by R. Scott Alagood
Texas allows lenders to make “reverse mortgages” which are secured by a borrower’s homestead. A reverse mortgage is an instrument that allows a borrower to borrow money against the equity in his or her home in a single installment, in annuity-like installments, or a line-of-credit available on demand. Like home equity loans, reverse mortgages are subject to a litany of state constitutional restrictions.
A reverse mortgage may only be created voluntarily by the borrower through a written contract. Each owner and each owner’s spouse must join and consent to the reverse mortgage. A reverse mortgage may not be made unless the borrower or borrower’s spouse is at least 62 years of age at the time the loan is made.
If the reverse mortgage provides for the annuity-like string of payments, those payments must be made at regularly scheduled intervals. However, the lender may also make advances on the borrower’s behalf where the borrower fails to pay taxes and assessments, insurance, repairs to the secured dwelling, or any lien with priority over the reverse mortgage. The proceeds received from a reverse mortgage may be used for anything. A reverse mortgage will accrue interest at either a fixed or variable rate of interest which may be compounded during the term of the loan. Most reverse mortgages will accrue interest at a variable rate. Interest on interest is permitted, and will typically compound monthly. However, during the term of the loan, there are no monthly repayment requirements. The principal balance and accrued interest do not become due and payable until one of the following occur:
- All borrowers have died;
- The property securing the loan is sold or transferred;
- All borrowers cease occupying the secured property for longer than 12 consecutive months without prior written approval of the lender;
- The borrower defaults on an obligation specified in the loan documents to repair and maintain the secured property, pay taxes and assessments, or insure the secured property;
- The borrower commits actual fraud in connection with the loan; or
- The borrower fails to maintain the priority of the reverse mortgage after receiving notice from the lender and an opportunity to cure.
Unless voluntarily repaid, when the note becomes due the lender may only satisfy the outstanding balance of principal and accrued interest from foreclosure of the secured property. Reverse mortgages may only be foreclosed through a lawsuit for judicial foreclosure or an expedited legal proceeding allowing foreclosure under the deed of trust. Neither the note nor any deficiency occurring from the foreclosure sale may be satisfied from the borrower’s estate. Said another way, the borrower is not personally liable for the repayment of the note.
A reverse mortgage may not be made unless the borrower and each owner receive counseling regarding the advisability and availability of reverse mortgages and other financial alternatives. The borrower and each owner must attest in writing that they each received the required counseling. If the lender fails to make any required loan advances after receiving notice from the borrower, then the lender forfeits all principal and interest on the reverse mortgage.
Reverse mortgages are not for everyone. Since the loan will not be typically repaid until after the death of the borrower or the sale of the home, family and heirs should be consulted before entering into the loan. Life insurance may be an available option to use to pay off the reverse mortgage upon the borrower’s death. Reverse mortgages may include high closing costs. Because of a life expectancy factor in the loan repayment formula, less money will be available from the loan for younger borrowers. Also, if a reverse mortgage is obtained, seniors may be prohibited from receiving available deferrals of ad valorem taxes.
Available alternative options to a reverse mortgage may include:
- Cashing out whole or variable life insurance policies on the borrower;
- Obtaining a home equity loan;
- Selling or leasing the property; or
- Applying for tax credits and tax abatements for seniors.
While no one plans to run out of money during retirement, the longer folks live, the harder it becomes to sustain the necessary income to provide for living expenses. A reverse mortgage is one option that may be considered for seniors needing additional income. However, care should be taken to make sure that all of the resulting consequences have been considered before entering into a reverse mortgage.
Amendments to the Texas Constitution concerning reverse mortgages are currently scheduled for approval during the November 5, 2013, general election. If approved, these amendments will become effective upon proclamation by Governor Perry.