WHO INSURES REVERSE MORTGAGES?
The FHA (Federal Housing Administration) insures reverse mortgages. The FHA HECM, Home Equity Conversion Mortgage, is administered and regulated by the United States Department of Housing and Urban Development (HUD).
WHAT IS THE HISTORY OF REVERSE MORTGAGES?
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 was 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.
There was no FHA mortgage insurance on reverse mortgages at that time. They didn't provide the protection that the FHA reverse mortgage provides today. The FHA HECM had its inception in 1987 when the 100th Congress passed the 1987 Housing and Community Development Act. The act was signed into law by President Ronald Reagan on February 5,1988. The law gave the Department of Housing and Urban Development the authority to extend FHA insurance coverage to also include reverse mortgages. 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. There are proprietary reverse mortgages where 55 is the accepted age.
Is there a minimum credit score to qualify? There is no minimum credit score required in order to qualify for a reverse mortgage. But your credit history will be analyzed along with your real estate tax payment history during the required financial assessment done on each reverse mortgage.
I cannot qualify for the HECM since I owe too much on my current mortgage. Is there a jumbo reverse mortgage?
Yes. Contact Advisors Mortgage to see if you qualify for the jumbo product.
(All Jumbo loans are proprietary products and arranged through third party providers).
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 whether they are FHA approved. If they are not, you can apply to have your own condo FHA approved (single unit approval) without having to have the entire condominium FHA approved. There are parameters for approval, so call your loan officer to inquire. Proprietary reverse mortgage also follow the same HUD guidelines for condos.
Co-ops are currently approved for Reverse Mortgages but only in New York state. Mobile homes are also not eligible for a Reverse Mortgage as the land is not owned by the borrower. See Manufactured Homes page.
What types of plans are there for the FHA HECM?
Adjustable Rate HECM Plans:
* 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 along with monthly proceeds if a monthly was chosen. However, the borrower does not have to depart the residence but can continue to live there even though the term has expired.
* Fixed interest rate HECM: You will receive a 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.
How is my money disbursed?
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.
What if My Spouse if Not 62 Years of age?
If your spouse is underage, you can still take out a reverse mortgage. 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 difficult 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 Reverse Mortgage Stabilization Act of 2013 and changes to that law in 2015, there has been a change in reverse mortgage parameters as regards non-borrowers. Among the changes, if there is an underage spouse, the reverse mortgage will not become due when the borrower passes away. Spouses who remain and are under age 62 will be able to remain in their home. However, the HECM line of credit would no longer be accessible, and any monthly proceeds would cease.
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.
Can the interest rate be locked?
Although you cannot lock the initial or applied interest rate on a HECM ARM, your lender can generate an application, and the Expected Rate on the HECM ARM can be locked for 120 days. Hence, you will receive either the rate at application or the rate at closing, whichever is lower.
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 nor are any of your retirement benefits. The impact on other federal, state, or local assistance programs such as Medicaid should be discussed with a financial advisor or Medicaid administrator. NOTE: Your Medicaid benefits may be affected if not spent in the month they are received. We are not Medicaid professionals, so it is best to contact Medicaid with your questions.
Will my reverse mortgage balance go up?
Because the reverse mortgage loan does not require any monthly mortgage payments, it is called a rising debt loan, the opposite of a typical mortgage where you make monthly mortgage payments, and the balance does down. For this reason, the reverse mortgage balance can potentially end up higher than the value of your home. However, written into both the FHA HECM and jumbo reverse is an important safeguard called "non-recourse." Simply put, the house stands for the debt. You can never owe more than the house is worth. If that does happen, FHA will cover any shortage.
Can I refinance my home with another reverse mortgage?
As long as there is sufficient equity in your home, you can refinance your reverse mortgage. It is called HECM to HECM or H2H. You can also refinance proprietary jumbo reverse mortgages. As borrowers age and home value rises, there may be more equity to be drawn from another reverse mortgage transaction. Perhaps the home was updated such as new kitchen, updated bath, or other renovations. There could be more proceeds available. Costs are lower on a reverse refi than the first reverse mortgage.
"The new legislation allows FHA to reduce the costs to HECM borrowers, by collecting a lower upfront mortgage insurance premium for the refinanced HECM". (Sometimes the upfront mortgage insurance premium will be zero).
Guidelines - The 5 x Rule: Does the refinance benefit the borrower?
To make sure the refi is of benefit to the borrower, there must be an increase in principal limit at least 5X the costs of the transaction. Example, if the closing costs are $10,000, there must be an increase in principal limit of at least $50,000.
The benefit to the borrower from the refinance must be at least 5% of the borrower’s principal limit. If a borrower has a $300,000 principal limit, there must be at least $15,000 in proceeds available to the borrower. Note: You will need to qualify for the reverse mortgage refinance just as you did with your original reverse mortgage.
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 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, the Federal Housing Administration that insures reverse mortgages implemented a requirement in 2015 that all HECM lenders were required to conduct a financial assessment. The financial assessment will determine if borrowers can meet their HECM loan obligations such as the ability to pay property charges on their own. If it is determined that a borrower will not be able to pay their property charges and could actually default on their HECM loan, a set aside of funds called a LESA will be set up.
What is a LESA?
LESA, Life Expectancy Set Aside, was implemented by HUD in 2015 for those borrowers who have a poor credit history or tax payment history. The LESA sets aside a portion of the HECM mortgage proceeds to pay property charges such as taxes and insurance, etc. It is as the name implies, a life expectancy 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. (For more info, request our LESA FAQ flier).
If a maturity event occurs such as moving out of the home, residing for over 12 consecutive 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 become 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. Your loan servicer will provide monthly statements by mail showing the property charges paid on your behalf. You can also call your servicer and ascertain that information.
Do I still need a LESA if I refinance my HECM?
Naturally, if a borrower refinances their HECM, another financial assessment will be conducted as the loan is a completely new mortgage. The financial assessment will determine if a LESA is required. All reverse mortgages require a financial assessment.
How much money can I borrow?
The cash out with an FHA Reverse Mortgage depends on age of youngest borrower, current interest rates, current liens, and the appraised value of the home. At present, the maximum FHA lending limit is $1,089,300, but you'd have to be up in age to receive that entire amount.
With the FHA Reverse Mortgage, the older you are, the more money you receive. So if your home is worth $1,089,300 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.
HUD has split the proceeds of the HECM into two disbursements. The initial disbursement comes at closing (or 3 days after a cancellation period where you can change your mind). The maximum disbursement is based on 60% of the Principal Limit OR all mandatory obligations plus an additional 10% of the Principal Limit (or lending limit). The second draw of funds comes 365 days after funding and can remain in a line of credit.
What is a non-recourse loan?
Non-recourse debt is a type of loan secured by collateral which is usually real property. In the case of mortgages, the collateral is your home. A reverse mortgage is a loan in which the lender may look only to the property for repayment of the debt even IF the collateral does not cover the full value of what is owed, i.e., you end up owing more than the home is worth.
None of your assets can be used to satisfy the reverse mortgage 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 for repayment of the reverse mortgage debt.
You are NOT personally responsible for the reverse mortgage debt nor are your heirs.
The reverse mortgage closing documents state clearly that the borrower has no personal liability for the reverse mortgage debt. THE HOME STANDS FOR THE DEBT. THE HOME IS THE ONLY COLLATERAL FOR THE LOAN. YOUR ASSETS CANNOT BE USED TO SATISFY THE DEBT. The below quotation from the reverse mortgage closing documents state this clearly:
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