Everyone knows the basics by now - “Senior homeowners and home-buyers over the age of 62 may qualify for a government insured reverse mortgage. Call now for our free video.” But what are the nuances and how are they helpful or hurtful? I’d like to point out some of the fine print that you will find in FHA Reverse Mortgage documents, guidelines and other things that might trip someone up. I consider myself very knowledgeable on the product and I won't cover it all here. If you need to know more, dig deeper. There is tons of information out there for you!
- Even late charges are reversed with a reverse mortgage! (I love this one.) Sounds kind of backwards doesn’t it? But it’s true! If a senior homeowner receiving monthly payments on their reverse, or requesting an advance on a reverse line of credit, does not receive their funds within 5 days of the servicer’s receipt of request, the borrower is entitled to a late charge of 10% of the payment amount. I spoke with a VP of Servicing at one of my past employers and asked point blank, “Do you ever have to pay that?” “Yes we do.” Was the answer. “It is one of the ways we measure our efficiency and service levels.” Good to know don’t you think?
- Although it’s true that borrowers with low income and credit scores can qualify for reverse mortgages there are some things that can cause your application to be denied.
- If you have a foreclosure on your record, whether your own or one you co-signed for, you are ineligible to obtain a reverse mortgage for 2 years on a refinance or 3 years for a purchase.
- If you have a government student loan or co-signed for one that is in default, you’ve got to bring it current.
- Federal Debt or Judgements- any Federal debts must be satisfied or a repayment plan approved in writing.
- The adjustable rate reverse mortgages allow you to take your funds in the form of monthly payments or a line of credit. You can choose monthly payments for as long as you live in the home - called “tenure” payments or monthly payments for a specified period of time - called “term” payments. But did you know that if you have a line of credit on a reverse mortgage that it could grow over time? Yep! It’s true, so your $100,000 line of credit could become $101,000 or more within a year. Now, don’t think you’re earning interest cause you’re not. What is happening is that the amount of money you can borrow is going up. I call it “borrowing capacity”. Basically, your credit limit is going up, and unlike traditional lines of credit, it cannot be “frozen” due to home value or your credit worthiness.
- Can the lender foreclose on a reverse mortgage? You bet they can. Though the senior homeowners are not required to make monthly mortgage payments, they ARE responsible for keeping property taxes, homeowners insurance and homeowners association fees current. Not doing so is an acceleration event. (Acceleration is a fancy lending word for “Immediately Due and Payable”)
- Seniors may not be able to participate in Property Tax Deferral Programs - Here is some fine print from a typical FHA reverse deed of trust (aka Security Instrument) - ”Borrower shall not participate in a real estate tax deferral program, if any liens created by the tax deferral are not subordinate to this Security Instrument.”
- Putting your property into a trust after you get a reverse mortgage requires special attention - Get the lender’s approval first! Straight from HUD - “What are servicers expected to do when mortgagors have completed Trust documents on a HECM loan after closing? Once the servicer has either discovered or been advised of the Trust, they are expected to have their legal division review the documents. If there has been a violation of the covenants of the mortgage due to the Trust, the servicer should take whatever steps are necessary to rectify the violation. The mortgagor may change the terms of the Trust, or revoke it, to cure the default. If all attempts to rectify the violation fail, the servicer may request permission from HUD to call the loan due and payable. HUD will evaluate the circumstances for declaring the mortgage due and payable and will respond in writing to the servicer within 30 days of receipt of the request either approving or denying the request. Until the reason for the default is cured and the loan removed from a due and payable status, the loan is not eligible for the assignment option.”
- You must live in the home! FHA reverse mortgages are for primary residences ONLY. No exceptions, and yes, the lender or servicer will check.
- A Reverse Mortgage is a Non Recourse Loan - Here’s the fine print from an actual Deed of Trust “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 Secretary upon demand by the Secretary, 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 am a huge fan of the reverse mortgage product and, yes, I am a biased loan originator for a large reverse mortgage company, BUT it wasn’t always so. For years I owned a notary signing service and was also an escrow officer. I became very skeptical about lenders in general. I would search out the fine print and make sure the clients knew if there really was a prepayment penalty or when the loan rate would change and how much.... it’s all there in the loan documents. Ya just gotta read them people... I hope you enjoyed these examples of the “fine print”.
As always, your feedback and comments are appreciated. And of course, these are my thoughts and opinions and do not necessarily reflect those of HUD, FHA or my employer.
Deborah Nance
Your Local Southern California Reverse Mortgage Professional
