INTRO TO REVERSE MORTGAGES
- HISTORY OF REVERSE MORTGAGES
- THE REVERSE MORTGAGE PROCESS
- HOW IT WORKS
- CHOOSING A LOAN ORIGINATOR
- REVERSE MORTGAGE RESOURCES
Imagine living in your home without a traditional monthly mortgage payment *, or instead enjoying monthly loan proceeds from the years you’ve invested in your home. A reverse mortgage is a unique mortgage designed for older homeowners 62 and older. You may enjoy access to part of the equity in your home and the freedom and comfort of the home you’ve known for so many years. It’s your home, now you can put it to work for you.
Reverse mortgage borrowers retain ownership and title to their home*. It’s yours just as it was before, but now you may benefit from the equity that’s been building in your home for years. In addition, HECM (Home Equity Conversion Mortgage) reverse mortgage loans give you the peace of mind of a loan that is insured by the Federal Housing Administration (FHA) and where your home and property are the only assets which secure the loan. In order to retain the home when the reverse mortgage becomes due and payable, the heirs may choose to keep the home and pay 95% of the home’s appraised value, less customary closing costs real estate commissions.
You can get a reverse mortgage on your primary residence and no repayment is due until the home is sold, the last borrower passes away or permanently leaves the home*. Borrowers also must keep the home in good condition, pay property taxes and keep homeowner’s insurance coverage to avoid the loan becoming due and payable.
As a protection, all those seeking a reverse mortgage are required to obtain counseling (from an independent HUD-approved third-party counselor) prior to incurring any costs associated with the loan (other than the counseling fee). While proceeds from a reverse mortgage are not subject to personal income taxation, borrowers should seek tax advice on how proceeds may affect government needs-based programs such as Medicaid and Medi-Cal.
- A Reverse mortgage is a specialized loan for homeowners 62 and older.
- A reverse mortgage allows older homeowners to access a portion of the equity in their home.
- Borrowers maintain title and ownership of their home*.
- Proceeds from a reverse mortgage are not subject to personal income taxation, but borrowers should seek tax advice on how proceeds may affect government needs-based programs such as Medicaid and Medi-Cal.
- It is not a government grant, but a loan that is repaid in the future when the home is sold or the last borrower dies or permanently leaves their residence.
- A reverse mortgage is eligible only for the borrower’s primary or principal residence.
- HUD counseling (from an independent HUD-approved third-party counselor) is required prior to the borrower incurring any costs associated with the loan.
- A reverse mortgage loan is secured by a mortgage on the home and failure to comply with loan terms could result in foreclosure.
* There are some circumstances that will cause the loan to mature and the balance to become due and payable.
* Borrower is still responsible for paying property taxes, homeowner’s insurance and maintaining the property to HUD standards. Failure to do so could make the loan due and payable.
* Credit is subject to age, income standards, credit history, and property qualifications.
* Program rates, fees, terms, and conditions are not available in all states and subject to change.
* Borrowers should seek professional tax advice regarding reverse mortgage proceeds.
HISTORY OF REVERSE MORTGAGES
The origins and history of reverse mortgages show a loan product that has evolved dramatically over the last 40 years. The first reverse mortgage loan was written in 1961 by Nelson Haynes of Deering Savings & Loan (Portland, Maine) to Nellie Young, the widow of his high school football coach helping her to stay in her home despite the loss of her husband’s income.
The need for reverse mortgages was further developed in the 1970’s with several private banks offering reverse-mortgage-style loans. These programs gave seniors money from their home but did not afford the protections of today since no FHA insurance had been put in place.
In the early 1980’s the U.S. Senate Special Committee on Aging issued a report stating the need for a standardized reverse mortgage program. Other committees throughout the mid 80’s cited the need for FHA insurance and uniform lending practices. In late 1987 Congress passed the FHA insurance bill that would insure reverse mortgages. On February 5, 1988, President Ronald Reagan signed the FHA Reverse Mortgage bill into law. In 1989 the first FHA-insured HECM was made to Marjorie Mason of Fairway, Kansas by the James B Nutter Co.
Since 1989 reverse mortgages have grown in popularity, especially in the mid to late 1990’s. Despite the economic upheaval and forward mortgage lending issues, reverse mortgages have continued to grow as a safe, government-insured loan allowing seniors to access a portion of the equity in their homes while not having to make a monthly mortgage payment.*
* Borrowers must continue to pay property taxes, homeowner’s insurance and other property obligations complying with HUD’s requirements for the loan. Failure to do so may result in foreclosure.
THE REVERSE MORTGAGE PROCESS
You may have heard about the reverse mortgage loan on TV, radio or received a mailer or have done your own research.
Meeting with a qualified reverse mortgage professional is key. This is where you learn about your specific numbers, what you qualify for, and receive an analysis of your particular situation.
Counseling is required from an independent third-party, HUD-approved counseling agency, for all reverse mortgage borrowers. Typically this fee is paid by the borrower. Consult with your reverse mortgage professional and make sure you complete this a soon as possible. Many times counseling can be completed over the telephone. You will receive two certificates; one to keep and the other to send to our office.
Action / Application
Meet with your trusted reverse mortgage loan officer and decide if a reverse mortgage is right for you. Our reverse mortgage professionals may meet with you at our office or your home or by phone to help guide you through the application. You will be left with a complete copy of ALL the documents for you and your trusted advisors or family member(s) to review.
To help ensure the long-term success of the HECM loan over time, HUD requires a review of each applicant’s credit history, property tax payments and other credit factors that will be evaluated to measure a borrower’s willingness and financial capacity to meet the ongoing obligations of the loan.
Upon receiving your HUD counseling certificate we will contact you to arrange for an appraisal of your property. The appraisal is paid by the borrower. Reverse mortgages use a full FHA appraisal. The value of your home is based on what comparable properties in your neighborhood have sold for recently.
We (the lender) will begin to process your paperwork. This process includes the appraisal, title report, and checking the balance of any liens/mortgages to be paid. Also verification of income and other credit factors are gathered at this time. We will be in contact regularly during this time.
When the processing and all paperwork is complete, we forward your file to the loan underwriter for final approval and will work to satisfy any conditions/requirements needed to close the loan.
Closing & Funds Disbursed
Once your loan has been approved by underwriting we will contact you to arrange for the signing of your final loan documents. At this time we will confirm your payment plan or partial lump sum (how you want to receive your money). Once you’ve signed the closing documents you have three business days to cancel the loan if you should chose to do so. After the cancellation (rescission) period has passed your funds are distributed based on the payment option you chose at closing. HECM for Purchase loans do not have a rescission period. See HECM for Purchase Guideline for more information.
HOW IT WORKS
“My house has been my home for most of my life. I can’t leave, but I can’t afford to stay.”
You live in a home that you’ve watched increase in value for years. You find it difficult keeping up with bills and healthcare expenses. You’re faced with a dilemma: sell the house—your home, which really doesn’t have a price tag—or continue to live in it and watch your financial burden increase. Now imagine this dilemma resolved.
Enter The Reverse Mortgage
A reverse mortgage allows you to draw on the equity in your home without having to sell it. A “reversal” of a conventional mortgage where you would pay monthly principal and interest payments, a reverse mortgage is a loan that may allow you to receive monthly payments. The loan is repaid when you either sell your home, the last borrower passes away or no longer live there as their principle residence*. As a borrower, you must continue to pay property-related fees, taxes and insurance, and must maintain the home in good condition. You can use the cash payments as you wish: to supplement your retirement income, make home improvements, pay bills, or vacation. It’s all up to you.
Deciding whether or not to go forward with a reverse mortgage is a big decision. If you are still learning about reverse mortgages may we direct you to our Top 10 Reverse Mortgage Questions. Here you will learn the ins-and-out of what to expect from a reverse mortgage.
* There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes and insurance. Credit is subject to age, minimum income guidelines, credit history, and property qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
CHOOSING A LOAN ORIGINATOR
Deciding to venture into a reverse mortgage is a major decision. When choosing whether or not one is right for you, qualified advice is invaluable; so too is selecting a loan originator who is well versed in all aspects of reverse mortgages.
A loan originator must adhere to strict ethical conduct. They must inform you of all the terms and conditions of the loan clearly and with the utmost respect for your needs and goals. They must not pressure you or steer you into another type of loan, such as an annuity, that might not be in your best interest. If you sense you are being pressured, feel free to shop around. It is your decision; only you can decide what is right for you.
Knowledge is power. Read up on reverse mortgages before consulting with a loan originator. This will not only save time but could help you get a better deal. A good place to start is our Top 10 Reverse Mortgage Questions. We’ve also provided a list of Reverse Mortgage Resources.
Most reverse mortgages or Home Equity Conversion Mortgages (HECMs) are insured by the Federal Housing Administration (FHA). FHA requires a Mortgage Insurance Premium (MIP) to be collected at closing and during the life of the loan.The upfront Mortgage Insurance Premium (MIP) is calculated at 2.0% of your home’s appraised value or a maximum of $679,650 (the national lending limit cap of $679,650). For example, a home appraised at $275,000 would have a one-time upfront FHA insurance premium of $5,500. The ongoing FHA insurance premiums are .5% (one-half of one-percent) of each month’s calculated outstanding loan balance.
This insurance provides the following protections and peace of mind for borrowers and their children:
- The borrower(s) are not required to pay more than the home’s fair market value.
- If the loan balance exceeds the value of the home, FHA reimburses the lender for the difference when the estate sells the home.
- Payments made to the borrower by the lender are insured by FHA. If the lender is unable to continue making payments, the payments would be made by FHA.
- If the loan balance grows and exceeds the home’s present market value, the lender cannot take title. FHA insures that borrowers can live in their home as long as basic loan obligations are met (homeowner’s insurance in force, property tax payments current and the home is maintained in good condition).
Reverse Mortgage Resource
AARP free information on reverse mortgages
Housing Counseling Clearinghouse
The Eldercare Locator: Local Resources for Older Adults
Federal Trade Commission (FTC) to report possible fraud
Phone: 1-877-FTC-HELP (1-877-382-4357)
We realize that a reverse mortgage may not be right for you. We encourage you to explore your options. If, for example, you wish to remodel your kitchen, a different type of single-purpose loan might be more appropriate. If however, a reverse mortgage would suit your needs, we invite you to contact us. An experienced loan originator will walk you through each step of the process and answer any and all questions you may have.
We wish you good luck and good fortunes.