10 Little-Known Reverse Mortgage Pitfalls to Watch Out For

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The reverse mortgage is a great financial solution, but there are some reverse mortgage pitfalls that could pop up. We’ll cover some basics, clear up some common misconceptions, then go over what to watch out for.

Defining Terms

Before we dig into this, let’s first clear up what a pitfall is. Not every supposed reverse mortgage pitfall truly is a pitfall. I’ll explain more about what I mean by that in a moment.

According to Merriam-Webster, a pitfall is “a hidden or not easily recognized danger or difficulty”. In the case of a reverse mortgage, a pitfall is a difficult to anticipate negative circumstance caused by the reverse mortgage.

Based on this definition, not all pitfalls you hear about truly are reverse mortgage pitfalls. The reverse mortgage is a highly misunderstood product, so many perceived pitfalls are actually just misconceptions about how reverse mortgages work.

Others are issues of suitability rather than “hidden” or “not easily recognized” dangers. The reverse mortgage is a great product, but it’s not always a good fit. The reasons why it may not be a good fit aren’t necessarily pitfalls, they’re just reasons why it doesn’t make sense for a particular person’s situation and goals. No financial product is perfect for everybody.

With that said, let’s first clear up some misconceptions about how a reverse mortgage works. Once we’ve done that, we’ll get into some genuine potential “hidden” or “not easily recognized” dangers to watch out for.

How a Reverse Mortgage (Really) Works

A reverse mortgage is a unique home loan that enables homeowners 62 and older to convert home equity into cash without giving up ownership of their home or taking on a mortgage payment.

The most popular reverse mortgage in the United States is the FHA-insured and regulated home equity conversion mortgage, or HECM (commonly pronounced heck-um by industry professionals).

No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the property charges.

You remain the owner of your home and you’re free to leave it to your heirs. Your heirs can keep the home by paying off or refinancing the reverse mortgage balance.

If your heirs don’t want the home, they can sell it, repay the reverse mortgage, and keep the remaining equity.

The HECM is a non-recourse loan, which means the most that will have to be repaid is the value of your home. FHA covers any shortage if your home isn’t worth enough to pay off the entire balance.

Some Common Misconceptions

Based on what we’ve just covered, let’s clear up a few perceived pitfalls (which are really just misconceptions) you may have heard about:

  • The bank does not take over the title of your home or go on title with you. The bank is also not buying your home for a discount. A reverse mortgage is a home loan, which means you always remain the owner of your home.
  • The bank does not get the house after you pass away. You remain the owner, so you’re free to leave your home to your heirs. Your heirs can decide if they want to keep the home or sell it.
  • You won’t leave a debt for your heirs to clean up. The HECM is a non recourse loan, which means your house is the only recourse to pay off the loan balance. If your house isn’t worth enough to pay off the entire balance, FHA will cover the rest.
  • A reverse mortgage doesn’t lock you into keeping your home. A reverse mortgage is just a home loan, so you’re always free to sell your home in the future.

Two Non-Pitfalls

Let’s also address two supposed reverse mortgage pitfalls that I’ve seen mentioned in other media outlets:

  1. You’ll leave less (or maybe zero) equity to your heirs. The purpose of a reverse mortgage is to convert home equity into cash. This means the balance will increase and your equity will decrease over time. This is how a reverse mortgage is supposed to work. If you want to leave the most equity possible to your heirs, then a reverse mortgage just isn’t a good fit.
  2. You risk triggering a maturity event if you don’t pay the property charges. Any mortgage lender requires you to pay your property charges. This is a normal obligation of homeownership. For example, if you don’t pay your property taxes, your county will eventually foreclose on you. Even homeowners associations can file liens or foreclose if you fail to pay your dues. Paying your property charges on time is important to avoid a maturity event that could cause your reverse mortgage to become due and payable. Triggering a maturity event because of failure to pay the property charges isn’t a reverse mortgage pitfall.

Folks, these aren’t reverse mortgage pitfalls. This is how a reverse mortgage is supposed to work.

They’re also not “hidden dangers”. Lenders are required to provide disclosures that estimate how your loan balance increases over time.

Lenders are also very clear that you have to continue paying your property charges – which is a normal obligation for any home loan.

Now that we’ve covered some basics, cleared up some misconceptions, and addressed a few non-pitfalls, let’s dig into some genuine reverse mortgage pitfalls.

Many reverse mortgage pitfalls you’ve heard about are, in reality, just misconceptions about how reverse mortgages work.

Potential Reverse Mortgage Pitfalls

In my experience, the following reverse mortgage pitfalls rarely come up. These situations won’t apply to the vast majority of reverse mortgage borrowers, so they’re likely not something you’ll need to worry about.

However, if any of these situations apply to you, just make sure you thoroughly understand the potential negative consequences if you decide to move forward with a reverse mortgage.

  1. Getting married after you get a reverse mortgage. A new spouse is not “grandfathered” into an existing reverse mortgage. That’s why this can be a serious reverse mortgage pitfall if you get married after you get a reverse mortgage. If something happens to you, your new spouse will have to pay off or refinance the reverse mortgage balance or potentially give up the home. If you marry after getting a reverse mortgage, you may consider getting life insurance to protect against this possibility. You may also be able to refinance your reverse mortgage into a new reverse mortgage under both of your names.
  2. You have a disabled relative living with you. A reverse mortgage may be unsuitable if you have a son or daughter or other relative living with you who can’t care for themselves. If something happens to you, they could lose the home if they can’t refinance or repay the reverse mortgage balance. The reverse mortgage balance becomes due and payable when you no longer live in the home and pay the property charges. If you have a disabled relative living with you, you may consider getting life insurance that can repay the HECM balance after you pass away.
  3. Leaving your younger spouse off the reverse mortgage to qualify for more money. It’s not as easy to do this as it used to be, but it may still be possible. Proceeds are calculated based on the youngest of two spouses (even if one spouse is a non-borrowing spouse), so some reverse mortgage applicants in the past chose to leave the younger spouse off the loan to get more money. When the older spouse passed away, the younger spouse would have to either pay off or refinance the loan or potentially lose the home.
  4. You’re not financially able to pay your property charges and maintain your home. FHA requires lenders to qualify applicants based on income and credit. Of course, lending guidelines aren’t perfect. It’s possible for applicants to be approved who really don’t have the financial ability to live in and maintain their home. If you really can’t afford to pay the property charges long term, you probably should avoid a reverse mortgage or consider taking a LESA. You don’t want to fail to pay your property charges and potentially trigger a maturity event that makes the loan balance due and payable in full.
  5. One borrower isn’t financially responsible. A reverse mortgage gives you access to a potentially huge amount of money. All borrowers on the reverse mortgage have full access to the funds. If one borrower is financially irresponsible, it may be a bad idea to get a reverse mortgage.
  6. Disability income and Medicaid. If you have asset or income-based government benefits, make sure you fully understand how a reverse mortgage could impact them. Most of the time, you just need to be careful about how much money you maintain in your bank accounts. However, other requirements could apply. You don’t want to jeopardize any benefits you’re receiving by not managing the reverse mortgage correctly.
  7. Changing title after the reverse mortgage is complete. Changing the title ownership after the reverse mortgage is complete could potentially trigger a maturity event. Make sure to check with your servicer before you change the title owners of your home.
  8. Paying your line of credit to a zero balance. This isn’t a common pitfall, but it can come up for borrowers trying to maximize their line of credit growth. Avoid paying your line of credit to a zero balance because it will close it out completely. Contact your servicer to confirm the minimum balance needed to keep your line of credit open.
  9. Late property tax, homeowner’s insurance, or HOA payments at application. This is a pitfall that occurs frequently during the reverse mortgage application process. FHA requires your lender to document the last 24 months of property tax, homeowner’s insurance, and HOA payments to make sure you paid them on time. Even if the payments were late just a day, it can cause problems when applying for a reverse mortgage. If you plan to apply for a reverse mortgage, make sure you pay your property taxes, homeowner’s insurance, and HOA dues before the due date.
  10. Pulling all the money out and dumping it into your savings account. Some reverse mortgage borrowers still insist on pulling out all the funds and dumping them into their bank account. This is a mistake and a self-inflicted reverse mortgage pitfall. If you have a lot of money still available on your reverse mortgage line of credit, it’s far better to leave it there. For one, you’ll keep your loan balance lower, which means it accrues less interest. You’ll also be keeping more money in the line of credit where it can grow and compound larger, giving you access to more money over time.
The reverse mortgage is a very safe and beneficial mortgage product for the vast majority of retirees. There are some pitfalls of reverse mortgages, but they come up rarely.

Is A Reverse Mortgage Risky?

A HECM reverse mortgage is a very safe mortgage product. It’s pretty hard to get into trouble with a reverse mortgage as long as it’s a good fit and you remain in good standing. Again, here are your obligations:

  • Live in the home
  • Pay the property taxes (and any applicable special assessments)
  • Pay the homeowner’s insurance (and flood insurance, if applicable)
  • Pay your HOA dues (if applicable)
  • Maintain your home like you normally would

These are all normal things that homeowners do anyway, right? As long as you uphold your end of the bargain, it’s pretty hard to get into trouble with a reverse mortgage.

Again, no repayment is required as long as you remain in good standing. There’s no time limit on that, either.

And don’t forget that the reverse mortgage is non-recourse. You’re protected even if home values fall and you owe more than your home is worth. FHA covers the shortage.

I don’t know of any other mortgage product that does that.

Some Final Thoughts

Hopefully what I’ve covered here puts your mind at ease about reverse mortgages and the reverse mortgage pitfalls you’ve heard about. There is a lot of misinformation out there about reverse mortgages. It’s great that you’re taking the time to do your homework before getting into one.

Many of the reverse mortgage pitfalls you’ve heard about are, in reality, misconceptions about how reverse mortgages work. Other pitfalls are really issues of suitability, not actual problems with how a reverse mortgage works.

Most actual pitfalls of reverse mortgages apply only to a small number of applicants, which means most people don’t need to worry about them.

The reverse mortgage is a great financial product, but it’s not always the right solution for everybody. If it’s not a good idea for you, it doesn’t mean it’s a bad product riddled with reverse mortgage pitfalls.

A HECM reverse mortgage is a very safe loan for the vast majority of retirees. As we’ve covered, your end of the bargain is to live in the home, pay the property charges, and maintain the home like you normally would. As long as you do that, it’s tough to get into trouble with a reverse mortgage.

What is the biggest problem reverse mortgage?

There’s really not a “problem” reverse mortgage that you need to avoid. There’s only one reverse mortgage product available for the vast majority of seniors: the FHA-insured HECM reverse mortgage. A HECM reverse mortgage is very safe; no mortgage payments are required as long as you live in your home and pay your property taxes, homeowner’s insurance, and HOA dues (if applicable). You remain the owner of your home and you can still leave your home to your heirs. The HECM is also a non-recourse loan, which means FHA covers any shortage if your home isn’t worth enough to pay off the entire balance. As long as you uphold your end of the bargain, it’s pretty tough to get into trouble with a HECM reverse mortgage.

What is the downside of getting a reverse mortgage?

The biggest downside is probably the closing costs. Reverse mortgage balances tend to start off low, so lenders don’t earn a lot of interest at the start of the loan that they can use to offset closing costs. Traditional “forward” mortgages tend to have lower closing costs because lenders make tons of money on all the interest that accrues on the large starting loan balance.

Why are people disappointed with reverse mortgages?

Actually, they’re not disappointed. In 2019, the Brookings Institution found a significant correlation between accurate information and a positive perception of the reverse mortgage. In other words, when seniors learn how a reverse mortgage really works, they like it. According to the study, 85% percent of survey respondents who had a reverse mortgage reported being satisfied or very satisfied with their decision to get one.

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About Mike Roberts

Mike Roberts is the founder of MyHECM.com, a published author, and a highly experienced mortgage industry veteran with over a decade of mortgage banking experience. When he's not working, he enjoys spending time with his family, skiing, camping, traveling, or reading a good book. Roberts is the author of The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage, which is available on Amazon.