A reverse mortgage allows a homeowner who is at least 62 years old to receive money from a lender, which does not need to be paid back until the borrower no longer lives in the home or dies.  This sounds like a pretty good idea to many people, especially if they lack sufficient income to pay their mortgage or other living expenses.  For some, it may be a good idea; but, for many others, it made not. 

In the past, lenders did not impose any income or credit worthiness requirements for borrowers to qualify for a reverse mortgage.  Due to a recent increase in foreclosures of reverse mortgage loans, however, new rules have gone into effect.  While these new rules may prevent some from entering into a loan that is likely to be foreclosed, they make it harder to qualify for such a mortgage.

In addition to the requirement that at least one of the homeowners be 62 or older, the home must have significant equity to qualify for a reverse mortgage.  The homeowner must also actually reside in the home, and the loan amount cannot be more than $625,000.

Although reverse mortgages are federally regulated, borrowers must understand the rules and the potential consequences of taking out such a loan.  There are usually considerable fees, and the interest charged on these loans is higher than traditional mortgages.  These expenses will reduce the amount of money a borrower can expect to receive from the loan. 

The homeowner is required to continue to pay the property taxes and hazard insurance for the home.  If this is not done, the lender may foreclose on the loan and evict the homeowner from his or her home.  In fact, the foreclosure rate on these loans has recently reached 9.8%.

If the homeowner does not reside in the home for a period of 12 consecutive months, the lender may also foreclose and evict the homeowner.  This is true, even if the homeowner no longer lives in the home due to illness.  For example, if the homeowner becomes ill and is at a health facility for a year and then recovers to the point of being able to return to his or home, this may not be possible, because the home may have been foreclosed.

Upon the homeowner’s death, in most cases, the children or other heirs of the homeowner will not get the home, unless they can afford to pay off the balance due on the reverse mortgage.  In fact, there have been many cases in which the lender rushed through foreclosure without even following the existing rules.  If the house is foreclosed, everyone living in the home must move out.

As you can see, there is much to consider before taking out a reverse mortgage.  In some situations, such a mortgage may be a good idea. However, before deciding, be sure to consider all of the pros and cons carefully.