Michelle Singletary: Considering a reverse mortgage? Make sure you can afford it

YOU'RE 62 or older, and life has derailed your plans.

You didn't save nearly as much as you wanted to retire - but you had to stop working because of health issues.

You'll receive a Social Security benefit and a monthly pension. But there's a financial gap because of unexpected expenses. You need a new roof and other necessary home repairs.

Then you see a late-night television commercial about something called a reverse mortgage.

"You know some people have told me reverse mortgages sound too good to be true," the actor and former Sen. Fred Thompson says. "I mean, you get cash out of your home. No monthly payments and still own your home."

Could this be the answer?

It may be. But be careful.

Most people understand a traditional 30-year or 15-year mortgage. You take out a loan for your home and make monthly payments. But with a reverse mortgage, there is no monthly payment. The lender doesn't get paid until you move, sell or die. If the home is sold, any equity that remains after the loan is repaid is distributed to you or your estate.

To qualify for a reverse mortgage, you have to be 62 or older and own your home outright or have a low-enough mortgage that it can be paid off with proceeds from the loan. Your home must be your principal residence. Borrowers can take the loan as a line of credit, a lump-sum payment, fixed monthly payments or a combination. Most important, borrowers have to maintain the home and pay property taxes and homeowner's insurance.

Like any other financial product, a reverse mortgage is not right for everyone. A 2012 report from the Consumer Financial Protection Bureau found that a large proportion of borrowers - nearly 10 percent - in the federally insured Home Equity Conversion Mortgage program, which represents about 95 percent of the reverse-mortgage market, were at risk of foreclosure because they hadn't paid their property taxes and insurance.

There have been changes to reverse mortgages recently. People are limited in how much they can withdraw during the first year. As of Aug. 4, nonborrowing spouses can't be kicked out of the house when their spouses die as long as they continue to meet certain qualifications. And coming soon are new rules from the Federal Housing Administration to make sure people can afford the expenses they must pay under a reverse mortgage.

Many folks are alarmed that some seniors are using the money from a reverse mortgage not to supplement other income or to handle unexpected medical expenses or make needed home improvements, but as a pot of money that they are too quickly depleting.

"To a lot of people, a reverse mortgage is a loan of last resort for [seniors] without any other options," said Peter Bell, president and chief executive of National Reverse Mortgage Lenders Association. "But a reverse mortgage can be a useful part of a retirement plan. However, you shouldn't use it as a bailout."

Most recently, a report by researchers at Ohio State University found that changes to the reverse-mortgage market could help reduce default rates among borrowers who currently don't have to undergo the same type of financial assessments as is done for traditional loans.

The Ohio researchers examined a pool of 30,000 seniors counseled for reverse mortgages between 2006 and 2011. As part of its intake of information, the agency pulled people's credit scores. FHA requires borrowers to go thorough preloan counseling.

As it turned out, borrowers with low scores were more likely to have trouble paying their property taxes and homeowner's insurance. Under the FICO credit-scoring model the score range is 300 to 850. The higher the score, the lower the risk.

The Ohio researchers conclude that if lenders held to a FICO credit score threshold of 500, this could reduce the percentage of people getting a reverse mortgage by 3.2 percent, but lower the predicted default rate by 12.4 percent.

"People have to realize, this is still a mortgage," said Stephanie Moulton, associate professor and director of doctoral studies at Ohio State and one of the co-authors of the reverse-mortgage report.

To get more information about reverse mortgages, go to hud.gov and search for "Reverse Mortgage."

"For the right person in the right situation, a reverse mortgage can be a sustainable way for seniors to age in place," said FHA Commissioner Carol Galante. "But converting your home's equity into a source of cash requires careful consideration with the help of an experienced housing counselor."

Although the TV commercials make a reverse mortgage sound super simple, there's a lot to consider. So please proceed with caution.