Reverse Mortgage vs Short Sale: Will it Work?

To my readers:

I have posted this item below ("Reverse Mortgages Versus Short Sales") because I wanted to be able to point out to you that you may have a very big choice here. A short-sale where you are able to sell your house for less than the amount of the mortgage means you are selling, and moving out of the house.

When you get a reverse mortgage, it means you are taking a reverse mortgage, for which you don't have to qualify (income, credit, assets are not used for qualifcation with a reverse mortgage)...and it means that you will still have complete title to your home, and will continue to live in it, without the burden of making mortgage payments.

However, in most cases, when someone does a short-sale, it's because the house isn't worth the amount of the mortgage. And that means your loan is over 100% loan-to-value of the home. Reverse Mortgages do not have high loan-to-values. Depending on your age, the intertest rate and the appraised value of your home, you will get approximately 60% to 85% loan-to-value.

This will not be enough to pay off your current loan, which is over 100% loan-to-value. So, to get the reverse mortgage you will most likely have to come up with cash from your other assets to make up the difference between what you owe and what the reverse mortgage will provide.

If you can pay the difference you will be able to save your home and live in it for as long as you wish, without the burden of any monthly mortgage payment. You will be responsible for paying your own property taxes and property insurance.

Taking this one step further, if you have equity in your home, but are late with your mortgage payments, or close to foreclosure, or have a high total of other debt, it is not wise to get a home equity loan which requires monthly payments. (If you have late mortgage or credit card payments and can even get an equity loan the interest rate will be very high.) Unless you know that you will be getting a large sum of money, through, say, an inheritance or bonus and can quickly pay back the equity loan, and then make your regular mortgage payments, etc. that plan might work.

But if you get an equity loan you may be raising the loan-to-value on your home so high that a reverse mortgage will not be able to help you.

So, if you are 62+, and are facing foreclosure, or have a high debt level it would be wise to see how a reverse mortgage could help you. It's entirely possible that a reverse mortgage can pay off your current loan and stop all monthly mortgage payments. Then you can use that old mortgage payment money to pay off your other debt at a fairly rapid pace. Later, if you wish you can make payments on the reverse mortgage, or even pay it off without penalty.

Gloria


Reverse Mortgages Versus Short Sales

Posted: 10 Jun 2008 05:03 AM CDT

If you’re a senior and have financial difficulties, which is better: A short-sale or a reverse mortgage?

With a short-sale you sell your home at a discount — and the lender accepts less than the full mortgage balance to make the deal work.

The only reason a lender will agree to take a loss with a short sale is that it believes it will have even bigger costs if the property is foreclosed.

But why should a lender take any loss? If the value of the property goes up the lender does not get a share of the profits so why should the lender take a loss if the value of a home declines?

In terms of credit, a reverse mortgage can allow you to pay off the existing mortgage on your home — and as a result eliminate a huge monthly payment. That’s good for your cashflow and also good for your credit standing because a reverse mortgage is not a negative item.

Also, of course, with a reverse mortgage you get to stay in your home while with a short-sale the property is sold and you must rent it back or move elsewhere.

Fair Isaac Corporation — developer of the most widely-used credit scoring systems — explains that for purposes of credit reporting a short-sale is no different from a foreclosure. Few events, of course, are more damaging to credit scores than a foreclosure.

Here’s what the company says at its MyFico.com website:

Are the alternatives to foreclosure any better as far as my FICO score is concerned?

“The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all “not paid as agreed” accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score.

“If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact to your FICO score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score.”

Courtesy of Reverse Mortgage Guide 6-10-20008