No. of Recommendations: 3
Because she has insisted on maintaining her current residence, many years ago she did a cash-out refinance of her mortgage (5% APY), then took out a HELOC (at a fixed rate of 6%), and has since spent down all her savings (and done a round robin of asking for money from various relatives over a period of years) paying on these. The payments on these alone are about 125% of her monthly income, leaving her perpetually behind on bills and living expenses. She is now behind on her mortgage and HELOC by about 4 months and has a small amount of additional unsecured debt (about 300% of her monthly income). Because of her credit history and her current income, she will not be able to refinance these into a standard mortgage.

Are the payments that are 125% of her monthly income that high because of fees and late charges, or is the P&I plus escrow without fees and late charges up to that amount? If the payments are that high due to fees and late charges, there may be some hope of asking the lenders for a modification. Have you asked the current lender(s) about modification possibilities?

3. Reverse mortgage. Despite all the warnings I have read about the high fees and steady loss of equity, this may be the best option in her situation. The expenses and fees would be about 1 year worth of her current housing payments and could be financed so that she’d have no upfront costs. It would eliminate her current housing costs so that she could pay off the other debts and then gradually save and get the house positioned to sell, assuming the market recovers somewhat. If the market doesn’t recover for some time, she can at least stay in the house indefinitely. Because of her poor payment history, they are including a life expectancy set aside (LESA) that would cover the insurance and taxes, so no worries about her losing the house because of failure to pay these. The concern I have is that because of the LESA, they are using what I consider an aggressive valuation for the house so that she will receive enough to pay off the current mortgage and HELOC. If the appraisal comes back lower than this, this option will likely fall through because she does not have sufficient funds to close if she can’t finance the costs. (If only a small amount is needed at closing, I could probably gift her that money.)

Ask if, instead of the LESA, she could do a monthly escrow payment to cover the taxes and insurance. Yes, it would be a payment that she would have to make, but given that she doesn't usually have to pay any property taxes, I doubt it would be a significant payment.

AJ
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