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Let your parents beware
According to the Consumer Financial Protection Bureau, there are three lenders that have employed illegal and deceptive advertising practices. They are American Advisers Group, Reverse Mortgage Solutions, and Aegean Financial.
Their advertising has falsely stated that borrowers can’t lose their homes. Not only that, they could not be required to leave. They will also always continue to own their homes. The truth is that the contracts for reverse mortgage require borrowers to continue paying their real estate taxes and homeowner insurance and that they must maintain their property and observe some other requirements. In the event that your parents fail to do all these things then the lender can legally foreclose on the home. And if the property is foreclosed your parents will lose their home, will be required to leave and will no longer own it.
No government benefit
Another thing the CFPB is concerned with is how reverse mortgages are advertised. It is mentioned that a reverse mortgage is a loan from the government or some kind of government benefit. Neither of these is true. Also, lenders are now prohibited from implying any kind of an affiliation with the federal government.
Some of these companies that offer reverse mortgages have also stated or inferred that there are no fees associated with getting a reverse mortgage. The truth is that there will probably be title insurance costs, flood certification fees, an appraisal fee, credit report fees and the other incidental costs associated with closing a loan.
What your parents must understand
Your parents must understand that they must meet all the requirements of their loan agreement. At least, if they want to get a reverse mortgage, stay in their home and avoid foreclosure. If they are not sure they can continue to pay real estate taxes and homeowner insurance and maintain the property, they should not get one of these mortgages. In addition, urge them to have their loan agreement reviewed by a certified financial planner or an attorney before signing a contract.
Do the homework
A reverse mortgage could be a good option for your parents but you or they must do the homework. You also need to first help them determine if a reverse mortgage would be their best option. If they decide to move ahead it's critical that you help them comparison shop. The initial and recurring costs, in addition to interest rates, can vary dramatically from lender to lender. Not only that, don't think that the lender that has the most ads necessarily has the best product.
Here's a video from the Today Show with Jean Chatzky explaining more about the pros and cons of a reverse mortgage including an explanation of the three ways your parents could get their money.
Frequently Asked Questions about reverse mortgages
Q. What are my parents’ options if they can't meet the obligations of a reverse mortgage?
A. If your parents are having a problem with property-related expenses paid by the reverse mortgage servicer they may be able to get a repayment plan. This plan involves spreading the amount due over a 24-month period. Alternately, they might be able to get a debt consolidation loan and use the funds to cover the property-related expenses.
Q. Can your parents leave their home to their heirs?
A. Yes, they can. Their heirs can choose to retain the property and satisfy the reverse mortgage debt. This can be done by paying the lesser of the mortgage balance due. Or you can pay 95% of the then-current appraised value of the home.
Q. Could my parents add a borrower to the reverse mortgage?
A. No, co-borrowers cannot be added to a reverse mortgage after the loan has been originated
Q. What happens if my parents receive a foreclosure notice?
A. Even if this occurs, it may not be too late. They will need to contact the company that services their reverse mortgage to determine their options. If they are unable to pay off the balance of the reverse mortgage they may be able to do a Short Sale or a Deed-in-Lieu of Foreclosure.
Q. What is the role played by the reverse mortgage company or servicer?
A. It will require your parents to certify annually that they are living in the property and maintaining it. In addition, the mortgage company may remind your parents about their property-related expenses. This includes their insurance payments and property taxes. However, these expenses are your parents' responsibility and they need to make sure they’ve set aside enough money to pay them and on time.