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Reverse Mortgage Overview
- How Much Money Can You Get From A Reverse?
- Loan Product Options
- Reverse Mortgage Costs
- Lenders
- The Process
- Concerns
- Changes
Information provided herein is not meant to be comprehensive for all situations. It includes guidelines for seniors so they might determine if they should pursue a question further.
Please consult a professional financial advisor before taking any actions. Look here to find one near you. http://www.napfa.org
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This FHA guaranteed program enables older homeowners (62+) to 'borrow
back' a portion of the equity in their home and convert it into cash while
remaining in their home for as long as they want. They remain on title
and do NOT have to make any loan payments for as long as they continue
to live in the home and it remains their primary residence. When the last
borrower sells, moves out or passes away, the loan becomes due. This enables
many senior homeowners to age in place.
Loan Features
- Everyone on title must be at least 62 years of age.
- There are NO income requirements.
- There are NO credit requirements.
- There are NO monthly payments.
- The funds may be used for ANY purpose and are tax free.
- You do NOT have to own your home free and clear to be eligible, but loan proceeds must be sufficient to pay off any existing mortgages.
- The property may be left to heirs and trusts are permitted.
- As a non-recourse loan you or your heirs can never owe more than the
property is worth regardless of the loan balance amount.
A reverse can offer advantages over conventional loans as they address the fact that so many older people are retired and/or live on fixed incomes and can't often meet normal lending guidelines.
The funds are tax free and can be used for any purpose. Many have chosen to secure in home health care plans and/or life insurance policies, help family members now, meet increased living expenses without selling investments, make home repairs and help with estate tax planning to avoid higher liabilities associated with inheritances..
Proceeds from a reverse do not affect Medicare or S.S.I benefits in any way. They can impact Medicaid benefits in certain situations so it is best to consult with an elder attorney. Reverse mortgage borrowers continue to own the home and are responsible for paying property taxes, insurance and home maintenance.
How Much Money Can You Get From A Reverse??
Each borrower presents a different case and the calculation is based on the client's age (all on title must be 62+), home value, location and interest rate. The FHA lending limit is $625,000. Keep in mind, the reverse mortgage is designed to give you only a portion of your equity. The older you are the higher that percentage is. Again the proceeds must be sufficient to cover any existing mortgage balance. The borrower receives the difference once their existing balance is subtracted from their loan amount.
Loan Product Options
Currently there is only the FHA HECM (Home Equity Conversion Mortgage). It is the traditional FHA insured reverse mortgage. There is also a new HECM for Purchase product that allows you to take out a reverse mortgage on a new home. It works the same way as a regular reverse only it is for a new property and can often give the borrower more than half of the purchase price. The borrower must bring the difference to the transaction and the money may come from any assets as long as it doesn't involve credit of any kind. This is ideal for those who are thinking of relocating within the next few years, perhaps to downsize or move closer to family.
Both products feature an adjustable interest rate (ARM) or fixed rate option and that rate is based on the LIBOR or London Interbank Offered Rate, plus a margin charged by the lender. Keep in mind a higher initial interest rate lowers the amount of money you will receive.
-The Adjustable Rate (ARM) HECM allows you to access the money in one of three ways; you can take it all, receive it in the form of monthly payments or you can leave it in a creditline account.
The credit line option gives you the most flexibility. You can withdraw the money in any amounts, whenever you wish. The money that remains in the creditline does not incur ANY interest. You are only charged interest on the money you withdraw from the creditline.-The Fixed Rate HECM offers the security of a set rate, but:
Even though the fixed rate is higher than an initial ARM, it offers more money because the rate is already capped and won't move.The borrower MUST take out all the money at closing. There is no creditline option. It is ideal for borrowers who have an immediate need for a substantial percentage of the proceeds. Whether it is to pay off the previous mortgage, or make repairs etc.
Reverse Mortgage Costs
A lot of controversy surrounds the reported costs of a reverse mortgage. Many of the costs borrowers pay are similar to those of a conventional mortgage. Things like appraisal fees and third party closing costs. Generally, those are minor. Closing costs for reverses, however, include an origination fee and a mortgage insurance premium. Those costs are regulated and determined by HUD. The origination fee is paid to the originator of the loan to pay for processing, administrative overhead, underwriting review etc. The mortgage insurance premium (MIP) insures that the borrower is protected from paying more than the home is worth if the loan balance exceeds that amount. Both origination fee and mortgage insurance premium are based on the maximum loan amount for that transaction. Typically, total costs amount to 5-8% of the loan amount and compare reasonably with a home sale which carries a 5% agent commission plus third party costs. These costs are factored into the loan itself so the borrower does not have to pay for them upfront.
Lenders
There are a number of financial institutions that provide financing including banks like Bank of America and lending institutions like Financial Freedom. While the products do not vary from place to place, the calculations can result in differences in the actual loan amounts due to different margins and rates. The banks offer only their own version of the traditional HECM and most do not have the HECM for Purchase product. This is also true of other lending institutions.
The other option is to work with an independent reverse mortgage broker. Much like independent insurance brokers, these loan officers do not work for a specific lender but are wholesale correspondents for many of them and consequently they have an array of products to choose from. The AARP and other senior service organizations are now encouraging those interested to do some comparison shopping and independent brokers are an ideal means to do so.
The Process
The first step is to contact an FHA approved reverse mortgage professional to determine eligibility and to gain an understanding of how the loan works. They will also do the calculations that show how the loan will work in your case. There is NEVER a charge for this type of consultation.
The next step is to set up a phone call with an FHA approved reverse mortgage counselor. The FHA requires that counseling be completed before an applicant can proceed. Counselors are trained and not affiliated with any lender. The phone calls usually take less than an hour and establish the applicants understanding of the loan. There is a $125 fee that must be paid by the borrower. Recently the FHA funded the program so that fee is waived. You will receive a certificate of counseling in the mail which will become part of the application.
The application process is fairly routine. The loan officer meets with the client to explain each document and secure the appropriate signatures. Within 72 hours of signing the application, the client will receive a Good Faith Estimate which lists all the costs associated with the loan item by item. These figures are not allowed to increase except for a few, very specific reasons.
The property must then be scheduled for appraisal and in some areas for a pest inspection.The entire process can vary in terms of completion time, depending on the lender's turnaround time and unusual conditions that can arise, but it usually averages 4-6 weeks. The applicant can change their minds at any point in the process including a 72 hour rescission period after the loan is closed.
Concerns
Closing costs are one aspect. While they are comparable to the costs associated with a home sale, they are not inexpensive. Because of that, a reverse mortgage is generally not cost effective if the borrower plans on moving in the first 4 years.
A reputable reverse mortgage professional should consult with the borrower to determine their goals and priorities. The FHA now prohibits reverse mortgage originators from selling their clients other financial products such as annuities and insurance policies. They have increased oversight and the penalties for violations by loan originators. Borrowers must perform due diligence before using the proceeds for investment purchases and should consult with a certified financial advisor.
Because reverses are a negatively amortized loan (the principal balance grows) there is the concern that the balance due can eventually wipe out remaining equity. Generally the home's appreciation rate doesn't lag so far behind the interest being paid as to immediately start decreasing that equity which is left. Usually, the retained equity actually increases for the first 10-15 years or so of the loan and then starts rolling back down. Most often, there is money left to leave to heirs, but check the amortization table to get a better idea. Heirs have 30 days after the death of the owner to decide if they want to sell the property or refinance it. With extensions they may have up to a year to complete the transaction.
If the appraisal cites certain problem areas on the property that require repair, the reverse mortgage can still go through before they are corrected. The lender will require a repair estimate and they will put that money aside (plus 50%) to hold in escrow until the repairs are corrected. A lender may require that some structural repairs be remedied before the loan can be closed but this is extreme.
A borrower may own a second home in addition to their primary residence and reside there for part of the year, just so long as the borrower doesn't rent the home upon which the reverse was taken.. You ARE permitted, however, to rent out rooms (up to 50%) If you are the sole borrower and suffer a medical emergency that requires staying in a care facility of some kind for more than a year, the lender can call the loan due.
Changes
Reverse Mortgages have undergone extensive change over the last two years partly as a result of the economic realities facing the financial sector and an aggressive posture taken by the HUD/FHA to protect senior consumers and make these loans more secure and attractive. The Reverse for Purchase is one such innovation. These agencies are also tightening the licensing procedures for those originating mortgages and they are issuing stricter guidelines for those underwriting such loans. Their goal is to minimize malfeasance and error through increased regulation and oversight. It is advisable to make sure your broker has the most recent information. You can always check sites such as AARP's to monitor changes.
Provided courtesy of John Brodey, Sequoia Pacific M. C., Santa Rosa, CA.