Reverse mortgages are complex financial tools that, when utilized to their full potential, can be instrumental in helping you plan for retirement. But not used under the right circumstances, they have recently made headlines for consumer complaints about them.
What are the biggest reverse mortgage complaints?
In February, the Consumer Financial Protection Bureau (CFPB) highlighted some of the most common complaints against reverse mortgages in a
report titled Snapshot of Reverse Mortgage Complaints December 2011 – December 2014.
Reverse mortgage grievances totaled just 1% of all mortgage complaints during that three-year time period. Most of the issues stemmed from borrowers’ frustrations with their loan terms, servicing procedures and issues related to foreclosure.
You can make sure you don’t end up with a reverse mortgage complaint by first learning what the loan is, who it serves, and how it functions compared to traditional, or “forward,” mortgages. You need to understand the product thoroughly in order to make a decision about whether it is right for you or not.
Reverse mortgages enable homeowners age 62 and older to access the equity they have built up in their homes. Borrowers defer payment of the loan until they pass away, sell the house or move out. This means that you accrue interest on your loan amount until the loan becomes due.
Rather than making monthly payments to the purchase of your home, with a reverse mortgage you receive payment from a lender either in a lump-sum, monthly payout or as a line of credit option.
Think of a reverse mortgage as a loan that lets you borrow against your home equity—the key word here being loan. And just like any loan, you’re required to abide by its terms when you sign the agreement — including paying interest on the amount you borrow and use.
Here are some of the 5 biggest reverse mortgage complaints:
1. Complaint: I Can Not Refinance My Reverse Mortgage
Many reverse mortgage borrowers try to refinance their loans. Refinancing can be a good financial move if interest rates have gone down or home equity has gone up.
However, it can be extremely difficult to qualify for a reverse mortgage refinancing. To refinance you must have sufficient equity in your home. Too often, the reverse mortgage may have accrued too much interest to make qualifying possible.
- How to protect yourself: A reverse mortgage is a big financial decision, not to be taken lightly. Before securing the loan, make sure that you are comfortable with all terms of the loan — including interest rates.
2. Complaint: I Can Not Change the Loan Terms
According to the CFPB, the most common reverse mortgage complaints are about not being able to change the terms of the loan. Terms that borrowers often wish they could change include:
Interest Rates: Many consumers are surprised by how quickly interest accrues on a reverse mortgage. And then they want to try to lower the interest rate or change from a variable rate to a fixed rate loan. However, a loan can not be modified except under a refinance but — as shown above — it is difficult to qualify for refinancing.
- How to protect yourself: Educate yourself thoroughly about the interest. When considering a reverse mortgage, ask your loan officer or your reverse mortgage counselor to show you how interest will accrue. No one should be trying to keep these facts secret from you.
Adding Borrowers to the Loan: The most frequent complaint concerning requests for loan changes involves consumers wishing to add additional borrowers to the loan in order to extend the loan’s term. Borrowers often wish to add their children to the loan.
However, adding borrowers to the loan is impossible. Reverse Mortgage loan amounts are determined by the age of the borrowers. Loan amounts are determined by use actuarial tables to determine how much to lend a borrower. Criteria such as age, current interest rates and the value of your home are key factors lenders consider in making this determination and influence how much of your home equity you may be eligible to access.
- How to protect yourself: Again, understand every term of the loan. Be aware that when all borrowers named on the loan die or move out of the home, then the loan becomes due. If you are concerned about leaving your home to your heirs, then learn about the options your heirs will have for keeping the home.
3. Complaint: My Spouse Loses the Home When I Die
If married and both spouses are over the age of 62 and are on the reverse mortgage loan agreement, then no one ever would have been in danger of loosing the home.
However, there have been issues for couples where one spouse (non borrowing spouse) was not on the reverse mortgage agreement because they were too young. The issue of the non-borrowing spouse has been a hot topic for reverse mortgages and one of the primary sources for negative media attention.
Some married couples—though the CFPB did not specify how many—reported submitting complaints, distraught that they are facing foreclosure following the death of the borrowing spouse.
The good news is that the Federal Housing Administration (FHA), which insures many of the reverse mortgages on the market today, has implemented new protections for surviving spouses within the last year.
As a result of the new rule from the FHA, surviving spouses for new reverse mortgage loans are allowed to defer the reverse mortgage’s due and payable status until they themselves pass away or vacate the home. This rule only applies to new reverse mortgage borrowers and not those who took out a reverse mortgage before the rule took effect August 4, 2014.
- How to protect yourself: It appears that the FHA has resolved these issues for all future loans.
4. Complaint: Loan Servicers Make Repaying the Loan Difficult
When a reverse mortgage loan becomes due, you have options for repaying the loan. You may pay off the balance in full or 95 percent of the property’s current appraised value — whichever is lower. The debt can also be settled by selling the home.
However, many complaints are made by heirs of reverse mortgage borrowers stating that the process is confusing and cumbersome.
- How to protect yourself: Make sure you are working with a lender you are comfortable with. Ask them about how they handle loans when they become due. You might also wish to make sure that your heirs understand their obligations.
5. Complaint: I am Facing Foreclosure for Non-Payment of Property Taxes or Homeowners Insurance
A term of securing a reverse mortgage loan has always been that the borrower is responsible for ongoing property taxes, home maintenance and home insurance. However, some borrowers have not kept current with these obligations and have faced foreclosure.
The FHA now requires that all borrowers undergo a financial assessment to insure that they are capable of affording these ongoing home ownership costs. In some cases borrowers will be required to set aside some of their loan proceeds to fund these expenses.
- How to protect yourself: The new FHA financial assessment should insure that this is no longer an issue for new borrowers. However, it is important for both new and existing borrowers to fully understand that they must continue paying taxes and insurance.
Not unlike other financial tools, reverse mortgages present their fair share of complexities. That is why the application process for reverse mortgages requires prospective borrowers to undergo mandatory counseling sessions prior to receiving the loan
The purpose of these sessions is to discuss the loans in greater detail and clear up any confusion, questions or misconceptions you might have, so that you can make an informed decision on whether or not a reverse mortgage is right for your particular situation.
“Education is key,” says Eric Meehan, a reverse mortgage broker and owner of Golden Opportunity Mortgage in Solana Beach, California. “It’s not just about educating customers, but also educating originators and making sure people know how these loans work so they can be presented in the correct manner.”
