Following up on a previous article detailing some possible reverse mortgage risks, there are four additional risks that a potential borrower should be aware of before entering into a reverse mortgage transaction. This is according to Dr. Wade Pfau, professor of retirement income at the American College of Financial Services, in a piece at Forbes.
Dealing with loan servicers
The first of these additional risks is dealing with reverse mortgage loan servicing companies. As highlighted in a reverse mortgage report conducted by the Consumer Financial Protection Bureau, consumers have complained about ways that servicers can make the process of coordinating repayment difficult, how they can sometimes act as if a borrower hasn’t met their required obligations, and how they can sometimes lack the maintenance of accurate records or remain unresponsive to communications, Pfau says.
“One example I have personally witnessed is of a reader who obtained a reverse mortgage and then experienced hail damage to the roof of the home,” Pfau describes. “The homeowner’s insurance provided a check to repair the roof but made it out to both the homeowner and the reverse-mortgage servicing company. The reverse-mortgage servicer was very unresponsive and uncooperative about endorsing the check so that it could be cashed and the roof could be repaired.”
While this particular situation was resolved because of intervention by the lender, a lender is not typically obligated to step in on behalf of the borrower in a situation like this, Pfau says.
Temptation to irresponsibly use loan proceeds
For most people, there will always be a temptation to use any major influx of money in an irresponsible and unsustainable manner, and use of reverse mortgage loan proceeds in this way could have a significant impact on a borrower’s financial security in retirement.
“For those who might look at a reverse mortgage as a means to overspend, this could jeopardize the ability to meet spending obligations later in retirement,” says Pfau. “Such individuals may be better off keeping their home equity illiquid and thereby avoid misusing the potential benefits of liquidity.”
While this risk doesn’t apply to every borrower, it should still be kept in mind for those borrowers who may not have “adequate self-control,”writes Pfau.
Effects of saving proceeds on government benefits
Many reverse mortgage borrowers are needs-based, which means that they may be eligible for, and participate in benefit programs aimed at providing assistance to lower-income households or individuals. While taking a reverse mortgage can allow the needs-based borrower to make more effective financial plans in retirement in concert with these benefit programs, saving loan proceeds into a bank account could have unintended consequences when attempting to re-qualify for programs they may depend on.
“Spending from a reverse mortgage, or holding some reverse-mortgage proceeds in a bank account, could reduce eligibility for means-tested benefits like Supplemental Security Income or Medicaid,” Pfau writes. “For those thinking about reverse mortgages as a ‘last-resort’ option, it is important to consider the potential impact of the reverse mortgage on other government benefits.”
Home destruction in natural disasters
If a home is outright destroyed by a natural occurrence like an earthquake or a flood, generally the homeowner has insurance coverage to facilitate rebuilding the home on the same property, which does not make the loan balance become due, Pfau says.
The loan balance, Pfau describes, can become due if there is not sufficient insurance coverage to rebuild the home, or if the displaced borrower decides to move to a different area if it’s determined that the home cannot be rebuilt on the original site.
“The risk here is that the loan balance could become due sooner than the borrower had expected,” Pfau writes. “For those with sufficient remaining assets, this could be a nuisance but not necessarily a severe disruption for the success of the retirement plan.”
However, for a needs-based borrower, this risk can have major consequences if the proceeds of a reverse mortgage are used once the other assets of the borrower are exhausted, Pfau says.
Read the full article at Forbes, sourced from Pfau’s book “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement.”
