With the crisis in the real estate market, the American dream of homeownership has come to an abrupt end. Lots of people have lost their homes in foreclosure and many more are delinquent on their mortgage payments. Most people are facing such a situation mainly due to job loss. However, there are some homeowners who can afford their mortgage but are struggling to make their payments.  Such borrowers are tempted to walk away from the property in order to make a fresh start.

However, walking away from property is not a very good option in my opinion as it would ultimately lead to foreclosure. Take a look as to how it can affect you:

Credit effects: If you walk away of the property, it will result into foreclosure. The lender would sell off the property to recover his dues. You would be responsible for paying the deficient amount. It will lower your credit score by 250 points and you won’t be able to get a loan for the next 3-4 years. Moreover, the foreclosure would remain on your credit report for the next 7 years.

Tax penalty: If your lender forgives the deficient mortgage balance resulting from the sale, then you will have to pay taxes for that forgiven amount. The balance amount would be considered as your income and the IRS will charge you the income tax. However, with the Mortgage Debt Relief Act in vogue, you won’t be liable for paying the taxes on the deficient amount from the sale of your primary residence if the debt was incurred between 2007 and 2012. After that, the taxes are planned to kick back in.

So, you must be thinking that there’s no respite. No one’s there to help you from this mortgage mess, isn’t it? However, that’s not the case. You can get help provided you take the right step at the right time. Just have a look:
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According to National Consumer Law Center (NCLC), reverse mortgage would be the next sub-prime disaster. It has been noticed that the brokers are making mis-leading claims to the senior citizens in order to give them reverse mortgages. Also, the lenders who were responsible for the real estate boom and the resulting crisis from it are now targeting seniors for reverse home loan scams.

How do lenders scam seniors looking for reverse mortgage?

Some of the reverse mortgage lenders market their products as retirement income. Though the cross-selling has been banned by the Congress in 2008, yet the lenders have been selling annuities along with reverse home loans. Some of the brokers are even seeking higher fees which have led to long-term annuities. In my opinion, this is inappropriate for the seniors as it would tie up their retirement savings for years to come.

It is true that reverse mortgage plays an important role in order to help seniors get mortgage. But it’s important that there should be transparency so that consumers are protected. The government should not only enforce the rules regarding transparency but also ensure that the rules are being followed by the lenders.
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Reverse Mortgage, also known as “Aging in Place”, has been quite popular with the senior citizens since its inception in 1987. FHA along with Congress, NRMLA etc. are continuously working towards making reverse mortgage more attractive for the seniors.

Senior citizens who are aged 62 years or above could earlier cash out home equity with the help of reverse mortgage. But from 1st January, 2009 onwards, reverse mortgage will be available to senior citizens to buy their primary residence as well. Along with this, the reverse mortgage limit has been raised to $417,000 nationwide and those living in high cost areas can qualify for loans even up to $625,000.

It was noticed that the reverse mortgage program which was introduced to keep seniors in their home wasn’t helping those who wanted to downsize or those who were keen to move closer to their kids. But with the new development in reverse mortgage, things have become easier for the senior citizens.

With the raising of the reverse mortgage limit and changes in the traditional reverse mortgage, I think, a lot of senior citizens will be benefited. In order to get a reverse mortgage, it was necessary that the senior citizens had their own residence. The reverse mortgage was mainly used by them to pay off debts and medical bills. But now, seniors can also buy a home of their own with the help of a reverse mortgage.