Sharon Kampen, 69, has been a widow since 1976, and few people have guided her through financial decisions, she said.
“I’ve gotten into a lot of trouble along the way,” she said.
When her mother died, Kampen inherited her childhood home. With the house completely paid for, Kampen looked into the federal reverse mortgage program, called the Home Equity Conversion Mortgage (HECM), to help pay for her taxes, bills and increasing health costs.
“I used all my money getting my mother’s house together,” Kampen said. “I needed extra cash. I also had ongoing medical issues. If you have an emergency, you can draw on the house and they deposit the money within a few days.”
A reverse mortgage is just like it sounds. Instead of Kampen getting a loan to buy a house, she essentially is exchanging a portion of her home’s equity for cash over a long period of time.
To be eligible for the program, the Federal Housing Administration (FHA) requires that you be a homeowner 62 years of age or older and own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan. You also must live in the home.
Although Kampen and others have found the program beneficial, seniors should be aware that predatory lending practices exist nationwide. This is why seniors must first attend a consumer information session from a HECM counselor prior to obtaining the loan. The sessions are free or very low cost.
One of the groups that educates seniors about the pros and cons of reverse mortgages is Justine Petersen, a St. Louis-based company that assists low-wealth individuals to develop financial assets. Galen Gondolfi, chief communications officer at Justine Petersen, said, “A bank can’t have a client sign on the dotted line without speaking to HUD-certified counselor.”
Gondolfi said seniors should be cautious of people knocking on their doors or heavily advertising for the loans. And they should also reflect on whether or not they want to take out a mortgage on a piece of property that may not have a mortgage.
Kampen advised others, “Just be careful and don’t rush into anything. You can get suckered.”
As long as Kampen is living in the home, the bank cannot take away her home, and that’s what she likes about the loan, she said. Gondolfi said there are safeguards to make sure the calculations are done based on a lifespan that far exceeds the average human life expectancy.
“There is not an instance where one would be living and be homeless,” he said. “They have you living at 115 years.”
However, if you don’t pay your property taxes, keep up with the property conditions or pay your homeowners insurance, the HECM lender can foreclose on you – in which you would be living and homeless.
‘My dad went ballistic’
Deborah McClellan, a HUD-certified foreclosure specialist, looked into a reverse mortgage for her father Clyde Ross. Ross built his home from the ground up in the 1950s, but needed help with extra cash to pay the property taxes.
“At first I was totally against reverse mortgages, even as a loan officer myself,” she said. “But I finally found out that for some people, they are very useful.”
In her opinion, McClellan felt that the loan didn’t completely address what would happen to the property for the heirs. However, her family members came up with their own plan regarding the house’s future. And in her family’s case, she feels it would have been helpful.
When the home is sold or no longer used as a primary residence, the cash, interest and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to the spouse or estate. However, Deborah and her siblings decided that if their father only took out a small monthly amount, then they would be able to come up with the mortgage and buy the house.
In the end, her father decided not to go through with the process because he didn’t like the appraisal process. Ross did not know the appraiser would be taking interior pictures.
“My dad didn’t like it,” she said. “He was in his bedroom, and the bed was not made up. And my dad went ballistic.”
She still cautions families that children or heirs are at risk of losing the property through the loan process.
“If the heirs don’t care about the property, then it’s a god sent,” she said. “It can be a nightmare or a god sent. With my dad, it would have been a blessing for him.”
For more information about the loan, you can locate a FHA-approved lender by searching online at www.hud.gov or by contacting a HECM counselor for a listing. Or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you.