Consumer Safeguards for Reverse Mortgage Borrowers
There’s always a large concern for the safety of the elderly in business and lending situations. Scam artists often prey on older people in an attempt to defraud them of their money. In the case of reverse mortgages, the concern of exploiting the elderly can be of great concern to borrowers, their children, or their caregivers.
Reverse mortgages today were created with many features to protect seniors from unscrupulous lenders who want to defraud or prey on seniors. In many cases, seniors aren’t aware that they have numerous rights and protections in lending and borrowing. Today many consumer safeguards are in place to regulate the reverse mortgage industry and protect the interests of senior citizens and their families, including:
• Counseling services: All prospective borrowers must meet with an independent counselor before they are able to apply for a reverse mortgage. These counselors are overseen by the Department of Housing and Urban Development (HUD). Counseling sessions are designed to:
o inform borrowers of their rights and responsibilities
o outline the alternatives to reverse equity mortgages
o offer financial guidance to prospective borrowers
• Interest rates: With federally insured reverse mortgages like FHA HECM, the borrower often has a choice of interest rates. Some choose a fixed interest rate that never changes. Others choose an adjustable rate that can change monthly or yearly, depending on the terms of the mortgage and the current interest rate. In a conventional reverse equity mortgage, an adjustable rate is most common and is usually based on a standard bank rate plus an additional amount (variance) charged by the lender.
• Fees: As with any mortgage, reverse mortgage fees are paid to the lender as part of the terms of the mortgage. These fees can be financed using funds from the mortgage if the borrower doesn’t have the money available to pay those fees outright. Regulations cap those fees at a maximum limit, in order to prevent unscrupulous lenders from charging outrageous fees to borrowers.
• Disclosure: Borrowers who borrow under the federally insured FHA HECM program are required to receive a disclosure about the Total Annual Loan Cost, known as TALC. This disclosure shows borrowers the transaction costs for the life of the loan and lets borrowers know every cost they’ll incur as part of the reverse mortgage.
• Maturity: A reverse mortgage loan will never become due during the lifetime of the homeowner or homeowners. As long as one homeowner continues to live in that home as the primary residence, the homeowners aren’t obligated to repay any part of the loan balance.
• Amount due: These loans offer protections for borrowers because these mortgages are “non-recourse.” This means that borrowers will never owe more than the value of the home, even if the loan balance ultimately exceeds the appraised value of the home.