Borrower behavior before and after the loan can lead to avoidable mistakes

There are many pitfalls reverse mortgage borrowers can fall into, and most have nothing to do with the loan itself. Many of you, our viewers, have had a front-row seat watching reverse mortgage borrowers exhibit some of the strangest and most irrational behavior.

Personally, I’ll never forget the time I pulled up to a potential borrower’s home to find a brand-new RV parked in the driveway. They were in the application process to get a reverse mortgage but the loan was weeks away from closing and by far not a certainty. “When did you get the RV?”, I asked. “Just last week”, answered the husband. I came to learn they were counting on the proceeds of the reverse mortgage as if it was already money in the bank. I was mortified.

This brings us to the first mistake some reverse mortgage borrowers make: using the loan proceeds too quickly or all at once. While the adjustable-rate HECMs (Home Equity Conversion Mortgages) allow for borrowers to leave unused proceeds in what many call a line of credit, some borrowers immediately go on a spending spree with no thought of possibly needing those funds for a future health emergency or financial shock. This could leave the borrowers at risk of foreclosure if they end up without the funds needed to pay their required property charges.

However, beyond the wild-eyed spendthrifts, there are other potential pitfalls every reverse mortgage borrower should avoid.

The second mistake to avoid is rushing into the loan. While

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pushy salespeople will pressure a prospect to proceed quickly there are times when the homeowners themselves are moving ahead too quickly. While required HUD counseling and ethical originators can help mitigate a hasty decision, homeowners may be motivated to act quickly out of an immediate need. As a result, they may not disclose that they have a roommate or relative who lives with them and could be forced to move when the last borrower dies. Another possibility is they need access to funds immediately and disregard the true cost of the loan knowing they’ll likely move from the home in a few short years.

The third mistake reverse mortgage borrowers should avoid is disregarding the potential risks their spouse may face in the future. More specifically, non-borrowing spouses applying for a HECM loan should be notified that while they may continue to live in the home following the death of their partner their access to a future line of credit withdrawals or tenure payments will not. The primary borrower should plan how their partner would be provided for in the event that they predecease the non-borrowing spouse.

The fourth mistake to avoid is ignoring home maintenance and upkeep. One of the key provisions of a reverse mortgage is that the borrower must continue to maintain the home to prevent the deterioration of the property and ensure safety.

The fifth mistake is to ignore increasing property taxes and homeowners insurance premiums. HECM borrowers with a required Lifetime Expectancy Set Aide (LESA) account must understand that the LESA payments are NOT guaranteed for all long as they live in the home. While LESA accounts anticipate future property tax payments over the borrower’s life expectancy rapidly increasing property tax or homeowners insurance payments can exhaust the account prematurely leaving the borrower to resume making these payments out of pocket.

A traditional mortgage or a reverse mortgage for that matter are not necessarily risky loans. However, a borrower’s behavior before and after the loan will shape the trajectory of their success or failure.

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