Reverse Mortgage Information

Reverse Mortgages in Corona, California and the rest of the country will be changing on October 4^th.

An informative and relative post at Reverse Mortgage Daily, yesterday:

Here's the gist of  it: On October 4, 2010 (yep, next month) there will be some changes to all new HECM loans with case numbers assigned after that date.  We've know n about these upcoming changes for some time now and here they come.

1. The MIP will increase from a .5% annual premium to 1.25%.  This amount is added monthly to the loan  balance. 
2. The principal limits (sort of like Loan To Value ratios) will decrease between 1 and 5% where they are currently.

Last year, HUD reduced the principal limits by 10% and I noticed an immediate increase in the number of homeowners I was unable to help.  This is because for the most part seniors use the reverse mortgage to payoff an existing mortgage, eliminating the monthly mortgage payment and effectively increasing their cash flow.  When I have to tell them that they now have to bring funds to the table to get a reverse, many times (not all) I am told.  "Gee, Debbie, if I had $XX,XXX.XX dollars I wouldn't be trying to get a reverse mortgage!" For them, the best option may be to sell.  Others will look for ways to supplement their income. Most will just keep going as they have been, deeper into savings, deeper in credit card debt until....

This is the second time HUD has been forced to reduce the principal limits in the last two years.  Last year HUD reduced the principal limits by 10% which had a large effect on the number of seniors able to utilize a reverse mortgage to payoff their existing traditional mortgage.

According to HUD, loans with a case number assigned prior to October 4th will still be eligible for the previous principal limits.  A mortgagee letter explaining the changes will be published in September.

The bright side - If you look at the raise in MIP as effectively an "interest rate" in as much as it accrues to the balance, even at 1.25% MIP rates are lower than they were when I first got into this business and it was benefiting many seniors.  At that time the FHA HECM lending limits were around $212,000.  Now the limit is $625,500, making if very useful for seniors living in higher value areas like Southern California.  It also allows FHA to keep this great product viable and available for senior homeowners and home buyers over the age of 62.

In addition to these changes, HUD is expected to release a new type of reverse mortgage, called a HECM light.  More to come on that!

This set of Reverse Mortgage  Q & A is educational and helpful as you research the HECM product. Let me know what you think!

What Is a Reverse Mortgage?

A Reverse Mortgage allows a senior homeowner to convert a portion of the equity in his or her home, eliminating mortgage payments and gaining tax-free income without losing the title to his or her home. The equity in your home that has built up over years of mortgage payments and appreciation can be paid to you.  Unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer uses the home as their principal residence.

Can I qualify for a HUD Reverse Mortgage?

HUD's federal housing administration (FHA) guidelines require that the borrower is a homeowner  62 years of age or older with a low enough mortgage balance or sufficient funds to reduce the current mortgage  balance  low enough that it can be paid off at the closing with proceeds from the reverse loan.  The home MUST be the borrowers principal residence.

To be eligible for a JUD Reverse Mortgage, the borrower(s) must receive formal counseling from a HUD-approved counseling source prior to completing the loan.  To find a counseling agency near you use HUD's own HECM Counseling Web Search at HUD Certified HECM Counselors.

What types of homes are eligible?

The home must be a single-family dwelling or a two-to-four-unit property that is owner occupied. Townhouses, detached homes, units in condominiums and some manufactured homes are eligible. Condominiums must be FHA approved.  The home must be in reasonable condition and must meet HUD minimum property standards. In some cases, home repairs can be made after the closing of a Reverse Mortgage.

What's the Difference between a Reverse Mortgage and a bank home equity Loan?

With a traditional second mortgage or a home equity line of credit, there must be sufficient income versus debt ratio to qualify for the loan, and monthly mortgage payments are required.  FHA Reverse Mortgages are different in that they pay you and are available regardless of current income. The amount depends on age, current interest rate, other loan fees and the appraised home value or FHA Lending Limits for your area - whichever is less.  There are no monthly payments required. (And there are no prepayment penalties should the senior homeowner wish to make prepayments.) The loan is not due as long as the house remains the principal residence, the property taxes and homeowners insurance are kept up to date and the home is reasonably maintained.

Can the Lender take my home away if I outlive the loan?

No! A borrower cannot outlive a Reverse Mortgage! Nor is the loan due. It does not have to be repaid as long as one of the borrowers continues to live in the house and keeps the taxes and insurance current.  .

Will I still have an estate that I can leave to my heirs?

When you sell your home or no longer use it for your primary residence, you or your estate will repay the loan proceeds from the Reverse Mortgage, plus interest and related fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.

How much money is available to me?

The amount you can borrow depends on your age, the current expected interest rate, other loan fees and the appraised value of your home or FHA's mortgage lending limits for your area, whichever is less. Generally, the more valuable your home is, the older you are and the lower the expected interest rate is, the more you can borrow.

What's the most you can owe?

Reverse Mortgages are nonrecourse loans, which means that in seeking repayment the lender does not have recourse to anything other than the home. Not income, nor any other assets. So even if a monthly loan amount advances until you are age 115, the home declines in value between now and then, and the total of monthly payment advances becomes greater than the home's value - you still would never have to repay more than what you could obtain by selling the home at market value.  If you or your heirs sell your home to pay off the loan, the debt is generally limited by the net proceeds from the sale. This is why mortgage insurance is so important. This insurance, which is part of your closing fees, ensures your heirs are not liable for a penny of your Reverse Mortgage after you are gone.

How do I receive payments?

You have several options:

*Tenure - equal monthly payments as long as at least one borrower continues to occupy the property as a principal residence.

*Term - equal monthly payments for a fixed period of months selected.

* Line of credit - unscheduled payments at times and in amounts of your choice, until the line of credit is exhausted.

Lump sum - obtain a lump-sum payment of some amount when the loan is funded.

*A combination - Most people do a combination of all the options. For example, you could take out some amount as a lump sum for home improvements, travel or large-item purchases, put some into a line of credit for possible future use, and use the remaining as a tenure monthly payment for life.

Are there restrictions on how I use my Reverse Mortgage loan proceeds?

You can do anything you want with the money; it is your money. Many people take vacations, buy a new car and help kids or grandkids with college or their first home. Many people put some in a line of credit that they will use in the future for in-home healthcare, medical costs, property taxes and home repairs.

What are the  costs?

Cost have recently been lowered by most lenders.  Most closing costs are generally of the same type found on traditional mortgages: interest charges, third-party closing costs (title search and insurance, surveys, inspections, recording fees, mortgage taxes that are required in your area. Reverse Mortgages also typically include a "FHA MIP "mortgage insurance premium".  Many lenders have eliminate the loan origination fee and monthly servicing fees.  Some do this on both fixed and adjustable, others only offer it on the Fixed Rate reverse. (This is because of the higher resale value of the fixed rate, closed end loans in the secondary market. )  Monthly MIP is currently charged on a reverse mortgage at an annual rate of .5% (one half of one percent) and is currently being reviewed for a likely increase this fall to 1.25%.

* Line of Credit, Tenure Payments, Term Payments and Combination of benefits are not available on the Fixed Rate Reverse Mortgage product.  The fixed rate reverse is a closed end loan and all funds must be disbursed at the close of the loan - in other words you must take all that you qualify for.

I am so excited to have a couple of deals in escrow right now where the buyers are financing their home purchase with an FHA HECM Reverse Mortgage!  It's a relatively new product (2009) and not every agent, broker or buyer is aware of it.

In one instance, a young 70 year old is  putting down $130K on a $318K property in a gated 55+ golf community!  He still works and plans on making payments to his Adjustable Rate Reverse Mortgage and build up a line of credit.  That way he will still be able to take advantage of the tax write off for interest payments.  When he wants to, he can stop making payments knowing that the money he pre-paid is available to him to withdraw again!  I think his plan is very smart.

Southern California Realtors, if you would like some information about how the Reverse 4 Purchase can help you to help your senior home buyers.... just let me know! I'd love to sit down with you and brainstorm.

Here are a few situations when a reverse mortgage is not a wise choice.

A reverse is not the right loan for short term needs.  If you only need the money for a short period of time and are planning on paying it off prior to 5 years, a reverse mortgage is just not an appropriate financial tool. The upfront closing costs will make the cost of the money (APR) non competitive. The minimum recommended amount of time is five years.

Both homeowners should be on title for a reverse mortgage.  If your spouse is under age 62 beware of lenders who encourage you to remove them from title.  A reverse mortgage must be repaid when the last person on the title moves out of the property permanently or passes away. So, if you were to pass away before your spouse and your spouse was not on title, the reverse mortgage would become due even though your spouse is still living in the property.

Risky investments If you are being encouraged to get a reverse mortgage so that you can use the money to invest in stocks, start-up companies, real-estate, or any other type of investment, you should take a good hard look at what the person encouraging you stands to gain. Chances are they're asking you to take big financial risks at a time in your life when you should be conservative. If your home is your only asset, don't risk it.

Annuities - Unethical life insurance salesmen have on occasion encouraged homeowners to take out a reverse mortgage and then try to sell the homeowner an annuity. That is wasteful because the reverse mortgage has a built-in annuity feature called "term" or "tenure" payment. I'm sure that there are some perfectly good annuity products on the market, but if the person encouraging you to get a reverse mortgage also brings up annuities.... BEWARE! They may have their own financial interest as a priority and not yours!

The above reasons are not the only reasons a reverse mortgage may be the wrong fit for you, a good reverse mortgage professional (like me!) will help you to understand all of the benefits and liabilities of a reverse mortgage for your situation.

Remember, all reverse mortgage borrowers must receive special reverse mortgage counseling from a HUD approved counseling agency before they can begin processing on a reverse.  I encourage homeowners to have their trusted advisers or children participate in counseling as well.  Your loan officer should not attend the counseling session with you, either on the phone or in person.