Once the turn of the century occurred, reverse mortgages began to gain popularity. According to statistics from the U.S. Department of Housing and Urban Development, the period from 2000 to 2008 saw a 1,500% increase in reverse mortgages.

Seniors over the age of 62 are looking for options to gain some extra cash or to simply use the equity in their house for emergency situations. Though reverse mortgages can seem like a wonderful option for some, they are often a burden for others. It’s important for you to completely understand the process and future implications of a reverse mortgage before you apply.

Step 1

Gather research. The web is a great resource to find up-to-date, relevant information about whether a reverse mortgage is right for you and your family. You should also contact lenders and mortgage professionals to discuss the fine print and the pros and cons.

Step 2

HUD requires you to sit down with an approved counselor to help you understand reverse mortgages and also to provide you with alternatives that may suit you better.

Once these two steps are completed, you will need to arrive at a decision. While you are taking this journey, you should avoid these common mistakes and scenarios:

• Due to the immense popularity of reverse mortgages, con artists have surfaced in an attempt to  into paying exorbitant fees or even to steal their identities. To safeguard your investment, contact only lenders approved by the Federal Housing Administration. The Federal Housing Administration insures HECMs (home equity conversion mortgages). An HECM is the only reverse mortgage insured by the U.S. Federal Government.
• Condo Owners – The FHA poses more stringent restrictions on condo homeowners. Your condo development must meet FHA requirements. Many reverse mortgage borrowers are approved initially and rejected at a later date due to the condo development’s failure to meet FHA standards. Unfortunately, the FHA can disqualify an entire development from a HECM loan if too many residents fail to pay their ownership fees. As a condo owner, you will also face stricter insurance requirements as well.
• Consider your options before signing on the dotted line – Mortgage counselors will instruct you to consider reverse mortgages only after you have exhausted all other options. The reason is because the initial fees can cost tens of thousands of dollars.
• Your counselor is supposed to discuss alternatives with you but some will not. When you fulfill your mandatory visit, make sure to ask the counselor about any alternatives and the pros and cons of each.
• Consult with a financial advisor to discuss the ramifications of a reverse mortgage on any government assisted programs such as Supplemental Security Income or Medicaid. Typically, Medicare and Social Security are not affected because you are applying for a loan and not receiving extra income.

If you are concerned and you have further questions, you can visit the HECM FAQ section on HUD’s website.

Step 3

If you exhausted your options and you feel a reverse mortgage is the best choice, you can complete the application and specify how you would like payments to be classified (lump sum, monthly payment, line of credit, or a combination of the three).

Your lender will process your application. At this time, your house will be appraised and inspected for any defects. The loan will be submitted for final approval.

Step 4

Once the loan is approved, the interest rate is determined and you will need to sign the paperwork for closing.

Note: You have three business days to cancel the loan.

The Right Decision is Vital

Once the three days pass, you will receive payments according to your disbursement agreement. The loan amount will be due only when:

a) you pass away

b) your house is sold

c) you move out of the house

d) you allow the property to deteriorate.

Take the necessary time to consider every other option before choosing a reverse mortgage. These types of loans can be valuable to the right person in the right scenario, but most people find they can make money in other ways. Consult with a professional and discuss your alternatives in detail before you make this very important decision.