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Accounting Series- Confusing Tax Forms

There was a story on the Tampa Bay news channel last night (May 3, 2016) about a reverse mortgage situation. A couple owned a reverse mortgage person property with a reverse mortgage that was “upside-down” and when they died, the bank was attempting to recoup the shortfall from the couples’ children.

Most people assume that a reverse mortgage is a no-risk situation, but when the property values decline, it is anything but no risk. Elderly people may be at risk of losing their homes, either because of confusion on their part or intentional misrepresentation on the part of a lender.

What is a Reverse Mortgage?

You’ve all seen the ads. Happy smiling couples enjoying the good life thanks to there reverse mortgage.

A reverse mortgage is a home equity loan that someone 62 years or older can take out and continue to live in their home.

It’s similar to a home equity line of credit (HELOC) or a second mortgage with one big difference: with a HELOC or a second mortgage, the borrower must make monthly payments on the loan, which with a reverse mortgage the borrower does not. The thought was that it would permit a retiree who needs money but lacked the income to make monthly payments to borrow money that they could use to support themselves.

Sounds pretty great, doesn’t it?

What is Wrong with Reverse Mortgages?
They are Confusing.

The Consumer Financial Protection Bureau (CFPB) conducted a recent study of homeowners 62 years and older. In the study, the homeowners were shown ads from a number of reverse mortgage lenders.

The results of the Study?

  • Incomplete and inaccurate statements used to describe the loans
  • Important loan requirements often buried in fine print or not mentioned at all
  • Many of the homeowners did not realize the loans needed to be repaid, believing that they were getting interested in free loans, and in some cases believing that the reverse mortgage was a government benefit that provided money to the elderly.
  • The homeowners were left with the message that the can still own their homes and live in them forever, while the ads either glossed over or omitted entirely the fact that the homeowner could lose their home if they didn’t pay property taxes or homeowners insurance.

It is the last finding that I see the most.

Most individuals do not pay their property taxes and homeowners insurance directly when they have a mortgage. Instead, the lender maintains an escrow account where a monthly amount is collected by the lender and used to pay taxes and insurance on an annual basis.

However, this is not the case with the reverse mortgages I see. In those mortgages, the homeowner is now required to pay the taxes and insurance themselves.

Often, when I see an elderly client with a reverse mortgage they may be years behind on property taxes and insurance. When this happens the lender then pays the taxes, and usually, the lender acquires what is referred to as forced placed insurance on the property, which is usually at a higher premium than the homeowner could get on the open market.

After paying the taxes and insurance for a period of time the lender will normally begin the foreclosure process which when completed leaves the borrower homeless.

What You Need to Know About a Reverse Mortgage!
  • It’s a is a home loan, not a government benefit.
  • You have to pay your property taxes and homeowners insurance directly. The lender will not escrow those funds.
  • These loans have interest and fees associated with them.
  • It is a loan that will need to be repaid.
  • If you don’t pay the taxes, insurance, and fees when they become due, you can lose your home to foreclosure.

Sometimes the only option is to file a Chapter 13 Bankruptcy which permits the homeowner to catch up on the taxes and insurance through monthly payments.

Carolyn Secor P.A. focuses its practice in the areas of Bankruptcy and Foreclosure Defense in Clearwater, Florida. For more information, go to our web site www.BankruptcyforTampa.com or call 727-254-1704.

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