Common Myths & Misconceptions About Reverse Mortgages

There are many myths and misconceptions regarding HECM reverse mortgages, regardless of the fact that legislators and regulators work vigorously to protect the best interests of seniors when it comes to these FHA insured products.

Today's economic climate is often difficult for seniors, who are beginning to experience financial freedom through these unique loans.  Online and off, there are countless resources providing information regarding reverse mortgages and how they work.  Still, the myths and misconceptions remain among both seniors and even financial advisors.  We hope to clear up some of the misconceptions in the information below, so that you can better understand how reverse mortgages help seniors enjoy a more comfortable lifestyle in their retirement years.

Myth 1: You'll loose your home...

With a reverse mortgage, a loan cannot be called due as long as you pay homeowners insurance, property taxes, and maintain the home.  Your home will not be taken by the lender, and you continue to own your home.  The loan must be repaid at the time the last borrower moves out of the home permanently.

Myth 2: My heirs will not inherit the home...

Not true at all. This is one of the most common myths, and one that is not true.  Your heirs will never owe money on your home, as the loan is FHA insured which means you will never owe more than your home's market value.  Upon your death your heirs can choose to sell your home and divide the equity that remains, or keep the home by refinancing with a conventional mortgage.

Myth 3: I won't qualify because of my credit...

When applying for a reverse mortgage, your credit standing makes no difference.  Whether you have exceptional credit or no credit at all, the only requirement for those trying to obtain an HECM reverse mortgage is that you are not delinquent on FHA, federally insured SBA, or similar loans.  Even if you have filed bankruptcy in the past, it does not affect applying for a reverse mortgage.  If you have filed bankruptcy, it is required that you have paid consistently on the plan for a period of 12 months.  Facing foreclosure?  You may still qualify.

Myth 4: I owe money on my home, so I won't qualify...

Again, not true.  Reverse mortgages are often used by seniors to pay off an existing first or second mortgage on a home, so that the monthly mortgage payment is eliminated.  Any money that remains can be used in any way you like.

Myth 5: I don't need a reverse mortgage because I am not "cash poor." 

False again.  While many seniors do need reverse mortgages for living expenses or emergencies, the fact is most seniors are interested in using the lump sum or monthly proceeds to plan for their estate or enhance their standard of living.  A growing number of seniors with multi-million dollar homes include reverse mortgages in combination with financial guidance from their advisors in legacy or estate planning.

Myth 6: I will have to pay taxes on a reverse mortgage...

A complete fallacy.  The money given to those who are approved for a reverse mortgage is not income, but a loan.  Loans are not taxed; proceeds of your reverse mortgage are tax free.

Myth 7: My social security benefits or Medicare may be affected by a reverse mortgage...

Social security benefits, government based Medicare and retirement programs are not affected at all by a reverse mortgage, however if not properly managed this type of loan could impact programs that are "need" based such as Medicaid.  Consult with a qualified financial advisor to ensure you fully understand how a reverse mortgage could impact whether you qualify for certain government benefits.