WHO INSURES REVERSE MORTGAGES?
The FHA (Federal Housing Administration) insures Reverse Mortgages. The FHA HECM, Home Equity Conversion Mortgage, is administered through the United States Department of Housing and Urban Development (HUD).
WHAT IS THE HISTORY OF REVERSE MORTGAGES?
The Reverse Mortgage program has changed over the past 50 or so years. In 1961, Nellie Young got the first Reverse Mortgage through a company called Deering Savings & Loan in Portland, Maine through loan officer Nelson Haynes. Nellie happened to be the widow of Nelson Hayne's high school football coach, and Nellie needed to supplement her income after the death of her husband. Getting a Reverse Mortgage helped Nellie to remain in her home.
During the 1970's, several banks offered Reverse Mortgage styled loans, but they didn't provide the protection that the FHA reverse mortgage provides today; there was no FHA mortgage insurance on Reverse Mortgage loans at that time.
A special committee in the 1980's called the U.S. Senate Special Committee on Aging issued a report on Reverse Mortgages. It stressed the importance of having a Reverse Mortgage program that was standardized with FHA mortgage insurance as well as uniform lending practices. In 1987, Congress passed the FHA insurance bill so that Reverse Mortgages could be insured. President Ronald Reagan signed the FHA Reverse Mortgage bill into law on February 5, 1988, and the first FHA HECM closed in 1989.
How do I qualify for a Reverse Mortgage?
You must be at least 62 years of age, own your own home, and live in the home as your primary residence or at least six months per year, and not be delinquent on any federal debt.
What if My Spouse if Not 62 Years of age? If your spouse is underage, you can still take out a reverse mortgage as follows:
It used to be that if a borrower had a spouse who was under age 62 and that borrower was not on the reverse mortgage (Home Equity Conversion Mortgage or HECM), once the borrower passed away, the spouse would eventually have to leave the home if they could not pay off the reverse mortgage. Death is considered a "maturity event" in the reverse mortgage world, and this was a tough situation. For this reason, we discouraged borrowers from taking out a reverse mortgage if their spouse was under 62 years of age.
Thankfully, through the Mortgage Stability Act, there has been a change in reverse mortgage parameters. If there is an underage spouse, the reverse mortgage will not become due when the borrower passes away, and spouses who are under age 62 will be able to remain in the home. However, the HECM line of credit would no longer accessible, and any monthly proceeds would end.
What types of homes qualify for a Reverse Mortgage?
Single Family homes, 2-4 unit dwellings, townhouses, detached homes, condominiums, and most manufactured homes are eligible for Reverse Mortgages. (Condominiums must be FHA approved- ask your condo board or HOA about status .) (Co-ops are not currently approved for Reverse Mortgages. Mobile homes are also not eligible for a Reverse Mortgage but manufactured homes are. See Manufactured Homes page.
What types of plans are there for Reverse Mortgages?
Here are the payment plans for the adjustable rate HECM (Note: The Fixed Rate HECM does not have the flexibility as does the adjustable rate HECM. See below.
* Lump Sum - an amount of cash at closing (you can choose a portion and keep the rest in a line of credit).
* Tenure- equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
* Line of Credit- draw any amount at any time until the line of credit is exhausted.
(NOTE: In 5 or 10 years, you may decide to convert your line of credit into a steady stream of monthly funds. It's your money. You choose how to appropriate your own funds.)
* Term - In order to increase your monthly proceeds, you may choose a term loan which will expire at the end of the term. However, the borrower does not have to leave the residence but can continue to live there.
* Fixed interest rate HECM mortgages: You will receive the Single Disbursement Lump Sum at closing. The fixed rate HECM does not have the flexibility of the adjustable rate HECM. There is no line of credit and no monthly stipend available with this program.
If I decide to do a Reverse Mortgage, will there be an inspection of my home?
Yes, there will be an inspection of your home known as an appraisal. Your home, inside and out, will be evaluated to determine its value. In some cases, a second appraisal will be required, but you will not be responsible for the cost.
Is there a minimum credit score to qualify?
No, there is no minimum credit score required to qualify for a reverse mortgage. But your credit history will be analyzed along with tax payment history during a required financial assessment.
What is a Financial Assessment?
Lenders must determine your ability to meet ongoing tax and insurance obligations by reviewing your credit and housing history in order to assess any current financial difficulties and detect any future financial issues. This process is called the FA, Financial Assessment. Lenders will review your credit report as well as tax and homeowner's insurance history. Due to a concern for default on HECM's, (which had been occurring), the Federal Housing Administration (FHA) that insures reverse mortgages, implemented a requirement in 2015 that all HECM lenders were required to conduct a financial assessment. The financial assessment is a through review to determine if borrowers can meet their HECM loan obligations such as the ability to pay property charges (on their own) such as taxes and homeowner's insurance. If it is determined that there is the possibility that a borrower cannot pay their property charges and could actually default on their HECM loan and be in danger of foreclosure, a set aside of monies called a LESA will be set up.
What is a LESA?
A LESA, Life Expectancy Set Aside, implemented by HUD in 2015 is for those borrowers whose credit history is less than stellar as it sets aside a portion of the HECM mortgage proceeds to pay property charges such as taxes and insurance, etc. All unused funds from the LESA remain in the equity of the home. It is as the name implies, a lifetime set aside and remains in place until the proceeds are depleted. After this, borrowers are responsible to pay these charges on their own. Since the introduction of the financial assessment and LESA, it has proven successful.
If a maturity event occurs such as moving out of the home, residing for over 12 months in a nursing facility, permanently residing away from the home, or death of all the borrowers, the LESA will end, and the loan will be due.
MORE INFO ON THE LESA
If a borrower requires a LESA to meet the Financial Assessment requirement, you cannot remove the LESA after closing. And a partial LESA is not allowed on fixed rate products. The specified amount in your closing documents remains in the LESA account. Your loan servicer will provide monthly statements showing the charges paid on your behalf.
Do I Need a LESA if I Refinance my HECM?
Naturally, if a borrower refinances the HECM, another financial assessment will be conducted as the loan is a new mortgage. The financial assessment will determine if a LESA is required.
How much money can I borrow?
At present, the maximum lending limit is $822,375, but you'd have to be very old to get the entire amount. The cash out in a Reverse Mortgage depends on a few factors:
1. age of the youngest borrower
2, appraised value of your home
3. current interest rates
4. balances on current liens and mortgages
With the FHA Reverse Mortgage, the older you are, the more money you receive. So if your home is worth $822,375 and you are in your nineties, you would receive more proceeds than if you were only in your sixties. Typically, you can expect to receive anywhere from 38% to 68% of your home's equity (age 62 to 93 as an age range of how much you'd receive.
Now, to protect your equity, HUD has split the proceeds up into two disbursements. There is a 60% cap on your funds for the first year which is 60% of the Principal Limit. After 365 days, your remaining proceeds can be accessed.
Can the interest rate be locked? Although you cannot lock interest rates with a reverse mortgage, you will receive either the rate at application or the rate at closing, whichever is lower.
How is my money disbursed to me? You may choose from a lump sum, fixed monthly payments, a line of credit, or a combination of all three. You can also choose a specified loan term. For example, ten, fifteen, twenty year terms or any term may be chosen. A shorter term will increase your monthly proceeds. Although with term loans, the monthly payments cease when the term expires, you can still remain in your home. (This has been a concern of some borrowers).
Does the lender own my home?
The lender does NOT own your home. Just as with any mortgage on your home, you retain title as the owner, not the lender.
How will the proceeds from a Reverse Mortgage affect my taxes, social security, or other benefits?
Proceeds from a reverse mortgage are not considered taxable income so your income taxes are not affected. Your Social Security and Medicare benefits are also not affected. The impact on other federal, state, or local assistance programs such as Medicaid should be discussed with a financial advisor or attorney . NOTE: Your Medicaid benefits may be affected if your reverse mortgage proceeds are not spent down in the month they are received. (Check with your tax advisor for more details.)
What is a non-recourse loan?
An important feature of the HECM program is something called "non-recourse." Simply put, the house that was offered as collateral stands for the debt. You are NOT personally responsible for the reverse mortgage debt.
A non-recourse debt is a type of loan secured by collateral which is usually property. In the case of mortgages, it's your home. If the borrower defaults on the loan, the issuer can seize the collateral but cannot seek out the borrower for any further compensation even if the collateral does not cover the full value of the what is owed. This means none of your assets can be used to satisfy the loan whether you have investments, bank accounts, other properties, etc. No matter how much money you have in the bank or possess in assets, these cannot be used to satisfy your reverse mortgage debt. And you can never owe more than the house is worth. A reverse mortgage is a loan in which the lender may look only to the property for repayment of the mortgage debt even IF the loan balance goes beyond the value of the home such as homes under water. The below quotation from the reverse mortgage closing documents state clearly that you have no personal liability for the mortgage debt:
HOME EQUITY CONVERSION MORTGAGE DEED OF TRUST, Section 11:
"No Deficiency Judgment. Borrower shall have no personal liability for payment of the debt secured by this Security Instrument. Lender may enforce the debt only through sale of the Property. Lender shall not be permitted to obtain a deficiency judgment against Borrower if the Security Instrument is foreclosed. If this Security Instrument is assigned to the Commissioner upon demand by the Commissioner, Borrower shall not be liable for any difference between the mortgage insurance benefits paid to Lender and the outstanding indebtedness, including accrued interest, owed by Borrower at the time of the assignment."
I cannot qualify for the HECM since I owe too much on my current mortgage. Is there a Jumbo HECM?
Yes, there is. Contact Advisors Mortgage to see if you qualify for the jumbo product. Rates are higher, but it may work perfectly. (All Jumbo loans arranged through third party providers.)
CAN I LOSE MY HOME IF I HAVE A REVERSE MORTGAGE?
You CAN lose your home even if you have a reverse mortgage. A reverse mortgage does not prevent a borrower from entering into default on the HECM loan nor from losing their home through foreclosure. Borrowers have obligations on a reverse mortgage just as with any forward mortgage. Borrowers must pay property charges, homeowner's insurance, flood insurance where required, condo fees, association dues, and HOA fees if applicable. Here are the possible scenarios in which a HECM borrower might lose their home by failing to fulfill their required obligations under the HECM loan:
1. The borrower or borrowers are away from the property for more than 12 months.
2. Borrowers are not occupying the home for at least 6 months out of the year.
3. Failing to pay property charges such as taxes and homeowner’s insurance.
4. Failing to maintain the home's condition according to FHA requirements.
What if I need to go into a nursing home?
As long as the borrower is not in a nursing home for 12 consecutive months, the loan will not become due. In the final mortgage documents, it states the 12 months must be consecutive for the lender to call in the loan to be paid. So if you go into a nursing home for six months, the reverse mortgage is not affected.
Who Pays My Real Estate Taxes If I Take Out a Reverse Mortgage?
You continue to pay your real estate taxes along with your homeowner's insurance and maintain your property. If you live in a condo or are part of an association, those fees must also be paid by you. After a Financial Assessment, and if the lender finds there is not enough income to pay your ongoing taxes/insurance, a LESA, Life Expectancy Set Aside, will be established to be sure that property charges will be paid throughout the life of the loan.
When is the Reverse Mortgage repaid?
Repayment occurs when your home is no longer your primary residence, when the loan is refinanced, or when the last living borrower has died. This is called a Maturity Event.
What will I owe at the end?
What monies are owed the lender at the end of the Reverse Mortgage are Principal, interest, and FHA mortgage insurance premiums that have accrued over the life of the loan. If you opted for a line of credit, you will only repay the portion of the credit line that was actually used.
Are my heirs responsible for the reverse mortgage debt?
Your heirs are not personally liable for the reverse mortgage debt. If your heirs do not want the home and choose to walk away, the lender would foreclose and remit the remaining equity to the estate. However, if your heirs choose to keep the home, they will never have to pay back more than the full loan balance or 95 percent of the home’s appraised value, whichever is less. Many heirs put the house up for sale, pay the amount owed to the lender from the proceeds of the sale, and keep the difference they are entitled to. Another option is deed in lieu of foreclosure for properties where the balance exceeds the value of the home. Your heirs can deed the house back to the lender and simply walk away from the home.
But I want to leave my house to my kids! What will be left for them?
The Reverse Mortgage is a rising debt loan as NO monthly mortgage payments are required. Your equity could be substantially reduced as the balance rises over time. However, if you wish to leave more equity to your heirs, you can opt to pay any amount to the lender whether per month or at various times throughout the year thereby preserving more equity for your heirs. There is no pre-payment penalty. If, however, you have intentions of leaving a substantial amount of equity to your children or grandchildren, a reverse mortgage may not be the best option for you. (See your financial planner for options on protecting your heirs.)
Will I be able to change to monthly proceeds if I closed with a line of credit?
Yes! Even after you close, you can change how you receive your money, after all, it's yours to do with what you want. You may want to receive monthly proceeds even though you have a line of credit with your HECM. There is a small fee for doing this, but it's your money to tailor to your needs exactly as you wish.
Can I deduct the Reverse Mortgage interest from my income taxes?
Because you are not paying interest on your reverse mortgage, you will be unable to deduct the interest on your income taxes. Please consult your tax advisor regarding what deductions your heirs might be able to take. Just as with any mortgage, reverse mortgage proceeds are tax free; there is no income tax charged on the HECM proceeds because the HECM loan is not considered income but based on the equity in your home.
What are the safeguards to the reverse mortgage program?
The HECM program has safeguards built into the loan. We consider the reverse mortgage to be one of the safest loan products for senior borrowers as it is an FHA loan and HUD regulated. Some safeguards: reverse mortgage counseling, caps on interest rates, a 3-day right of rescission after closing in which you can change your mind and cancel the transaction. Be sure to consult your family and trusted advisors who know your financial situation and your goals for the future.
Questions? Call Advisors Mortgage! Advisors Mortgage: 888-843-9797 or 631-804-9044
All reverse mortgage closing costs can be financed into the loan except the appraisal fee and HECM counseling fee. HECM Counseling, which is required by HUD, is a fee that can be waived based on income status, and if requested, the counseling free can be part of the closing fees. Here are typical reverse mortgage fees:
FHA MORTGAGE INSURANCE
This fee is calculated at 2% of the appraised value of the home up to the lending limit and 1/2% of the outstanding balance per year as the loan accrues. Mortgage Insurance protects you as follows:
a) If you or your heirs sell your home, your total debt owed to the lender will not be greater than the value of your home.
b) Should your lender go out of business, you will continue to receive your proceeds from the federal government.
THE ORIGINATION FEE
This fee is the lender’s fee for doing your loan. The maximum fee is set by FHA and is 2% of the first $200,000 of your property's appraised value and 1% over $200,000. The maximum origination fee is $6,000.
Appraisal Fee From $450 to $850
Inspections: manufactured home inspection (if a manufactured home)
Lender's title insurance
Settlement or closing agent fee (attorney or title company)
Endorsements, recording fees, search fees, overnight fee, document preparation, flood certification, credit report, notary fee, new deed fee (if required), etc.
FOR NEW YORK BORROWERS: You are required to obtain your own attorney to attend the closing and walk you through the process. You will be responsible for paying your attorney which can be included in your closing costs and added onto your loan.
Reverse Mortgages and Equity Loans - Similar, But Different
Although a Reverse Mortgage is a lot like an Equity Loan, there are some significant differences.
(a) With a Reverse Mortgage, your credit score is not a determining factor although a Financial Assessment is done to ensure you have enough funds each month to pay your real estate taxes, homeowner's insurance, condo fees, HOA fees, and flood insurance (if any).
(b) Unlike an equity loan, you make no monthly mortgage payments.
(c) With an Equity loan, you would have to refinance to increase your line of credit or get more proceeds. With a Reverse Mortgage, your unused line of credit increases year after year thereby giving you access to more funds without the need to refinance.
Consider the difference between an equity loan and a reverse mortgage. Compare the HELOC (Home Equity Line of Credit) to the Reverse Mortgage program and weigh all the benefits as well as the pros and cons. You'll find the Reverse Mortgage offers many advantages. Maybe that's why thousands of senior borrowers choose the HECM program. Peace of mind comes from having less stress and as we age. Consider the HECM as your peace-giving alternative.
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