REVERSE MORTGAGE LOANS
:: AN OVERVIEW ::
A reverse mortgage is a complex financial instrument.
It is important to have a full, transparent conversation with an experienced and/or NRMLA certified reverse mortgage lender.
We have addressed many concerns below including financial worksheets. Should you have a specific question, please feel free to email us at info @ lineagelending.com.
HOW MUCH DO YOU QUALIFY FOR?
What is a Reverse Mortgage Loan?
A reverse mortgage is loan available to homeowners who are 62 years or older that enables them to convert part of the equity in their home into cash.
The product was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction for how reverse mortgage proceeds can be used.
The loan is called a reverse mortgage because the traditional mortgage payback stream is reversed. Instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower.
Generally, you are not required to pay back the loan until the home is sold or otherwise vacated. As long as you live in the home, you are not required to make any monthly mortgage payments towards the loan balance, but you must remain current on your property taxes, homeowners insurance and condominium fees and other maintenance costs and otherwise comply with the reverse mortgage loan terms.
Borrower Requirements and Responsibilities
Age qualification: All borrowers listed on title must be 62 years old.
Primary lien: A reverse mortgage must be the primary lien on the home. Any existing mortgage must be paid off using the proceeds from the reverse mortgage. (Reverse mortgage proceeds can be used,)
Occupancy requirements: The property used as collateral for the reverse mortgage must be the primary residence. Vacation homes and investor properties do not qualify.
Taxes and Insurance: You must remain current on your real estate taxes, homeowners insurance, and other mandatory obligations, including condominium fees, or you are susceptible to default.
Property Condition: You are responsible for completing mandatory repairs and maintaining the condition of the property.
Conveyance of the mortgaged property by will or operation of law to the estate or heir after mortgagor's death: When a reverse mortgage becomes due and payable as a result of the borrower's death and the property is conveyed by will or operation of law to the estate or heirs (including a surviving spouse who is not on title and therefore not obligated on the HECM note) that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property.
Features of Reverse Mortgage Loans
With a reverse mortgage, you retain title or ownership of the home. You cannot lose your home under normal circumstances, but please understand foreclosure may occur if you do not pay your taxes and insurance, maintain the home, and otherwise comply with the loan terms.
The amount of funds that a person is eligible for depends on his age (or, in the case of couples the age of the younger spouse), the value of the home, the interest rate and upfront costs. The older you are, the more proceeds you may receive.
There is a limit on the amount of funds you can access during the initial year. If you are eligible for a $100,000 loan, for example, you can take $60,000, or 60 percent of that sum. There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, that exceed the 60 percent limit. You must pay off these "mandatory obligations" as the government calls them, before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount -- in which case that's an extra $10,000, or 10 percent of $100,000.
Loan proceeds can be taken as a lump sum, as a line of credit or as fixed monthly payments, either for a fixed amount of time or for as long as you remain in the home. You can also combine these options, for example, taking part of the proceeds as a lump sum and leaving the balance in a line of credit.
Fees can be paid out of the loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. Your only out-of-pocket expense is the appraisal fee and possibly for an independent counseling from a
HUD approved agency. Together, these two fees will total a few hundred dollars. In some cases, very low-income homeowners are exempted from being charged for counseling.
When you ultimately pay off the loan, the final balance equals the amount of funds borrowed, plus annual mortgage insurance premiums, servicing fees and interest. The loan balance grows as you live in the home. In other words, when you sell or leave the house, you owe more than you originally borrowed. Look at it this way: A traditional mortgage is a balloon full of air that loses some air and gets smaller each time you make a payment. A reverse mortgage is an empty balloon that grows larger as time passes.
With a Home Equity Conversion Mortgage or HECM (see Types of Reverse Mortgages), no matter how large the loan balance, you never have to pay more than the appraised value of the home or the sale price. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the federal government absorbs that loss. The government pays for it with proceeds from its insurance fund, which you as a borrower pay into on a monthly basis.
You are responsible for paying property taxes, homeowners insurance, maintenance costs, condo fees and other financial charges. Any lapse in these policies can trigger a default on your loan.
Lenders will analyze all income sources -- including pensions, Social Security, IRAs and 401(k) plans -- as well as your credit history. They will look closely at how much money is left over after paying typical living expenses. If a lender determines that you have sufficient income left over, then you won't have to worry about having any funds set-aside to pay for future tax and insurance payments. If, however, a lender determines that you may not be able to keep up with property taxes and insurance payments, they will be authorized to set-aside a certain amount of funds from your loan to pay future charges.
Types of Reverse Mortgage Loans
What is a HECM?
HECM is the commonly used acronym for a Home Equity Conversion Mortgage, a reverse mortgage created by and regulated by the U.S. Department of Housing and Urban Development.
A HECM is not a government loan. It is a loan issued by a private bank, but insured by the Federal Housing Administration, which is part of HUD. Each year the borrower is charged an insurance fee of 1.25% of the loan balance. Your loan balance thus increases by the amount of this fee. The insurance purchased by this fee protects the borrower (1) if and when the lender is not able to make a payment; and (2) if the value of the home upon selling is not enough to cover the loan balance. In the latter case, the government insurance fund pays off the remaining balance.
Currently, HECMs make up most reverse mortgages offered in America. HECM's come with rules and regulations that include a requirement that the borrower receive HUD-approved third-party counseling.
Single Product Option
Closing costs and interest rates may vary from lender to lender, but when shopping around for a reverse mortgage, you may find the product options are limited. That's because there is but one product option and it works like this. The amount of loan proceeds you can access during the first 12 months after closing is limited to 60 percent of the loan amount. For example, if you are eligible for a $100,000 reverse mortgage, you may only access $60,000. After the initial year has expired, you may access as much or as little of the remaining loan proceeds as you wish.
There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, that exceeds the 60 percent limit. You must pay off these "mandatory obligations" as the government calls them, before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount -- in which case that's an extra $10,000, or 10 percent of $100,000.
Single Payment Disbursement Option
Historically, HECM borrowers had to take all of the loan proceeds available to them.
You have the option to do a HECM “mini” that allows you to take less money at closing. If you are eligible for a $100,000 loan, for example, but don't want that much money, you can choose a single disbursement equal to 60 percent or less of that sum.
Unfortunately, if you wanted more money at a later time, you would not be able to access any additional funds. However, this is a great option for someone who wants to preserve the equity in the home by utilizing a smaller amount of funds.
While the typical retiree uses a HECM to pay for healthcare and/or cover daily living expenses, a growing segment of the senior population is using it to purchase a home that better suits their needs.
The advantage of using HECM for Purchase is that the new home is purchased outright, using funds from the sale of the old home, private savings, gift money and other sources of income, which are then combined with the reverse mortgage proceeds.
While study after study reveals that an overwhelming percentage of seniors want to continue living in their current home for as long as possible, for some people that isn’t the best, or safest, option. HECM for Purchase offers a solution to downsize into a place that’s more easily navigable, possibly more energy efficient, with lower maintenance costs, or which is closer to friends and family.
Proprietary Reverse Mortgage
Right now, very few proprietary reverse mortgages exist. However, it’s important to mention them, because market conditions may change in the foreseeable future when property values stabilize.
Proprietary reverse mortgages are privately insured by the banks and mortgage companies that offer them. They are not subject to all the same regulations as HECMs, but as a standard best practice, most companies that offer proprietary reverse mortgages emulate the same consumer protections that are found in the HECM program, including mandatory counseling.