11 Common Reverse Mortgage Myths vs the Facts
By: Courtney Jorstad
August 21, 2023 • 9 minute read
When you research reverse mortgages, you are bound to run into some conflicting information about this unique financial product that may lead you to believe that a reverse mortgage is not for you.
Unfortunately, there is a lot of misinformation out there that leads to a lot of confusion, which is why we wanted to put together a list of some of the most common reverse mortgage myths to help you be able to separate fact from fiction.
Reverse Mortgage Myth #1: The Bank Owns Your Home
FACT: One of the most common myths about reverse mortgages is that homeowners are handing their homes over to the lenders and the lenders are paying them for it.
A reverse mortgage is simply a loan that is taken out against the equity in the home. It gets paid off later down the road when the home is sold instead of with monthly payments like a traditional mortgage.
It is called a “reverse mortgage” because rather than make payments each month toward the balance of the loan as you would with a traditional mortgage, the lender makes payments to the borrower. (Borrowers may also receive the money as a lump sum or line of credit.)
But just like with a traditional mortgage, the title and ownership of the home remains in the borrower’s name, and the borrowers are also required to pay back the loan.
Reverse Mortgage Myth #2: My Family Will Lose Their Inheritance
FACT: When you take out a reverse mortgage, you still hold the title to the property. This means you can still leave your home to your family.
If you pass while still living in the home with a reverse mortgage, your heirs will be given the choice of keeping the home by paying off the reverse mortgage, selling the home, or handing it over to the lender.
If they want to keep the home, they can pay for it with cash or take out a traditional mortgage to pay off the reverse mortgage.
If they decide to sell, the proceeds will be used to pay off the reverse mortgage, and all remaining equity will belong to your heirs plus any other money or assets you left to them.
The good news about a reverse mortgage is that it is a “non-recourse” loan. This means that neither you nor your heirs will ever owe more than the value of the loan or 95 percent of the appraised value, whichever is less.
We always recommend that you talk to your family and involve them in the process of obtaining a reverse mortgage so that they can know what to expect.
Reverse Mortgage Myth #3: Reverse Mortgages Are a Scam
FACT: The Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, is a legitimate financial product that is backed by the Federal Housing Administration (FHA) and regulated by the U.S. Department of Housing and Urban Development (HUD).
Federally backed reverse mortgage loans can only be offered by lenders approved by the FHA and registered with the Nationwide Multistate Licensing System / Nationwide Mortgage Licensing System and Registry (NMLS).
One way to protect yourself is to only work with lenders that are licensed and registered with the NMLS. It is also recommended that you check with third-party review websites and read customer reviews.
Reverse Mortgage Myth #4: My Heirs Will Be Responsible for Repaying the Loan
FACT: Your heirs will be given the following options if you still have a reverse mortgage when you pass: selling the home, keeping the home, signing the title over to the lender, or doing nothing.
If they decide to keep the home, they will need to pay off the reverse mortgage loan by either paying for it with cash or taking out a traditional mortgage to pay it off.
However, it is important to reiterate that they are under no obligation to keep the home or pay off the loan unless they decide that’s what they want to do.
Reverse Mortgage Myth #5: Reverse Mortgages Should Only Be Used as a Last Resort
FACT: In recent years, the perception of reverse mortgages has shifted significantly. Once considered a loan of last resort, they are now recognized as a valuable tool for retirement income planning.
Renowned retirement income expert, Dr. Wade Pfau, emphasizes that reverse mortgages can be used as “a retirement income tool that can be incorporated as part of an overall efficient retirement income plan.”
“Financial planning research has shown that coordinated use of a reverse mortgage starting earlier in retirement outperforms waiting to open a reverse mortgage as a last resort option once all else has failed,” Pfau explained.
In summary, it is now recommended that if you meet the reverse mortgage requirements that you don’t wait until you find yourself in a desperate situation to pursue one.
According to a report published in the Journal of Financial Planning, when managed and used responsibly, a reverse mortgage can effectively contribute to a retirement portfolio.
The flexibility in how the funds from a reverse mortgage can be utilized, combined with the diverse options for receiving those funds, provides retirees with a wide range of options.
Reverse Mortgage #6: I Will Lose My Social Security and Medicare Benefits
FACT: One of the concerns about a reverse mortgage is that it will affect Social Security and Medicare benefits. Reverse mortgages have no impact on standard Social Security payments or Medicare benefits due to the fact that these programs are not based on needs.
However, a reverse mortgage could affect those who receive Supplemental Security Income (SSI), which is not the same as standard Social Security benefits, according to the law firm Moen Sheehan Meyer, LTD. A reverse mortgage may also affect Medicaid benefits.
If you are a Medicaid or SSI recipient, you will want to consult with a financial adviser so you can know whether or not those benefits could be affected.
Reverse Mortgage Myth #7: You Need Good Credit for a Reverse Mortgage
FACT: While a good credit score is important when applying for a traditional mortgage as it plays a role in the interest rate you qualify for, it does not have the same importance when it comes to applying for a reverse mortgage. In fact, there is no minimum credit score required for getting approved for a reverse mortgage, which means you can get a reverse mortgage with bad credit.
That being said, when you are going through the application process for a reverse mortgage, the lenders will pull your credit report and check your credit history as part of their overall financial assessment.
Lenders will primarily focus on your ability to cover property taxes, homeowners insurance, required fees, and maintenance costs to ensure the home remains in good condition.
Credit scores and credit history do play a role in conveying this information. However, even if you have bad credit, you may still be approved for a reverse mortgage if you can demonstrate that you meet the necessary requirements.
Reverse Mortgage Myth #8: You Can’t Get a Reverse Mortgage if You Have a Mortgage
FACT: Having a mortgage does not prevent you from getting a reverse mortgage. Getting approved for a reverse mortgage is based on your age and how much equity you have in your home. If you have sufficient equity, you can get a reverse mortgage with or without a traditional mortgage.
If you still have a conventional mortgage when you take out a reverse mortgage, the reverse mortgage will pay off your current mortgage. That also means that you will no longer have the monthly mortgage payments that go with it.
Reverse Mortgage Myth #9: If I Outlive the Reverse Mortgage, the Lender Will Evict Me
FACT: There are requirements for staying in a home with a reverse mortgage, but making sure you don’t outlive the reverse mortgage loan proceeds isn’t one of them.
In order to stay in a home with a reverse mortgage, borrowers are required live in the home the majority of the year, stay current on property taxes, stay current on homeowners insurance, maintain the home, and pay any other fees that may be required such as homeowner’s association fees.
If you run out of reverse mortgage funds, you can continue to live in the home as long as you continue to meet those requirements.
Homeowners decide to get reverse mortgages for different reasons. For example, if they are taking out a reverse mortgage to pay for home upgrades, fund a one-time project, or to beef up their retirement savings, they likely have other sources of income. This means that if they outlive their reverse mortgage proceeds, they will still be able to make ends meet.
However, some homeowners take out a reverse mortgage to supplement their income, which means running out of reverse mortgage funds may have a greater impact. Borrowers can be strategic about how they receive their funds as monthly payments.
If borrowers choose to receive their payments as monthly installments, they will have two options to choose from: term payments or tenure payments. If they choose term payments, they will elect to receive monthly payments for a determined period of months or years. When that period is over, the payments will stop. If they choose tenure payments, the monthly payments will last for as long as the borrower remains in the home.
Reverse Mortgage Myth #10: It’s Hard to Sell a Home with a Reverse Mortgage
FACT: Homeowners who have a reverse mortgage on their home can choose to sell it at any time. Selling a home with a reverse mortgage isn’t any different than selling a home with a traditional mortgage, but there are some differences for the seller.
The process of selling the home will be similar to selling a home without a reverse mortgage, but the proceeds from the sale of the home will be used to pay off the reverse mortgage loan. And since a reverse mortgage is borrowed against the equity in the home, the homeowners won’t earn as much profit as they would when selling a home with a traditional mortgage, in which equity grows.
Reverse mortgages are a non-recourse loan, which means that the homeowners will never owe more on the home than 95 percent of the appraised value.
Revere Mortgage Myth #11: My Spouse Will Be Kicked Out of the House if I Pass Away
FACT: Whether or not your spouse will be able to continue to live in the home after you pass away will depend on a variety of factors and scenarios, which are detailed below:
- If Your Spouse is a Co-Borrower. If you and your spouse were both at least 62 years of age when you took out the reverse mortgage and your spouse is listed as a co-borrower on the loan, then your spouse will be able to continue living in the home and benefit from the reverse mortgage. Essentially, nothing will change for him or her.
- If Your Spouse is an Eligible Non-Borrowing Spouse. Eligible non-borrowing spouses are afforded certain protections, and one of those is being able to stay in the home after the borrower passes away or moves into a long-term healthcare facility. An eligible non-borrowing spouse is defined as the spouse who is married to the borrower or in a relationship similar to marriage, is named in the loan documents as the Non-Borrowing Spouse, he or she lived in the home when the reverse mortgage closed, and the home is not in default for any reason.
- If Your Spouse is an Ineligible Non-Borrowing Spouse. If the spouse is an ineligible non-borrowing spouse, then he or she will likely have to vacate the property after you pass. A spouse becomes ineligible if he or she moves out of the home while the reverse mortgage is in place, divorces the borrowing spouse, the home is no longer the spouse’s primary residence, or he or she is not listed on the loan documents as the Non-Borrowing Spouse.
If you want to learn more about what a reverse mortgage is and how it works, check out this complete guide to reverse mortgages.
Looking for a reverse mortgage lender? Check out this featured list of reverse mortgage lenders.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.