Reverse mortgages may be a helpful financial tool for Americans 62 and older, although some readers will dispute that.
WASHINGTON (MarketWatch) -- Reverse mortgages may be a helpful financial tool for Americans 62 and older, although some readers will dispute that. But they aren't a way to keep you out of foreclosure. For that, you'll need different help.
Q. A couple of years ago, I lost my job of 14 years. Now I've used all my savings and retirement funds making my mortgage payments and find myself close to losing my house. It has been brought to my attention that you recently wrote about a reverse mortgage and I thought I should find out all I can about it as a way to save our home.
Reverse mortgages can be a great tool for providing extra retirement funds, but it is not a tool that someone can use to get out of foreclosure.
Answer: I'm not sure a reverse mortgage is a tool someone can use to stave off foreclosure. For starters, you or your spouse must be 62 years of age. And you must have substantial equity in the place, meaning your mortgage must be fairly close to being paid off or the value of your property far exceeds the balance on your mortgage.
If you meet these two criteria, then get on the phone right now and find a lender in your area that writes reverse mortgages.
But a better way to save your home might be to call your lender's workout department. Your lender may or may not have workout specialists on staff. But if the company does, these are the folks to speak to, not the collection-department nasties who have been calling you demanding payment.
Many lenders these days are bending over backwards to keep borrowers in their homes. If you are eligible -- that is, if there is any possibility that you can get back on track within a reasonable amount of time -- they have several tools at their disposal to help people who have lost their jobs, suffered from a major medical problem, dissolved their marriages and so on.
Here are some of the options lenders can make available to delinquent borrowers: Forbearance. An agreement that temporarily allows borrowers to pay less than a full payment, or no payment at all, for a set period. Forbearance is an option when you can show that funds from a bonus, tax refund or other source will let you bring the mortgage current at a specific time in the future. Reinstatement. Sometimes combined with forbearance, this allows the borrower to pay the total amount they are behind in one lump sum by a specific date. Repayment plan. An agreement that gives you a fixed amount of time, say six months, to repay what you owe by combining a portion of what is past due with your regular monthly payment. At the end of the repayment plan, you will have gradually paid back the amount that was delinquent. Loan modification. An agreement that permanently changes one or more terms of your original mortgage so your payment is more affordable. You and the lender may agree to add the missed payments to your loan balance, for example. You might turn an adjustable-rate loan into a fixed-rate mortgage. Or you could extend the number of years you have to repay. What I'm talking about here is a relatively new cosmos in the lending arena called loss mitigation. Investors -- and the companies that service the loans for investors -- won't do anything to help deadbeats who can pay but won't. But if you have a legitimate reason for not being able to meet your obligation, they want to help.
"Where it is economically feasible, we do whatever we can to get 'nonperforming' loans re-performing," says Bill Merrill, director of nonperforming loans at Freddie Mac, a secondary-market company which helps keep the mortgage money flowing from Wall Street to Main Street.
Like most investors in mortgages -- or conduits for investors -- Freddie Mac works hard to keep borrowers in their homes. In fact, it demands it of the companies which collect monthly payments on its behalf, all in the name of what Merrill calls "homeownership preservation."
"We require, we measure and we incent," says Merrill. And as a result, most companies which administer mortgages have what are variously known as workout departments or portfolio-retention sections.
The size of these departments depend on the size of the servicer. Some have "entire office buildings" devoted to the task; others just a few people. But no matter how big or small, the goal is the same: to keep those who want to remain in their homes in their homes.
Your lender might even be able to help, even if you do not or cannot keep your home. Indeed, there are several different ways to avoid foreclosure and reduce the negative impact on your credit standing, depending on your particular financial circumstances.
For one thing, a qualified buyer could be allowed to take over your debt, even if the loan is considered nonassumable. For another, if you can sell but only for less than what you owe, the lender might agree to a "short payoff" in which the company writes off the portion of your mortgage that exceeds the net proceeds from the sale.
A third choice is to allow you to voluntarily transfer title of your home to the lender in exchange for canceling your entire debt.
Help doesn't come automatically, however. You have to get in touch with your servicer. Unfortunately, studies show most people don't. Some 56% of all delinquent borrowers allow their homes to "go all the way to foreclosure" without ever talking to their lender, according to Merrill.
When borrowers do call, though, the statistics are just as eye-popping. Four out of five go on to be happy homeowners. But you have to call. And you need to call early. "Early intervention is key because you are not in arrears as much," Merrill advises.
Feedback
Several readers suggested that I should have mentioned in a recent item about reverse mortgages that any senior age 62 or older who has substantially paid down or even paid off his mortgage can get an equity line of credit of up to 80% of the home's value without incurring many of the upfront fees required by a reverse mortgage lender. See previous Realty Q&A.
"That's a much better deal, especially if your home is has a market value of $600,000 or more," wrote Mike.
Maybe so. But an equity line requires current monthly payments, so a borrower with a fixed retirement income might not qualify under the debt-to-income ratio. Also, it's possible the borrower could end up needing to use the proceeds from the loan just to make the monthly payments. That's not a very good use of money.
Reverse mortgage counseling will help you examine all alternatives before you undertake a reverse mortgage.
Still, all alternatives should be examined before anyone undertakes any financial transaction, including a reverse mortgage. That's why counseling is required.
Source: Market Watch
