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REVERSE MORTAGES

Per Wikipedia, "Reverse Mortgage is a mortgage loan, usually secured by a residential property, that enables the borrower to access the unencumbered value of the property.

The loans are meant for homeowners with one spouse, age 62 or older and typically do not require monthly mortgage payments.

Borrowers are still responsible for property taxes and homeowner's insurance.

Reverse mortgages allow elders to access the home equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home.

Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month.

The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower (or the borrower's estate) is generally not required to repay any additional loan balance in excess of the value of the home!"

In rising real estate markets, home equity gain can outpace the rising loan balance and the balance of the equity is paid to the beneficiaries upon sale of the home on passing away of the last surviving spouse.

A reverse mortgage is a type of loan that is used by homeowners at least 62 years old who have considerable equity in their homes. By borrowing against their equity, seniors get access to cash to pay for cost-of-living expenses late in life, often after they’ve run out of other savings or sources of income. Using a reverse mortgage, homeowners can get the cash they need at rates starting at less than 3.5% per year.

What Is A Reverse Mortgage?

Think of a reverse mortgage as a conventional mortgage where the roles are switched. In a conventional mortgage, a person takes out a loan in order to buy a home and then repays the lender over time. In a reverse mortgage, the person already owns the home, and they borrow against it, getting a loan from a lender that they may not necessarily ever repay.

In the end, most reverse mortgage loans are not repaid by the borrower. Instead, when the borrower moves or dies, the borrower’s heirs sell the property in order to pay off the loan. The borrower (or their estate) gets any excess proceeds from the sale.

Most reverse mortgages are issued through government-insured programs that have strict rules and lending standards. There are also private, or proprietary, reverse mortgages, which are issued by private non-bank lenders, but those are less regulated and have an increased likelihood of being scams.

How Does A Reverse Mortgage Work?

The process of using a reverse mortgage is fairly simple: It starts with a borrower who already owns a house. The borrower either has considerable equity in their home (usually at least 50% of the property’s value) or has paid it off completely. The borrower decides they need the liquidity that comes with removing equity from their home, so they work with a reverse mortgage counselor to find a lender and a program.

Once the borrower picks a specific loan program, they apply for the loan. The lender does a credit check, reviews the borrower’s property, its title and appraised value. If approved, the lender funds the loan, with proceeds structured as either a lump sum, a line of credit or periodic annuity payments (monthly, quarterly or annually, for example), depending on what the borrower chooses.

After a lender funds a reverse mortgage, borrowers use the money as provided for in their loan agreement. Some loans have restrictions on how the funds can be used (such as for improvements or renovations), while others are unrestricted. These loans last until the borrower dies or moves, at which time they (or their heirs) can repay the loan, or the property can be sold to repay the lender. The borrower gets any money that remains after the loan is repaid.

Reverse Mortgage Eligibility

In order to qualify for a government-sponsored reverse mortgage, the youngest owner of a home being mortgaged must be at least 62 years old. Borrowers can only borrow against their primary residence and must also either own their property outright or have at least 50% equity with, at most, one primary lien—in other words, borrowers can’t have a second lien from something like a HELOC or a second mortgage. If the borrower doesn’t own their house outright, they usually have to pay off their existing mortgage with the funds received from a reverse mortgage.

Typically only certain types of properties qualify for government-backed reverse mortgages. Eligible properties include:

  • Single-family homes
  • Multi-unit properties with up to four units
  • Manufactured homes built after June 1976
  • Condos or townhomes

In the case of government-sponsored reverse mortgages, borrowers also are required to sit through an information session with an approved reverse mortgage counselor. They also have to stay current on property taxes and homeowner’s insurance and keep their property in good condition.

Private reverse mortgages have their own qualification requirements that vary by lender and loan program.

Reverse Mortgage Borrowing Limits

If you get a proprietary reverse mortgage, there are no set limits on how much you can borrow. All limits and restrictions are set by individual lenders.

However, when using a government-backed reverse mortgage program, homeowners are prohibited from borrowing up to their home’s appraised value or the FHA maximum claim amount ($765,600). Instead, borrowers can only borrow a portion of their property’s value. Part of the property’s value is used to collateralize loan expenses, and lenders also typically insist on a buffer in case property values decline. Borrowing limits also adjust based on the borrower’s age and credit and also the loan’s interest rate.

Reverse Mortgage Costs

There are two primary costs for government-backed reverse mortgages:

  • Interest rates: These may be fixed if you take a lump sum (with rates starting under 3.5%—a rate comparable to conventional mortgages and much lower than other home equity loan products). Otherwise, they’ll be variable based on the London Interbank Offered Rate (LIBOR), with a margin added for the lender.
  • Mortgage insurance premiums: Federally backed reverse mortgages have a 2% upfront mortgage insurance premium and annual premiums of 0.5%.

Mortgage insurance is meant to protect lenders in case of borrower default. While reverse mortgages can’t usually default in the same ways as conventional mortgages—when borrowers fail to make payments—they can still default when owners fail to pay property taxes or insurance or by failing to properly maintain their properties.

In addition to these costs, lenders also will charge their own origination fees, which vary by lender, but typically range from 1% to 2% of the loan amount. Lenders also typically charge other fees, including for property appraisals, servicing/administering loans and other closing costs, such as credit check fees.

However, all costs are typically rolled into the balance of the mortgage, so lenders don’t need to pay them out of pocket.

Types Of Reverse Mortgages

Most reverse mortgages are government-insured loans. Like other government loans, like USDA or FHA loans, these products have rules that conventional mortgages don’t have, because they’re government-insured. These include eligibility criteria, underwriting processes, funding options and, sometimes, restrictions on uses of funds. There are also private reverse mortgages, which do not have the same strict eligibility requirements or lending standards.

Single-Purpose Reverse Mortgage

Single-purpose loans are typically the least expensive type of reverse mortgage. These loans are provided by nonprofits and state and local governments for particular purposes, which are dictated by the lender. Loans may be provided for things like repairs or improvements. However, loans are only available in certain areas.

Home Equity Conversion Mortgage

Home equity conversion mortgages (HECMs) are backed by the U.S. Department of Housing and Urban Development and can be more expensive than conventional mortgages. However, loan funds can be used for just about anything. Borrowers can choose to get their money in several different ways, including a lump sum, fixed monthly payments, a line of credit or a combination of regular payments and line of credit.

Proprietary Reverse Mortgage

Proprietary reverse mortgages are private loans that aren’t backed by a government agency. Lenders set their own eligibility requirements, rates, fees, terms and underwriting process. While these loans can be the easiest to get and the fastest to fund, they’re also known to attract unscrupulous professionals who use reverse mortgages as an opportunity to scam unsuspecting seniors out of their property’s equity.

How Do You Qualify for a Reverse Mortgage?

The main requirement is you must be 62 years old. If your spouse is not that old, he or she cannot be on the title.

The property must be your primary residence. You have to go through consumer counseling so the government will know you at least theoretically understand the obligations you’re getting into.

You must have a lot of equity in your home. The exact figure depends on the lender, but it is almost always higher than 50%.

Lenders might look at other factors that come into play when you get a traditional loan, like your credit score and debt-to-income ratio (DTI). But the DTI is not typically considered in the qualification.

Neither is your credit score if you are getting a HECM loan, though if you have any outstanding debts like federal student loans you will not be approved.

The Veterans Administration doesn’t offer reverse mortgages. But you can use the VA to get a traditional loan to pay off a reverse mortgage.

Reverse Mortgage Process: How Do You Get One?

The first thing to do is shop for a lender. Many large banks have stopped writing reverse mortgages, though they are still available at smaller banks and credit unions.

There are also plenty of on-line lenders like One Reverse Mortgage, Liberty Equity Solutions and Home Point Financial Corp.

All mortgages have costs, but reverse mortgages can be pricey compared to traditional mortgages. Between the interest rate, origination fees, mortgage insurance, appraisal fees, title insurance fees and other closing costs, the total could be as high as $40,000.

That would eat up much of the equity a borrower has in their home. And the origination fee is based on the home’s value, which is usually much larger than the loan amount.

So it pays to shop around for the best deal. Once you have chosen a lender, the property is appraised to determine its market value. Most reverse mortgages are processed within 30-60 days. Borrowers can receive 50% to 66% of the value of their equity depending on their age and interest rate, which is generally about 5%.

Once the loan is approved, borrowers have four disbursement options – lump sum, monthly payments, credit line or a combination of the three.

What Happens When the Loan is due?

Usually, you call the coroner because the homeowner has died. The mortgage also comes due if the homeowner moves or sells the property, fails to pay taxes and insurance or doesn’t make needed repairs.

If you live in a reverse-mortgage home in Buffalo and decide to retire to Florida, you’ll have to sell the property. If it’s worth more than what it owed, you get to keep the difference.

That’s an iffy proposition given how the debt increases. That’s where the HECM’s mortgage insurance comes into play.

Reverse mortgages are known as “non-recourse” loans. That means you or your survivors will never owe more than what the home is worth.  If that’s not worth enough to cover the balance of your loan, mortgage insurance pays the difference.

That has cost the government billions of dollars over the years, so the Trump administration tightened lending rules in 2017. Which brings us to…

Pros and Cons of Reverse Mortgages

They are a steady stream of income that lasts for years. You can convert the equity in your home into a pile of cash without having to move out.

The money is tax free. Rather than income earned, a reverse mortgage is considered a loan so the IRS can’t get its sticky fingers on it. And a reverse mortgage will not affect your Social Security or Medicare payments.

As for the cons, failing to keep up with the monthly fees has cost a lot of people their homes. Of course, if they didn’t pay those bills they’d also face foreclosure with a traditional loan.

The difference is that with traditional loan, the debt decreases every month. Since there are no mortgage payments with a reverse mortgage, the loan balance increases every month.

Between the interest and other costs, the debt may eventually exceed the home’s market value. If you want your children to inherit the house, they could be stuck with a steep bill.

The good news is you or your estate will never have to pay a lender more than the market value of the house. The bad news is Uncle Sam got tired of paying the difference.

Since 2009, reverse-mortgage losses have cost the Federal Housing Administration reserve fund $12 billion. That’s the same fund that insures low-income newcomers to the housing market.

Essentially, reverse mortgages were redistributing wealth from the poor to the predominately middle class. Beginning in October 2017, new rules require prospective borrowers to make much higher upfront payments and significantly lowered the amount that can be borrowed.

“Fairness dictates that future HECM loans do not adversely impact the overall health of FHA’s insurance fund, which supports the financing needs of younger, mostly first-time homeowners with traditional FHA mortgages,’’ HUD Secretary Ben Carson said. “We’re taking needed and prudent steps to put the HECM program on a more sustainable footing.”

The average reverse mortgage borrower drew 64% of their equity under the old rules. That will drop to 58%, according to the Wall Street Journal.

All that makes reverse mortgages less attractive, but the offers will keep coming.

Is a Reverse Mortgage a Good Idea?

For some people, yes. They have asked pertinent questions like:

Do I want to maximize what I can leave to my heirs?

Am I going to live in my home deep into my retirement?

How much extra income will I need to meet my needs?

Can I pay the taxes, insurance and meet all the obligations that come with a reverse mortgage?

Unlike all those people who’ve been foreclosed on, do I really know what I’m getting into?

If the answers to those questions are sketchy, you should consider a safer financial route like a traditional home equity loan or line of credit.

Whatever the decision, seek personalized advice from a financial counselor or debt-management agency.

Tom Selleck might say reverse mortgages are not too good to be true. But Magnum P.I. showed that it always pays to investigate.