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Saturday, December 20, 2008

Misinformation Rampant in Reverse Mortgage Lore

By Xerine Raziel

A realtor called me the other day. I was marketing the new reverse mortgage purchase money available after the first of the year.

The realtor lady showed interest in the purchase program, but before getting needed answers, she decided to go into a long drawn-out story about a person wronged by a reverse mortgage company.

First things first... The rule is you must complete this article. You can't just read what happened and then stop before I can explain. We can't have you running about telling everyone else how horrible the reverse mortgage is.

Like most stories that may not be true the story is told second, third or fourth hand. In this case, the agent had a girlfriend, who's friend's father had a reverse mortgage on his home. After his passing the home made it's way into the hands of the FOAFOAR (I'm going to use this acronym for the Friend Of A Friend Of A Real estate professional).

Well, more money was owed to the lender, at the time of his death, than the home was worth. According to the realtor the mortgage company required repayment of the entire amount owed.

To repay the reverse mortgage lender the FOAROAR sold the property and had to come out of saving an addition 40 thousand dollars to cover the deficiency.

Did this happen? I seriously doubt it. The reason is reverse mortgages are known as non-recourse loans. This means in the circumstance of the FOAFOAR the mortgage company cannot come after the heirs for the difference.

In the circumstance of a deficiency or negative equity the borrower or estate conduct the sale of the property as follows....

The mortgage company will require a real estate agent to list and market the property for sale. In the process the realtor will furnish comparable properties so the mortgage company knows the property will be sold at a fair market value. Eventually the home is sold and the lender is repaid the sale price less closing costs.

HUD makes the rules and the lender is entitled only to these proceeds from the sale of the home. If the loan balance exceeds the net proceeds, it's tough cookies for the lender. They have to write it off and go on their merry way.

This is one of several myths flying about regarding the reverse mortgage. The reverse mortgage may be a strong tool for you to utilize, or a poor choice given your circumstance. But don't assume you know until you really know. Call a professional or two first.

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