Reverse mortgages are a godsend for some senior citizens, but they're not without some pitfalls. If your parents bought their home in their twenties or thirties, they may have long since paid off their mortgage, so they're sitting on property that's all equity. Reverse mortgages allow them to take that equity as cash. If your parents are considering doing this, however, you might want to monitor what they do with the money afterward, because they have a responsibility to maintain the property and pay the property taxes.
How Reverse Mortgages Work
The Federal Housing Authority backs the majority of reverse mortgages through its Home Equity Conversion Mortgage program. The program insures lenders when they buy out homeowners' equity and give them cash in exchange, and it sets some federal rules. Homeowners must be at least 62 years old to qualify. If your parents are married and living together in the home, only one of them must be 62. Your parents can continue living in their home, without making mortgage payments, until they die or relocate. When either of these events occurs, they – or you – must repay the loan, in addition to any interest and fees that have accrued. This is typically accomplished by selling the home.
Your parents can’t take the reverse mortgage money and then ignore the upkeep of their property. The lender does not assume liability for other fees associated with the home – these remain your parents' responsibility. They must keep current with property taxes, homeowners insurance, and repairs and maintenance. Unlike with conventional mortgages, lenders don't build taxes and insurance into a reverse mortgage contract. There's no such thing as escrow from which the lender pays these costs. Your parents must service them separately and apart from the mortgage.
Failure to Pay
If your parents don't pay their property taxes, it can have dire consequences – their lender can foreclose. Foreclosure in a reverse mortgage situation has the same effect as with a traditional mortgage: the entire balance of the loan comes due. If your parents can't repay it immediately, their house is sold at auction to the highest bidder. Your parents could lose their home simply because of delinquent property taxes.
As a practical matter, the FHA doesn't want senior citizens facing homelessness because they don't understand their responsibilities under the terms of a reverse mortgage. The government urges lenders to try to work out these situations before resorting to foreclosure and, by law, reverse mortgage lenders cannot foreclose without giving your parents two years to remedy their default. If your parents are in trouble, contact the lender to find out what options it offers, or seek legal help to sort the problem out. The lender might make the tax payments on your parents' behalf, then incorporate the sum into the amount due at the time the loan is repaid. It might give your parents a grace period, giving them a little more time to bring their property taxes current.
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