The Reverse Solution for Distressed Homeowners

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This unique financing solution can help save distressed homeowners

 If you or a loved one are behind on mortgage payments and are inching towards foreclosure, it may seem like there is no hope. Banks are very reluctant to modify a homeowner’s mortgage and they simply will not overlook any missed payments. Government programs such as the Home Affordable Modification Program (HAMP) aren’t working either because they were designed with loopholes to protect the banks which allow them to easily foreclose on delinquent homeowners who qualify for the program. However, there is one foreclosure solution homeowners can take advantage of that, for many, is right at their fingertips: a reverse mortgage.

Homeowners, especially young homeowners who are facing foreclosure would never think of using a reverse mortgage to solve their financial problems. Not until discovering how a reverse mortgage works can a distressed homeowner see the advantages of using one as a foreclosure bailout tool. A reverse mortgage allows a senior citizen, age 62+, to tap up to about 65% of the unused equity in their home and use it for cash. If you are under 62 years of age, you’ll have to find someone 62 or older (preferably a family member) to work with as partner for this foreclosure bailout method.

There are four remarkable characteristics of reverse mortgages that make it a nearly perfect foreclosure bailout vehicle.

1) There are no income, asset, or credit requirements; nearly everyone qualifies. This is what makes the reverse mortgage so spectacular; all seniors qualify except those that have IRS tax liens or other large unpaid debts. Senior citizens age 62+ that are currently in foreclosure or those have very low credit scores can receive funding through a reverse mortgage.

2) There are no monthly mortgage payments. The balance of the loan increases every month until the senior passes away. Then, the heirs or beneficiaries of the senior citizen have roughly a year to sell the house to pay the mortgage off. If there are no heirs or beneficiaries designated by the senior citizen, or the remaining heirs or beneficiaries cannot sell the home for whatever reason, the lender will attempt to sell the house for the balance owed plus interest accrued according to the terms of the loan. If the senior citizen sells the house for whatever reason before passing on, the loan and any accrued interest must be paid back at the time the home is sold. The only expenses for the senior citizen are their homeowner’s insurance policy and their annual property taxes.

3) A reverse mortgage does not require repayment as long as the borrower lives in the home. Again, lenders recover their principal loan balance, plus any accrued interest (according to the terms of the loan), when the home is sold; either by the senior borrower during life, or after the senior borrower passes away. Assuming the home is sold at a price above the outstanding loan balance at the time of sale, the remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the outstanding reverse mortgage lender the amount of the shortfall. In other words; if the senior lives so long that more is owed on the house than the house is worth at the time of sale, the surviving family is not responsible for the loss, HUD is.

4) The older a borrower is, the larger the percentage of the home’s value that can be borrowed. The size of a reverse mortgage loan is determined by the borrower’s age, the current prime interest rate, and the subject home’s value. The amount that may be borrowed is capped by the maximum FHA mortgage limit for the area, which varies from $81,548 to $160,950, depending on local housing values.

Before using a reverse mortgage in a foreclosure bailout situation, you need to weigh its benefits and compare it to this one drawback: A reverse mortgage takes away from the net worth of the senior citizen from a real estate equity standpoint until it is paid back. In other words, reverse mortgages are a negative amortization loan. The homeowner’s equity is slowly being dissolved every month by the money the senior borrower decides to use against the home and the interest rate according to the terms of the loan they agree to.

Ideal candidates

The ideal candidate for this foreclosure bailout method would be a senior citizen who has a lot of equity in their home, but for whatever reason is missing their monthly mortgage payments. A simple consultation with a reverse mortgage specialist is all that’s needed to get the financing process started. If approved, the new reverse mortgage will pay off the existing mortgage and save the homeowner from foreclosure. There will be no monthly payments on the new reverse mortgage, which will free up some money for living expenses and medical care. Chances are the senior will be approved because a reverse mortgage is not based on credit, but rather available equity in the property to be refinanced.

Younger borrowers can only access the funds a reverse mortgage can provide through a senior citizen parent, relative or elder friend who refinances, extracting cash out of their property. It is imperative to understand that this finance method should only be used in certain situations, and should only be used as a band-aid loan, when the younger distressed homeowner is certain that the reverse mortgage can be paid back to their elder financier over time. This pay back would start with monthly payments to the senior borrower and end with a refinance of their own home at some point in the future to pay off the remaining balance. Obviously the elder loan candidate needs to be a homeowner with enough equity in their house to be able to obtain a reverse mortgage and use the proceeds to pay off the house that’s in foreclosure. Once paid off, the younger individual now has a house with nothing owed.  This frees up money to start paying down the elder’s reverse mortgage. It’s wise to note for all parties involved that the younger distressed homeowner needs to have sufficient income to be able to pay down the reverse mortgage in a timely fashion agreed on by the parties involved. It would be wise to record a mortgage lien against the property in the name of the senior who assisted the distressed homeowner.  Doing so protects the senior’s financial interest. In time, the younger borrower can refinance and pay the senior off in full assuming their credit and income is sufficient enough to obtain a new mortgage.

If you owe more than your home is worth, it’s not a wise idea to use a reverse mortgage to float monthly mortgage payments. That is simply delaying an inevitable foreclosure and destroying the equity position of the person who elects to cash their home out with a reverse mortgage to apply the proceeds to your situation.  Instead, put your house on the market with a licensed real estate agent and proceed with a short sale. A short sale is when your mortgage servicer allows for a partial payoff of your home based on the sales price of the home, not what is owed. Banks won’t allow a relative with the same last name to “buy out” a distressed homeowner, therefore you’ll have to get someone you’re close to with a different last name as yours to be the buyer. Have them place a low cash offer through your agent. Your agent will negotiate with the bank until they agree on a sales price. Once the bank accepts the offer to purchase, have your chosen senior complete the financing for the reverse mortgage. When they close on the reverse, their funds will go to your buyer who will execute the short sale purchase. They can deed the home back to you after the transaction closes. You will then make your monthly mortgage payments to the reverse mortgage holder or directly to their mortgage servicer; whichever you collectively decide on. Remember to have your senior borrower approved with reverse mortgage financing before you list the house with your agent. By doing so, you’ll be able to close much faster when your buyer’s cash offer is accepted. Some may frown on this method of foreclosure rescue, but the banks are frowning on 4 million homeowners right now who are about to lose their homes. This is a viable solution.

The other option for a younger distressed homeowner would be to simply walk away from their house altogether and buy a new, more inexpensive house, using the proceeds from the elder’s reverse mortgage. Short sales can be a time consuming nightmare. It may just be easier to walk away and start over instead of dealing with the headaches associated with short sales. The whole key to this finance technique is understanding that it is a business deal. The senior puts up money, in the form of a reverse mortgage against their own property, to pay off a house that would otherwise go to foreclosure, be it their own or a younger homeowner’s who doesn’t qualify for a reverse mortgage. What’s in it for the senior? An equity stake in the property that was “bailed out”. This can be done by recording a mortgage lien, in the senior’s name, against the property they saved from foreclosure. There are no monthly payments for the senior to make on the reverse mortgage itself, but the reverse mortgage is still a mortgage; it needs to be paid down, and eventually paid off by the beneficiary of the transaction. The senior’s property is never at risk because reverse mortgages cannot foreclose. Consult with an attorney before exercising this method of finance as it may involve multiple parties and could involve various facets of the Real Estate Settlement and Procedures Act (RESPA).