Reverse Mortgage Program Guide
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Seniors who have
retired, or who are contemplating retirement, may have to face the unpleasant
reality that their savings and retirement income are not going to be sufficient
to support them. With life expectancies and living costs increasing, while
Social Security and benefits do not keep up, many who have retired and many who
are contemplating retirement are finding they need to make some adjustments.
Although some may return to the work force, others are utilizing reverse
mortgages or the HECM loan to help ease their financial strains.
What is a Reverse Mortgage?
A reverse mortgage and the HECM loan (home equity conversion mortgage) is a home
loan given by a traditional mortgage lender to seniors over 62. It does not
require credit approval or FICO scores. Rather, the reverse mortgage loan uses
the equity in the home as collateral, and instead of having a monthly mortgage
payment to make, the homeowner receives a monthly stipend or a lump sum from the
reverse mortgage lender. The loan does not have to be repaid until the surviving
homeowner either passes away or moves permanently out of the home. According to
HUD, the HECM loan can be disbursed in the following six ways:
- Lump Sum (can be used to payoff existing mortgage balance and eliminate monthly
mortgage payments)
- Equal monthly payments as long as one borrower lives in the house.
- Equal monthly payments for a specified number of months.
- A line of credit.
- A combination of the line of credit and monthly payments as long as one
borrower lives in the house.
- A combination of the line of credit and monthly payments for a specified number
of months.
When the homeowner dies or moves out permanently, the estate has six months to repay the
balance of the loan. It may be necessary to sell the home to repay the loan in
its entirety. Should the proceeds from sale of the home be insufficient to
satisfy the balance of the reverse mortgage, the estate is not held liable for
the balance. Should there be an excess of funds, they will go to the estate of
the deceased homeowner. A reverse mortgage cannot be outlived. As long as one
homeowner retains the home as a primary residence, the loan does not become due.
However, the homeowner must keep the insurance and property taxes current and
keep the home as per the FHA guidelines of the reverse mortgage. Should the
homeowner be absent from their home for more than twelve months, it will be
considered that they have vacated the home and the loan will become due.
Who Qualifies for a Reverse Mortgage?
The Federal Housing Administration requires that all homeowners be at least 62
years or older in order to
qualify for a reverse mortgage. The homeowner must own the home with a clear
title; or any liens must be able to be paid off with proceeds of the reverse
mortgage refinance. If the homeowner has a mortgage balance, they may still be able to
obtain a reverse mortgage by using some or all of the loan proceeds to satisfy the
mortgage loan balance. Usually, there are no credit or income requirements
because the loan is being secured with the equity in the home and a reverse
mortgage loan / HECM mortgage can be obtained from a FHA-approved lender.
What types of Properties are Eligible for a Reverse Mortgage?
Reverse mortgages are available for almost all types of homes, including mobile homes
and some condominiums. Mobile homes must be less than thirty years old, on a
parcel of land on a permanent foundation and not in a mobile home park, and it must pass FHA inspection.
Reverse Mortgage Disadvantages & Advantages
For seniors who are at least 62 years old, a reverse mortgage can provide an
increase in their monthly income, not only because they do not have to make a
monthly mortgage payment, but because they can also receive a monthly payment
from the lender. Particularly with current economic conditions, many seniors
have difficulty living on their retirement income. A reverse mortgage can
alleviate much of the financial stress for seniors. Proceeds from a reverse
mortgage are not taxable and therefore do not affect Social Security payments.
However, according to the AARP, reverse mortgages have substantial fees that must be paid
up front, such as mortgage insurance premiums, loan origination costs, and
closing costs, as well as ongoing fees such as mortgage premiums, interest and
servicing fees. The annual homeowner’s equity conversion mortgage (HECM)
insurance can be as much as 1.25% of the loan value.
Also, there are restrictions, which are established by the FHA, and must be adhered to. Those
wanting to leave an estate to their heirs may find they have less of an estate
to leave. Those who take a reverse mortgage too early may find themselves not
having enough funds to cover future expenses, such as long-term care.
Another disadvantage to reverse mortgages is that failure to keep property taxes
and insurance current, homeowner’s dues if applicable, or failure to keep the
property in good repair, can cause the mortgage to go into default and the
homeowner could lose their home.
Opposite to a regular mortgage, the balance on a reverse mortgage increases each month and
interest is paid on an ever-increasing balance. The interest is not
tax-deductible until the reverse mortgage is repaid in full or in part.
Homeowners considering a reverse mortgage should seriously consider all their other
options, such as downsizing to a smaller, more affordable home, getting a
roommate, refinancing or arranging for a reverse loan from a private source.
Seniors are advised to defer reverse mortgages as long as possible to ensure
they have adequate funds for their needs as they age.
What Happens to my Home with a Reverse Mortgage? (Do I still own it? What happens when I die?) When a homeowner decides to take out a reverse mortgage, he or she retains the
title to the home. In essence, the lender places a lien on the home like
a traditional mortgage, so that in
the event the homeowner dies or permanently vacates the home, the lien must be
paid off. The timeframe for repayment is six months. If the estate or family
lacks sufficient funds to repay the reverse loan, the home must be sold.
Although there is usually a clause prohibiting the homeowner from owing more
than the value of the home, if the proceeds of the sale are insufficient to
repay the loan, the bank absorbs the loss and requests reimbursement from the
FHA.
How are Reverse Mortgage Rates Determined?
Both a Fannie Mae reverse mortgage and an HUD FHA reverse mortgage are calculated in a similar manner.
Although there is no limit on the value of homes used for a reverse mortgage,
the maximum loan that FHA can give on a reverse mortgage is $625,000. In
addition to an appraisal, the current interest rate and the age of the youngest
borrower are factors in determining the amount of a reverse mortgage.
In January 2011, the HECM insurance rate was reduced from 2% to .01%, although
this also reduces the dollar amount of the home loan that can be obtained to
about 80-90% of what could be obtained with a regular reverse mortgage. These
new loans, called “Savers”, are increasingly popular with more affluent seniors,
giving them more financial freedom and with lower up front costs and fees.
Reverse Loan Requirements
The HUD website states that the requirements for a reverse mortgage are that the home must be
owned free and clear, or the amount of the reverse mortgage must include
sufficient funds to pay off the regular mortgage. All other liens must also be
satisfied. The youngest borrower must be at least 62 years old, and the
borrower(s) must occupy the home as his/her/their principal place of residence.
Neither borrower can be delinquent on any federal debt, and both must
participate in a consumer information session given by an approved HECM
counselor.
The following types of property can qualify for a reverse mortgage, but must meet all FHA
property standards and flood requirements:
- Single family
home
- A 1-4 unit home with one unit occupied by the borrower.
- HUD-approved condominium.
- Manufactured home that meets HUD requirements.
Documents Needed for a Reverse Mortgage
When a homeowner applies for a reverse mortgage, they need to take the following documents with
them:
- Original loan application with original signature(s).
- An original counseling certificate.
- Photo identification, as well as a birth certificate or social security card.
- Proof of homeowner’s insurance.
- Copy of the survey of the home.
- Copy of current mortgage statement, if applicable.
- Lien release from prior mortgage company if home is owned outright.
- A check to pay for the appraisal.
Currently, many reverse mortgage lenders are waiving some of the fees for reverse mortgages, but homeowners
should be prepared to pay some upfront costs associated with a reverse mortgage
such as the appraisal.
The reverse mortgage is a good option as long as you understand exactly what it
is, so that there is no surprises at the end. Often the reverse mortgage
increases the quality of life for most seniors and families by eliminating
financial stress and this benefit far outweighs the slow erosion of equity in
the property over the loan term.
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