For compliance and legal reasons, there are many topics and phrases we should avoid when discussing reverse mortgages with a homeowner. The following is a list of such deceptive talking points:
Don’t tell them, “The reverse mortgage is tax-free cash”
While you may see ads that use this phrase, the CFPB considers this deceptive because the borrower must pay property taxes. Furthermore, there are other taxes paid with a reverse mortgage at closing (or after the home sells) like intangible tax, transfer tax, recording fees, state tax stamps, and even capital gains taxes.
Don’t tell them, “There is no payment”
The CFPB has flagged this phrase as highly deceptive because taxes, insurance, condo dues, HOA dues and more must be paid. It is more compliant to say, “a reverse mortgage requires no regular monthly principal and interest mortgage payments, but property charges must still be paid.”
Don’t tell them, “You will never lose your home”
Many will assume you cannot lose your home with a loan product that defers principal and interest payments, but that is not true. The easiest way to lose your home with, or without, a mortgage is failure to pay your property taxes.
Don’t tell them, “Making payments will give you a TAX break”
Any voluntary prepayments are applied to the mortgage insurance first, which may, or may not, be deductible. They may have a long way to go before payments are applied to mortgage interest, which again may provide no benefit. Only their CPA or tax planner will know the tax benefit for certain.
Don’t tell them, “We eliminate your debt”
The CFPB considers phrases that imply the elimination of debt to be deceptive. A reverse mortgage can wipe out liens secured by the home, but that doesn’t make one debt-free. Rather we transfer debt, replacing the existing mortgage with an equally large, or larger, liability.
Don’t tell them, “There are no income or credit qualifications”
We underwrite the loan through a process known as financial assessment. While low income or poor credit may not directly disqualify the borrower, it may indicate the need for a sizeable life expectancy set-aside (LESA) to pay property taxes and insurance. This sometimes disqualifies the homeowner.
Don’t tell them, “A reverse does not affect government benefits”
While Social Security and Medicare are not adversely impacted, a reverse could impact other benefits. For example, a borrower who draws funds and places them in a bank account may not qualify for Supplemental Security Income or Medicaid – both means-tested programs for those that need them.
Don’t tell them, “Your LOC is earning interest”
While their available line of credit continues to grow at a very nice rate, that is not interest. The borrower is not earning anything. LOC growth simply represents a greater capacity to borrow more money in the future regardless of their current home value. Remember, the LOC is a form of “credit.”
While this list is certainly not comprehensive, extra caution should be taken when discussing the following topics:
- Investment, insurance, or tax advice
- Removing or adding anyone to title
- Making or skipping mortgage payments prior to closing
- Specific counseling agencies and their fees
- The ability to refinance the loan in the future
For more information on reverse mortgage guidelines, please purchase the book Understanding Reverse, and subscribe to my blog in the upper right corner of this page.