Forward vs Reverse Mortgages

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1 A brief outline

2 Forward vs Reverse Mortgages Forward Purpose: Purchase, Refinance Start: Little or No Equity During: Pay Lender Balance Decreases Equity Increases End: Owes No Debt Substantial Equity Reverse Purpose: Generate Income Start: Substantial Equity During: Paid by Lender Balance Increases Equity Decreases End: Owes Substantial Debt Little or No Equity

3 Forward vs Reverse Mortgages 120 Mortgage Debt over Time Forward Reverse

4 HECM FHA Insured Reverse Mortgage Program Allows Seniors access to equity in their home No monthly repayment Lender disburses directly to borrower

5 HECM Funds used for any purpose Repayment due when last borrower: Dies Sells home No longer uses home as primary residence

6 HECM Terminology Maximum Claim Amount Maximum amount HUD will pay lender as a claim. Lesser (least) of appraised value or HECM program limit, and if HECM purchase, purchase price Principal Limit Amount borrower(s) can receive. Based on Maximum Claim Amount, interest rate, age of youngest borrower Net Principal Limit Amount remaining after loan costs are paid

7 HECM Terminology Expected Rate Rate estimated to be the average long term interest rate for the life of the HECM. Used ONLY to calculate the principal limit on adjustable rate loans. Initial Rate Interest rate effective at closing. Constant for fixed rate loans, adjusted monthly or annually per chosen adjustable rate plan.

8 HECM Terminology Index Basis for setting interest rates. Either of two may be used: Constant Maturity Treasury Rate (Treasury Rate), set by Federal Reserve of New York London Inter-Bank Offered Rate (LIBOR), set by rates that major banks in London charge for lending among themselves. Margin Percentage added to interest rate to help defray lenders costs. Must remain the same for expected and initial rates.

9 HECM Borrower Eligibility Youngest borrower at least 62 Must own home or purchase home and use it as principal residence No income requirement Limited asset requirements

10 HECM Borrower Eligibility Credit review limited to determine that no delinquent federal debts remain after HECM closing Borrower(s) cannot be listed on: HUD Limited Denial of Participation or General Service Administration government - wide debarred list

11 Processing Steps - Counseling Counseling HUD approved counseling agency assists borrower(s) in making informed decision on continuing HECM process Counseling Certificate issued upon completion Signed by counseling agency and all who will be on mortgage (must be exact match) Provide to lender to begin application processing

12 Processing Steps - Counseling Once lender receives signed counseling certificate, lender may: Order case number Order appraisal Order credit report Request title review Request other documents as necessary... (Power of attorney, trust, life estate...)

13 Processing Steps-Appraisal FHA appraisal required, same forms used as for forward loans Same appraisal requirements Exceptions: Underwriter may lift lead base paint requirement Repairs less than 15% of Maximum Claim Amount may be completed after closing

14 Processing Steps-Calculation Borrower(s) choose one of five ways to receive funds- Tenure monthly payment for life Term monthly payment for specific time Line of Credit used as needed, from all at closing, to portions at various times over the years Combination line of credit and tenure Combination line of credit and term

15 ONE EXAMPLE Youngest Borrowers Age at closing 72 Expected Interest Rate 5% Property Value 300,000 Maximum Claim Amount 300,000 Principal Limit 203,100 Up Front MIP 6,000 Other Closing Costs 12,000 Management set aside 5, Initial Draw 40,000 Net Principal Limit 139,524.19

16 Lender Participation Approved Direct Endorsement Lenders seeking HECM DE authority must: Enter test case phase and Submit five acceptable cases Third party originators may originate and process HECMs and submit them to their sponsors for underwriting

17 FHA Resource Center Phone Toll free: 800-CALL-FHA ( ) TDD: 877-2HUD or

18 Other Resources HECM Seniors Page: me.cfm HECM Lenders Page: melenders.cfm

19 Other Resources National HECM Counseling Network: hccprof18.cfm Reverse Mortgage Counselors: agency _look.cfm

20 Other Resources Lender Approval cfm Phone: Philadelphia HOC, Atlanta HOC, Denver HOC, and Santa Ana HOC Phone: (1-800-CALL-FHA)

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