The reverse mortgage and bankruptcy. So what is a reverse mortgage and how does it work if I decide to file bankruptcy?
First of all you need to know a bit about a reverse mortgage. A reverse mortgage loan is usually insured by the Federal Housing Administration (FHA) that will allow a homeowner to convert the equity in their home into cash with no ongoing monthly mortgage payment. A reverse mortgage is a loan for seniors age 62 and older.
After obtaining a reverse mortgage, the homeowner must continue to pay property taxes and property insurance as well as maintain the home in accordance with FHA guidelines. Typically the loan does not become due as long as long as the homeowner lives in the home as their primary residence and continue to meet all the loan obligations.
Reverse mortgage loans can be used to pay for home renovations, medical and/or day to day living expenses. Homeowners who have an existing mortgage often use the reverse mortgage loan to pay off their existing mortgage and eliminate monthly mortgage payments.
A reverse mortgage loan uses the properties equity as collateral. The amount of money the homeowner can receive is determined by age of the borrower, interest rates and the lesser of the home’s appraised value, sale price and the maximum lending limit. The funds available to the homeowner may be restricted for the first 12 months after loan closing under some loan requirements.
A reverse mortgage loan does not generally have to be repaid until 6 months after the last surviving homeowner moves out of the property or passes away. Usually after six months the estate will sell the home to repay the balance of the reverse mortgage – the homeowner’s heirs will then receive any remaining equity. The estate is not personally liable for any additional mortgage debt if the home sells for less than the payoff amount of the reverse mortgage loan.
There are three kinds of reverse mortgages: single purpose reverse mortgages – offered by some state and local government agencies, as well as non-profits; proprietary reverse mortgages – private loans; and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs).
If you get a reverse mortgage of any kind, you get a loan in which you borrow against the equity in your home. You keep the title to your home. Instead of paying monthly mortgage payments, though, you get an advance on part of your home equity. The money you get usually is not taxable, and it generally won’t affect your Social Security or Medicare benefits. When the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence, the loan has to be repaid. In certain situations, a non-borrowing spouse may be able to remain in the home. Here are some things to consider about reverse mortgages
Reverse Mortgage Eligibility
The basic requirements to qualify for a reverse mortgage loan include: the youngest borrower on title must be at least 62 years old, live in the home as their primary residence and have sufficient home equity. Borrowers must also meet financial eligibility criteria as established by HUD.
The amount you can access from your home equity is based on the FHA calculation which considers the following factors:
- Age of the youngest homeowner (at least 62 year old)
- Current value of the property
- Balance on existing mortgage loans
- Interest rates
How is the government involved in the reverse mortgage business? This is a big point of confusion, especially since advertisements have sometimes promoted the reverse mortgage as a government benefit of some kind.
First, it’s important to note that the FHA, a government agency, is not loaning you any money. You are working with a private company, and the FHA is providing a guarantee on your loan. Second, the FHA protects the borrower and his/her estate from ever owing more on the loan than the home is worth. In circumstances where the debt outstanding on the reverse mortgage exceeds the value of the home, the FHA covers the difference.
Bankruptcy can be a violation of the reserve mortgage loan agreement so it is vital that you have your attorney look at the agreement to determine if this is the case. There are three important things that you and your attorney should consider before filing the bankruptcy:
- The current value of your home: You must consider the value of your home prior to filing bankruptcy not just at the time you obtained the reverse mortgage. Each state has different laws to protect one home called Homestead Exemption Laws you may or may not be able to protect 100 percent of the equity in your home when you file bankruptcy. Since most people have equity in their home when they sign up for a reverse mortgage, so you need to be certain the equity is not more than you can protect.
- The reverse mortgage loan balance: This question always confuses my clients that have reverse mortgages. Most clients will says: It’s a reverse mortgage; there is no balance, and I don’t have to pay anything. While it is true they don’t make a payment there is actually a daily balance on the loan that they can find out about. With a normal mortgage, in which you will make monthly payments and eventually pay off the balance, where as a reverse mortgage increases each month. The homeowner may need to ask the lender for a pay-off statement. This is what you need to ask for when you try and sell the property but is very important in the bankruptcy sinerio. It will give your attorney an accurate balance as of the day they will be filing your bankruptcy case, even though you might not actually be selling the property it is a good way to get the needed information to file bankruptcy.
- Does the reverse mortgage have a line of credit? The reverse mortgage loan document probably has a clause that allows the lender to cease monthly payment distributions or closes the equity line of credit if the homeowner files for bankruptcy protection. You need to tell your attorney if you are counting on the additional monthly income that comes due to the reverse mortgage home equity line of credit. Your attorney will need to review the reverse mortgage loan documents prior to filing. It may require a reaffirmation agreement to be filed in your bankruptcy case. Your attorney will need to confirm whether this option is available in your case.
Bankruptcy may be a good option given your situation as long as you do the due diligence required before filing the bankruptcy. Working with an experienced attorney will help make the process go as smoothly as possible. In Utah contact The Law Office of Douglas Barrett; The Bankruptcy Guy at 801-221-9911.