Simply the idea of having the bank send a home owner a check every month for living in the home in which they have built equity to many sounds like a great way to help cover expenses in retirement years. Home Equity Conversion Mortgages (HECM), the so-called reverse mortgage, are not new. Recent months have propelled these loans more into the spot light as brokers and lenders scrambled for ways to continue in business after the bubble.
Essentially the HECM is a refinance loan which works in the reverse manner from a standard home mortgage. Instead of the home owner leveraging the equity in their property and borrowing a lump sum using their home as collateral the lender will send a check to the home owner on a monthly basis and slowly consume the equity.
Home owners must have reached a minimum amount of equity in their home and have reached retirement age which automatically gives an air of suspicion to the loans. The Department of Housing and Urban Development has not always insured this type of mortgage but their entry into the marketplace with their HECM has offered more of a safety net to borrowers.
Can the lender take the home?
According to an article in Kiplinger's Retirement Planner Magazine, "The debt will never exceed the value of the home, and you cannot be forced out to repay the debt. The insurance component pays the gap should the house sell for less than the debt way down the road."
Attention has come not to the HECM loan itself but rather the manner in which they are advertised and originated. Mortgage brokers stand to earn a substantially higher amount of origination fee and, according to the National Reverse Mortgage Lender's Association, it has brought on some serious infractions of their policies even among their membership. One particular offender has been censured and may possibly be remanded to authorities in the coming days.
Assistant special agent in charge of mortgage crime investigations in the HUD Inspector General's office, Michael Stolworthy, is currently heading several investigations into activities surrounding reverse mortgages. "I'm not saying fraud is widespread, but some of these are not just fly-by-night outfits," Mr. Stolworthy told the National Reverse Mortgage Lenders Conference. (Source: National Mortgage News)
Avoiding reverse mortgage scams
Shopping should always be first. Nothing is better to any seller of a product or service than to know their client is not shopping for alternatives. Making application to multiple lenders or banks who offer the service will no longer damage your credit as it did in years past. The Fair Credit Reporting Act made sure to allow people the opportunity to shop for home mortgages without being penalized provided they do not stretch their shopping beyond thirty day periods.
According to the website of the Fair Isaac Company (FICO) "most credit scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score."
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