to qualify for a reverse mortgage, you need to meet certain credit and income requirements.

The only requirements for obtaining a reverse mortgage are as follows: the borrower must be at least 62 years of age, and the property must be the primary residence. The lender doesn’t care about your credit history or financial position.

4. Upon obtaining the reverse mortgage, all of the funds are meted out to the borrower.

This is only a partial misconception, since all funds will technically become available to the borrower when the reverse mortgage is executed. However, the borrower can choose how he wants to receive them, whether as a lump-sum payment, monthly payments, or line of credit to be drawn from as the borrower pleases.

5. A reverse mortgage will render one ineligible to receive certain government benefits.

I explained the impact of obtaining a reverse mortgage on government benefits in an earlier post. Basically, neither social security nor medicare payments will be affected, but one’s eligibility for certain need-based programs could potentially be impacted if the reverse mortgage proceeds are used for anything beyond monthly expenses.

6. When the home is ultimately sold (if the borrower dies/moves out), any leftover funds (after the reverse mortgage has been repaid) inure to the lender.

When the home is sold, any difference between the sale price and the unpaid balance of the reverse mortgage is distributed to the borrower, or to his heirs/estate. If the home has appreciated in the interim, this should mean that there will be a healthy surplus after such a sale.

7. If the home depreciates and the reverse mortgage is “underwater,” the borrower is liable for the difference.

Reverse mortgages are non-recourse loans, so-called because the lender is legally prevented from seeking any deficiency judgment against the borrower regardless of what happens to the value of the property.

8. Reverse mortgage loans are handled by the government.

Reverse mortgage loans are not a government benefit, and are not arranged by the government. The government’s role (via HUD and its subsidiary, the FHA) in reverse mortgages is to insure them against default.

9. It is the responsibility of the lender to pay homeowners insurance and property taxes.

In fact, the borrower’s only financial responsibilities are to continue paying homeowners insurance and property taxes, as well as to maintain the property in accordance with the law. Failure to do so could trigger a breach in the terms of the loan, and even lender foreclosure.

10. There are rules stipulating how reverse mortgage funds can be used.

Proceeds from a reverse mortgage can be used freely by the borrower for any purpose. While spending “frivolously” is certainly not advisable, it is technically still the borrower’s right to do so.

5 Responses to “Top 10 Reverse Mortgage Misconceptions”

  1. Marilyn Zolnai Says:

    I only want to know one more thing, since this is a loan, what is the interest rate. thats it

  2. Dora Dessaso Says:

    Can funds from a reverse mortgage be used to purchase another home.

  3. wwilliam cleary Says:

    The info on this site is clear and helpful. Would you happen to know if a reverse mortgage can be obtained on a manufactured home situated on a land rental in a manufactured homes community?
    Thank You

  4. Ed Harris Says:

    This explained a lot of things quickly ans to the point.
    quite helpful.

  5. leonard Robinson sr Says:

    1. How’s is the interest rates determined. age ????
    2. Can I use the money for a summer condo or timeshare ?
    3. What if I change my mind …and what to revert back to a regular mortgage

Have Feedback on This Article?