are reverse mortgages great to profit from bubble bust?

[sniglet]

Will people taking out reverse mortgages these days be the ones laughing if real-estate prices tank over the next 4 years? Could a substantial real-estate bust have any negative impacts on people who have taken out a reverse mortgage?

[Rhonda P]

Sniglet, the amount of equity that a senior (minimum age of person on title is 62) can take is VERY limited with a reverse mortgage. They need quite a bit of equity in order to withdrawl or receive payments via a reverse mortgage. The amount of equity that is allowed to be drawn is based on their seniors age, property value and liens on the property (no credit or income qualification).

[sniglet]

[Rhonda P]

Great question. Answer: Nope...the seniors are protected from that. Reverse mortgages are now non-recourse (there may have been a time when this was not true). The LTV is around 50% or so (again, it's a variable amount). They cannot be foreclosed on. They're not making payments. The mortgage is not paid off until the property is sold. If there is a balance remaining due to the property selling for less than the low loan balance, it will not be the responsibility of the seller or their family.

[deejayoh]

[Rhonda P]

It is a risk the bank takes which is why they are conservative on the loan to value and factor in the age.

If I was born in 1940 and have a home currently worth $500,000; I may be eligible for $218,900 in the form of a lump sum or credit line.

Here is a calculator from AARP: http://www.rmaarp.com/estimates.asp#amount

[sniglet]

[Rhonda P]

Sniglet, reverse mortgages are backed by FHA or FNMA.

[sniglet]

[Rhonda P]

Sniglet, actually there is upfront and mortgage insurance on the more popular reverse mortgage programs. Seniors also are required to meet with a HUD approved counselor before they can obtain a reverse mortgage.

[Rhonda P]

woops...I meant to say upfront and monthly mortgage insurance.

[sniglet]

I have been thinking about reverse mortgages some more lately and am wondering what would happen if you wanted to just sell the under-water property? Who gets to set the sale price? Can the lender just veto any sale because they don't approve of the market price?

Its not as if you could list such an under-water property for the value of the outstanding mortgage.

Is it even possible that a lender could offer to pay you money NOT to sell your under-water property? But if the lenders had veto rights on any sales price lower than the value of the mortgage maybe they are the ones with the power, and could refuse to let you leave.

Then again, I suppose that if the home really is under-water, you can just mail the keys back to the lender. Why do you care about selling anyway? It's not as if you'd be getting any money out of the sale.