Reverse Mortgages

There are two types of reverse mortgages:

• There is a Home Equity Conversion Mortgage (HECM), which in its simplest definition is a loan that is government-insured by HUD and is regulated by the U.S. Federal Housing Authority (FHA), and
• A Proprietary Reverse Mortgage, which is a reverse mortgage originated by a mortgage broker that uses a wholesale lender like Finance of America Reverse (FAR), United Northern Mortgage Bankers (UNMB), American Advisors Group (AAG), etc. that have reverse mortgages programs especially for Condos and “Jumbo” properties (properties valued over $453,100).

Both types of reverse mortgages are intended for individuals age 62 and older, with primary residences, where there is a small loan balance (in relation to the value of the home) or they own the home outright, which require no monthly mortgage payments of principal and interest; homeowners are still responsible for paying property tax and insurance.

With a reverse mortgage, there are no monthly mortgage payments from you. As one of your most important assets, your home usually holds a certain amount of equity. Because of this equity, when the time comes someday for the loan to be repaid, the value of the home when sold is able to re-pay the loan. Meanwhile, you are able to live in the home for as long as you like without making monthly mortgage payments. Your only obligations as a borrower are to continue to pay taxes and insurance on the home, keep it in good condition and comply with the other loan terms.

How much money you qualify for will be dependent upon these factors:

Your age (you must be 62 or older), your home’s appraised value, the current reverse mortgage interest rates, and your current mortgage balance. These four variables determine the amount you can borrow.

To qualify for a reverse mortgage, you must be 62 years or older, own your home, and occupy it as your primary residence.

Your Reverse Mortgage funds can be disbursed to you in several different ways. For instance, you may receive:

• Full or partial lump sum at closing
• Line of Credit (LOC)
• Monthly Payments (tenure or term and modified tenure or modified term)
• Life Expectancy Set Asides (LESA)

A reverse mortgage is a non-recourse loan, which means that the loan is only secured by the house. Heirs will not/do not inherit personal debt. If the heirs decide they want to keep the property, they will need to pay 95% of the current market value or the Loan Balance, whichever is less.

If used properly – a reverse mortgage can offer many benefits, from everything to a personal emergency fund, used as part of your retirement plan, fix deferred maintenance of your home, pay off existing debt, in-home health care services, to name a few… Most often they are used as need based, lifestyle improvement, and/or financial planning.

As previously mentioned, a reverse mortgage is a ‘non-recourse’ loan, which means the home is securing the reverse mortgage, not the borrower. I.e., as an example, if the home is worth $ 500,000 and the reverse mortgage has accrued to $ 750,000 and there is a line of credit (LOC) – may be property market values crashed, like in 2007 or better yet, the borrower is living a long-happy life – the LOC can never be taken away or frozen, any tenure or term payments continue and the borrower will never owe more than the value of the home. Moreover, if the borrower passes his/her heirs can purchase the property at 95% of the current market value at that time.

Many confuse a mobile home as also a manufactured home… and in some ways they are somewhat correct but maybe not technically accurate. Simply put, a home can either be a mobile home or a manufactured home, but NOT both. I.e., A mobile home was built in a factory before June 15, 1976 and a manufactured home was built after June 15, 1976, when the Manufactured Home Construction and Safety Standards Act went into effect.

Based on this very definition, we can originate reverse mortgages on “manufactured homes” (built after Jun 15, 1976), but not mobile homes.

There are no hard and fast restrictions for using your proceeds from a reverse mortgage. However, many financial experts agree that the proceeds from a reverse mortgage should not be used to purchase additional financial instruments.

Yes, there are draw limitations that have been put in place to protect the borrowers from depleting all equity from the home at initial origination, which are limited to 60% of the initial principal limit or mandatory obligations, plus 10% of their principal limit. This is known as the initial disbursement limit. Additional limitations depend on whether the loan is a fixed rate (a closed-end loan) or a adjustable-rate loan (an open-end loan). Fixed rate loans may only be drawn one time at closing; i.e., there is no open line of credit for the remaining funds, the other 40% of the initial principal loan limit, available after the first year. Since adjustable-rate reverse mortgages are open-ended loans, as previously note, the remaining principal limit (40% plus growth) may be available to the borrower after first year.

One of the major misconceptions I hear about reverse mortgage all the time is “once I enter into a reverse mortgage, the bank gets my house.” That is not even remotely accurate.

New reverse mortgage legislation has been put in place in an attempt to maximize the amount of equity remaining in the home for longer periods of time.

When a borrower passes away, just like in a forward mortgage, the heirs receive the balance of equity in the home, which means the heirs have options. However, unlike a forward mortgage, even if there is no equity in the home, the heirs have options, they are:

With Equity (the home is worth more than the outstanding mortgage) – The heirs can refinance the home by paying off the existing mortgage and keep the home.

They can sell the property either via the lender (for a commission of sales price, much like a realtor) or sell the property on their own.

With-Out Equity (the home is worth less than the outstanding mortgage) – They can either use the non-recourse feature or the heirs can maintain ownership of the property by paying 95% of the current market value.

Yeah!!!! This is the best scenario – to live a long happy life, in your home, as long as possible!! Best wishes -M