Reverse Mortgage Guide. for Adult Children. Reverse Mortgage. for Purchase Guide

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1 Reverse Mortgage Guide for Adult Children Reverse Mortgage for Purchase Guide

2 Table of Contents 3. Introduction 4. Why Use a Reverse Mortgage to Purchase a Home? 1 - Customer with Limited Financing Options 2 - Conventional Loan Buyer 3 - Cash Buyer 7. The Loan Details Loan Amount Fees Upfront Financed Seller-Paid Fees Property-Related Issues Retaining Other Property New Construction Flipping Repairs Related To Seller The Sales Contract Seller Concessions Choosing The Title Company or Attorney Closing Date & Due Diligence Additional Forms Reverse Mortgage Counseling: Why, What, and How What You Can Expect How to Locate an Approved Reverse Mortgage Counselor The Loan Process The Appraisal: Determining Value for a Reverse Mortgage Processing and Underwriting Closing and Funding Life of Loan Issues Exhibit A: Analysis of a Reverse Mortgage vs. Conventional Loan Exhibit B: Analysis of Reverse Mortgage vs. Cash Purchase 26. Exhibit C: Analysis of Investing in Real Estate vs. Other Investment Vehicles 28. Purchase checklist

3 Introduction You may have heard of a reverse mortgage it s hard not to have heard of them these days with all of the commercials on television but did you know that you can use a reverse mortgage to purchase a home? The Department of Housing and Urban Development (HUD) created the reverse mortgage program in 1987, but only authorized them to be used for purchasing homes beginning January 1, Most people have trouble wrapping their minds around the concept, so we ll attempt to help explain all of that in this booklet. In its most simple form, a reverse mortgage purchase loan would provide you with X% of the purchase price of your new home (let s say 60%, for example), and you would put down the remaining Y% (40% in this example) with cash. You would move into the home and only be responsible for paying the property taxes, insurance, and any association fees. The key difference between a reverse mortgage purchase loan and a conventional loan is the lack of required monthly principal and interest payments. The loan is accruing interest and doesn t require payment until you pass away or no longer occupy the property as your primary residence. Reverse Mortgage for Purchase Guide - 3.

4 Why Use a Reverse Mortgage to Purchase a Home? In this section, we will help you identify some of the reasons why you should consider using a reverse mortgage to purchase a home vs. a conventional loan or paying cash. Reverse mortgage purchase loans are not well known, and haven t been researched by many advisors, so we want to help spark the discussion. We ll start by breaking out the three main scenarios we see most often. 1. Customer with Limited Financing Options This customer is generally in one of two scenarios. The first is a buyer who is limited in his/her borrowing power by either income or credit scores. When looking to take out a conventional purchase loan, one must prove they can meet the lender s debt-to-income ratios. There is also a minimum credit score requirement, along with an expectation to explain past credit blemishes. Qualification for a reverse mortgage is very similar these days, but isn t based on credit scores. The biggest difference is having the income to cover the principal and interest payments of a conventional loan versus no such payments with a reverse mortgage. If you have the funds to make the down payment required, but don t have the income for a conventional loan, a reverse mortgage purchase can be an easy decision. 4.

5 The second scenario is a buyer that wants to purchase a more valuable home than the cash they have on hand will allow, but also has no desire to take on a mortgage payment. His current monthly cash flow is fine, and he doesn t want to add the expense of a 30 year mortgage payment. For example, a 68 year-old that has $100,000 on hand with which to home shop can now look in the $210,000 to $215,000 range, depending on state. This is a great option for a widow that believes she is stuck in a home that no longer meets her needs. She doesn t think she can afford a new home with what she will net from the sale of her existing residence. With a reverse mortgage, however, she can improve her living situation by getting a home that is a better fit for her, and not have a disruption to her monthly cash flow. 2. Conventional Loan Buyer The first thing to do here is rule out who would not be a fit for a reverse mortgage purchase. Those that want to put 3% to 25% down need to stick with a conventional loan. Reverse mortgage loan amounts range from a low of 52% to a high of 75%, for 62 and 90 year olds, respectively. If you are over the age of 62 and purchasing a home with a conventional loan, retired or not, your first consideration should be about your post-retirement income. If you are planning to draw down your The 4% withdrawal concept was founded by Wil- retirement portfolio at 4% per year, liam P. Bengen, CFP in 1994 will your income be sufficient to cover and released in the Journal the suggested mortgage payment plus of Financial Planning. all other monthly expenses? If the answer is no, then you have a cash flow problem that could possibly be corrected by using a reverse mortgage for purchase. You may also be itching to retire, but taking on a conventional mortgage at this stage in your life won t allow that. If you won t have a cash flow problem then consider what kind of investment you feel is better for you at this stage of your life. Reverse Mortgage for Purchase Guide - 5.

6 Should you take on a 15, 20, or 30-year mortgage with the goal of owning real estate outright, or at least a large equity position? Or should you be putting that money into liquid or semi-liquid investment accounts? For an illustration and financial analysis of this concept, please see our exhibits at the end of the booklet. 3. Cash Buyer There are generally two types of cash buyers. The first are the ones that have sufficient non-real estate assets to last the rest of their lives, so they aren t really candidates for reverse mortgages. Why borrow money if you don t need to? The second is one that may need to access home equity as part of his overall retirement plan if he reaches full life expectancy. There can be serious liquidity issues when one waits to access home equity until all other assets are exhausted. In the current lending environment it is difficult to take out a sizable, conventional loan with little more than social security income, not to mention a higher risk of default due to taking on a new monthly payment. Here s the suggestion we are making: Instead of putting $300,000 down to buy a home outright, why not consider putting $147,400 down and holding the remaining $152,600 in an investment vehicle that your are comfortable with (or that is recommended by your 1 advisor). For an illustration and financial analysis of this concept, please see our exhibits at the end of the booklet. 1 The example is for a 65 year old buyer who would receive a 54.2% loan amount and have $10,000 net closing costs over a cash purchase. The expected interest rate used for this calculation is 5.06% and the APR is 6.88%. 6.

7 The Loan Details It is crucial to understand what your cash out-of-pocket will look like for a reverse mortgage purchase. We ll explain the various costs below, but it is important to get a detailed estimate before you make an offer on a property. There can be major variations in fees from state to state. Loan Amount You can use the table on the next page to calculate the gross loan amount (before fees) that you will be eligible for, based on your age. If you are married, use the age of the youngest spouse. You can round up if you will have a birthday within six months or less of the closing date. All you have to do is multiply the percentage by the purchase price to figure out your gross loan amount. If you are 62 and have a spouse below 62, please contact us for a quote. If you are over 90 years old, please use the amount shown for a 90 year old. (It s the max allowed.) AGE % 53.0% 53.6% 54.2% 55.6% 56.2% 56.2% 56.9% % 58.3% 59.1% 59.9% 60.6% 61.4% 62.2% 63.1% 64.0% 64.8% % 66.5% 67.4% 68.2% 69.0% 69.9% 70.9% 71.9% 72.9% 73.9% % *This table is for a loan with an expected interest rate of 5.06% or below. If expected interest rates rise above 5.06%, this table will no longer be valid. As markets can shift daily, that could happen at any time without notice. Reverse Mortgage for Purchase Guide - 7.

8 Fees The costs of purchasing a home using a reverse mortgage can be broken into two distinct groups: those that have to be paid up-front and those that are financed. Financed fees are paid at the closing, at the same time as the down payment. Upfront The out-of-pocket costs, in addition to an earnest money deposit with your agent, are typically: Counseling ($99-$125) Appraisal ($450-$500) Termite Inspection fees ($300-$500). The counseling fee can often be financed, and sometimes the session can be held for no fee. A termite inspection is usually waived, but it depends on the appraisal, location, and whether the property is a new or existing construction. A home inspection is not required, but is often recommended. Financed The financed fees can be broken into four groups: Lender - The lender fees consist of a document preparation, credit report, flood report, and loan registration fee (MERS). Attorney/title - The attorney or title fees consist of a title search, settlement, endorsement, lender s title insurance, and owner s title insurance fee (optional). Insurance - The insurance charges are a 2.5% FHA insurance charge (as a percentage of purchase price) and the first year insurance policies for the property (hazard, flood, wind, etc.). Check with a local insurance agent for an idea of what the insurance costs and requirements will be. 8.

9 State - The state fees consist of a recording fee and any taxes on the transaction. You will also have to pay any outstanding property taxes and association fees. Seller-Paid Fees HUD is very strict about what fees, if any, the seller is allowed to pay. Despite common misunderstandings, the seller is allowed to pay what is typically paid by the seller in a purchase transaction. That can include his portion of the settlement fee and the transfer tax (if the property is located in a state with a transfer tax). It s unlikely that any other fees would be approved as seller-paid. Qualifications To obtain a reverse mortgage, beginning in early 2015, one must have a satisfactory credit history and sufficient income to handle all of one s expenses and property related charges. There are four results of the qualification testing; approved, partial set-aside, full set-aside, and declined. Set-asides refer to partial or full lifetime set-aside for expected future property charges. The qualification testing is the result of nearly one out of ten reverse mortgage customers failing to pay their property charges after obtaining the loan. The only way one will be declined for the loan is if the proceeds won t be enough to cover the set-aside and pay off existing mortgages or other liens. The details of reverse mortgage qualification are too complex to describe in this guide. What we recommend is that you contact us to get pre-qualified if you have an interest in pursuing the loan. It ll be more important than ever to work with a loan officer that works full-time on reverse mortgages and knows the rules very well. There will be subjectivity in approvals from lender to lender, so it also helps to work with a broker. Reverse Mortgage for Purchase Guide - 9.

10 Property-Related Issues In this section we ll discuss property-related issues that buyers should know about before entering into a contract. It s important to know the rules before you put down an earnest money deposit. Retaining Other Property It is very common to sell your previous residence before closing, liquidating the equity for your new home s down payment. We will need a copy of the previous property s settlement statement and document the funds. If you are going to be retaining other property, keep in mind you will need to show enough income to qualify for all property charges, like principal, interest, taxes, insurance, and association fees. You can use a lease to offset if you can prove another party has been making payments on the other properties. Acceptable Property Types (All must be your primary residence): Single Family Residences 2-4 unit properties (on a case by case basis) Townhomes Condos (must be FHA approved) Manufactured Homes (must meet HUD s guidelines) Leasehold Properties (must meet HUD s guidelines) 10.

11 The following property types are ineligible for a reverse mortgage: Co-op units Unapproved condos Manufactured homes in an unapproved condo project Berm homes Geodesic homes Homes on Indian tribal land Mixed-use properties where more than 25% is used for nonresidential purposes New Construction For new construction properties, the certificate of occupancy (CO) must be issued before the loan application can be taken. The certificate of occupancy will dictate the closing timeline instead of the sales contract. Generally speaking, once a CO is issued, we can close within three weeks. It s important to keep this in mind, because some builders want to close within a few days of the CO being issued. Unfortunately, HUD doesn t allow any leeway on this rule. Reverse mortgages are intended for existing properties only, so they cannot be used to finance the construction of a new dwelling (i.e. one you are having built from scratch). You would need to find another way to finance the new construction. Once the property is complete, you can apply for the reverse mortgage loan. Flipping HUD has regulations in place to prevent property flipping. A property that was purchased within the past 90 days is not eligible for a reverse mortgage purchase, with a few exceptions. The exceptions include sales from the following parties: Reverse Mortgage for Purchase Guide - 11.

12 Government agencies Non-profit organizations approved by HUD Fannie Mae or Freddie Mac Sales acquired by inheritance If the resale date is 91 to 180 days following the date of the purchase, and the sales price exceeds the purchase price, additional documentation validating the property s value will be required. Any large increase in value must be supported by documented improvements since the last purchase, and be well supported by the appraisal. Repairs A home inspection typically isn t required, unless specified in the contract or required by state law. An FHA appraisal is required and any health, safety, and structural integrity issues will be cited in the appraisal report. Since HUD does not allow any seller concessions, nor any repair escrows, all repairs must be completed by the seller prior to closing. This can create problems when looking to buy a foreclosed home that is being offered as is and has potential repair issues. Related to Seller All reverse mortgage purchases must be arm s length transactions, meaning the seller and buyer are uninterested parties. 12.

13 The Sales Contract It s important to get the sales contract right the first time, if at all possible. It can be difficult to make amendments and get all the proper signatures on short notice during the loan process. One way to ensure accuracy is to make sure your realtor is aware that you are taking out a reverse mortgage purchase loan. If he/she is unfamiliar with this type of loan, please have him or her contact us for instruction. We will need a fully executed, legible copy of the purchase contract. Seller Consessions HUD does not allow seller concessions of any kind with reverse mortgage purchase loans. Seller concessions are anything of value given to the buyer, and can include the following: Closing costs contributions Interest rate buy downs Builder incentives Discounts Personal property Given this limitation, it is in your best interest to negotiate on sales price. Choosing the Title Company or Attorney As part of your purchase negotiation, it is important to know that you have right to select the title company (or closing attorney if Reverse Mortgage for Purchase Guide - 13.

14 you are buying in an attorney state). It is very common for builders, realtors, and mortgage companies to all have a title company to recommend. Be aware that we are unable to stand by our good faith estimate of title closing costs if you go with a different title company. In our experience it is also more difficult to close in a timely manner if we are required to work with a title company we don t know or has never closed a reverse mortgage. Closing Date and Due Dilligence As part of your negotiations, you will need to specify the timeline in which you will be closing the transaction. If you have followed our instruction, you will have completed the reverse mortgage counseling session prior to entering into a contract. Given this, we are comfortable with you offering a 30-day close. Anything longer than that is perfectly acceptable, but under 30 days will need to be approved on a case-by-case basis. There are two due diligence periods, and your realtor will likely add another based on inspections. Appraisal Period - The first is for the appraisal and gives you the opportunity to recover your earnest money deposit in the scenario where the subject property doesn t appraise for what you ve offered. For this due diligence period, we need 10 to 14 days, depending on when you ll be able to sign our application. Financing Contingency - The second is a financing contingency. If you get to the underwriting phase of the loan and are declined, you need to have the opportunity to recoup your deposit. Please have the contract specify 21 days for the financing contingency. Additional Forms Another good reason to put your realtor in touch with us before you sign a contract is that we have a few lender-provided forms that need to be signed by all parties. There are two with existing properties and several more for new construction that need to be completed by the builder. 14.

15 Reverse Mortgage Counseling: Why, What, and How Before you make an offer on a property, you will need to complete a reverse mortgage counseling session with a HUD-approved nonprofit agency. This step is required by law. This counseling will help to make sure that you are making a well-informed decision. If you wait until later in the process to complete the session, it can be difficult to meet the contract timelines. These meetings are not generally closed, so you should be allowed to bring any advisors with you that you want present. Many counseling agencies encourage homeowners who are seeking a reverse mortgage to share the decision with loved ones, particularly their children or other heirs. What You Can Expect A reverse mortgage counseling session can be in-person or over the phone. The details of the meeting, and its length, will depend on the agency you use and your unique situation. In general, an in-person reverse mortgage counseling session will last about one hour, while a phone session can take longer or require multiple calls. The counselor will discuss some or all of the following: How reverse mortgages function Financial and tax considerations of a reverse mortgage Costs associated with a reverse mortgage Your current financial situation and future goals Reverse Mortgage for Purchase Guide- 15.

16 Available alternatives to a reverse mortgage Potential impact on your government benefits Any benefits not being utilized that are available to you These reverse mortgage counseling sessions are your best chance to get clarification and answers, so be ready for your meeting. Get prepared: Review the requirements for a reverse mortgage, and make sure that you qualify. Request an estimate to see if you can qualify to purchase the property you are interested in. Write down a list of your questions and concerns Counselors are not financial advisors, tax specialists or lenders, but they can help you decide if a reverse mortgage is the best choice available to you. At the end of your counseling session, you will receive a certificate of participation, which is required for the lender to move forward. How to Locate an Approved Reverse Mortgage Counselor There are several nation-wide agencies you can call for an overthe-phone reverse mortgage counseling session. If you would prefer to sit down with a counselor in person, there is most likely a counselor in your area who is HUD-approved. Here are a few ways to find them: Ask us for a list of counselors, specific to your city. HECM Counselor Roster - Search online or call (800) to find a local HECM counselor. National HECM Counseling Network - See a list of approved agencies in the HECM network. 16.

17 The Loan Process The process of obtaining a reverse mortgage is not unlike the process of securing a traditional mortgage. Most of the elements will be familiar, from an appraisal to closing. The major difference is the lack of a traditional credit and income underwriting process. The Appraisal: Determining Value for a Reverse Mortgage An appraisal of the property will be ordered as soon we have a signed application and copies of your IDs returned to us. The appraiser will contact the listing agent for a date and time to see the property. As long as the property appraises for the purchase price, or above, and has no repair issues that are cited by the appraiser, we can move forward. If the value is below the purchase price, we ll need to know if you want to continue with the purchase or invoke your right to cancel the contract. If you decide to move forward, the loan amount will be calculated based on the appraised value instead of the purchase price. We have to use the lower of the appraised value and purchase price. Processing and Underwriting We will start processing paperwork while we are waiting on your appraisal completion, including: Purchase contract Reverse Mortgage for Purchase Guide - 17.

18 Credit report Flood certification Title report, showing ownership and any liens A review of your new homeowner s insurance policy A review of your down payment funds Your file is then sent to the loan underwriter for approval. The underwriter will verify all the information, and make sure the details of your reverse mortgage complies with laws and regulations. He or she will also make the final determination on the qualification rules. If there are any remaining issues, such as unpaid liens or past foreclosures, they will be dealt with and cleared up here. The initial underwriting process can take one to two business days and any conditions on the underwriting report must then be fixed. The time it takes to resolve the conditions can vary greatly depending on what the issue is. Once all of the conditions have been addressed and reviewed, the loan will be labeled Clear to Close. Closing and Funding We will schedule a closing time and location with you, and the title company or attorney listed in the contract, when the loan application is approved. You will receive the final settlement statement by the day before the closing for your review. On the morning of the closing, you ll need to wire the purchase funds over to the title company s account. Once you sign the final paperwork, the loan documents will be reviewed by the lender and approved for funding while you are at the closing. Life of Loan Issues The loan servicer will handle any issues you may have during the life of your reverse mortgage loan. They will help you with the following issues: 18.

19 Ordering an initial occupancy inspection to make sure you ve moved in within 60 days of the closing date. Sending monthly statements Collecting any voluntary repayments you send Sending out the annual certificate of occupancy that you must sign and return The loan servicer will also help to monitor your payments for property taxes, insurance, and any association fees, but you are still ultimately responsible for those balances. They will not pay them for you from an escrow account in the way that a traditional mortgage company might. Reverse Mortgage for Purchase Guide - 19.

20 Exhibit A: Analysis of a Reverse Mortgage vs. Conventional Loan John & Jane Doe, both 65 years old, are looking at buying a $300,000 home with every intention of living in it for the rest of their lives. Let s assume they have a life expectancy of 85 for this example. They are considering a 30-year conventional purchase loan at 4.5% interest. To compare fairly, we ll assume they are putting $137,400 down 2 and have similar closing costs with both loans. Their loan amount is $162,600. Conventional Mortgage Monthly payment (principal & interest) - $ Total interest paid during their life in the home - $114,624 Total mortgage balance at end of life expectancy - $79,495 Market value of home (assuming 2% annual appreciation) - $445,784 Estate net profit after 10% transaction costs and mortgage payoff - $321, In order for the example to be an apples-to-apples comparison, the conventional loan closing costs are equal to the reverse mortgage closing costs. In actuality, reverse mortgage closing costs are likely to be higher, but due to escrow account, the down payment amount can often be similar. 3 Total of the interest paid after 20 years of 30-year term. 4 Remaining principal balance of loan after 20 years of 30-year term. 20.

21 Reverse Mortgage Loan balance after 20 years $572,485 Market value of home (assuming 2% annual appreciation) - $445,784 Estate net profit/loss - $0 5 Investment account balance after 20 years is - $343,249 6 Conclusion If the assumptions we made in this scenario are accurate, it would be $21,539 more beneficial to utilize a reverse mortgage vs. a conventional loan. We would be remiss not to mention that this scenario leaves out the benefit of having a mortgage interest tax deduction as part of one s annual tax return. As the table below illustrates, the reverse mortgage is a better strategy when one expects higher investment return and lower real estate appreciation. 5 6 In this scenario, it is likely the estate would sign the deed over to the bank in lieu of foreclosure since the loan balance exceeds the home value. The estate is not responsible for the loss. It will be paid from the FHA insurance fund. $ is invested every month into an account with 5% annual return to compare equally to the conventional loan scenario of making a $ payment every month. Reverse Mortgage for Purchase Guide - 21.

22 *the green boxes represent data points where a reverse mortgage was more beneficial than a conventional loan Reverse Mortgage vs. Conventional Loan (20 year term)* Annual return of an investment account $83,116 $115,670 $152,744 $194,994 $243,165 $298,111 1 $23,665 $56,219 $93,293 $135,543 $183,714 $238, $48,089 -$15,535 $21,539 $63,789 $111,960 $166, $134,534 -$101,980 -$64,906 -$22,656 $25,515 $80,461 Annual housing appreciation Reverse Mortgage vs. Conventional Loan(15 year term)* Annual return of an investment account $27,090 $43,577 $61,698 $81,620 $103,524 $127, $16,371 $116 $18,237 $38,159 $60,063 $84, $66,294 -$49,807 -$31,686 -$11,764 $10,140 $34, $120,840 -$104,353 -$86,232 -$66,310 -$44,406 -$20,321 Annual housing appreciation Reverse Mortgage vs. Conventional Loan (10 year term)* Annual return of an investment account $23,038 -$16,330 -$9,207 -$1,646 $6,382 $14, $51,286 -$44,578 -$37,455 -$29,894 -$21,866 -$13, $58,138 -$51,430 -$44,307 -$36,746 -$28,718 -$20, $58,138 -$51,430 -$44,307 -$36,746 -$28,718 -$20,197 Annual housing appreciation 22.

23 Let s review the final variable that should contribute to your decision making: the amount of time you expect to live in the property. As you can see by the tables above, the longer you expect to live in the property, the more beneficial a reverse mortgage will be. Our conclusion is that for those that would like to retire and won t have the cash flow to handle a conventional mortgage payment, a reverse mortgage could be a great fit, no matter the period of time you will live in the home. In regards to those that have plenty of monthly cash flow to handle a conventional mortgage payment, the conclusion we draw from these tables is that a reverse mortgage is a better choice than a conventional loan when they intend to retain the property for 15 years or more. In instances where the home will be retained for less than 10 years, a conventional mortgage is the better fit. In the 10 to 15 year range, that decision is highly personal and should be discussed in more detail. Exhibit B: Analysis of Reverse Mortgage vs. Cash Purchase John & Jane Doe, both 65 years old, are looking into buying a $300,000 home with every intention of living in it for the rest of their lives. Let s assume they won t need to tap into their home equity until age 85. They are considering paying cash for the property vs. using a reverse mortgage to purchase. To compare fairly, we ll assume they are making a $137,400 down payment, and have $10,000 in closing costs above what they would have for the cash purchase. That would leave them with $152,600 to invest. Let s make a few more assumptions, so we can illustrate the concept properly. The average real estate appreciation for the area over time has been about 0.5%, but their expectations are more along the lines of 2%. The Does financial advisor believes she can invest their $152,600 in a mix of funds that would average an annual return of 6% Reverse Mortgage for Purchase Guide - 23.

24 *the green boxes represent data points where a reverse mortgage was more beneficial than a cash purchase Reverse Mortgage vs. Cash Purchase (20 year term)* Annual return of an investment account $5,612 $64,365 $134,893 $219,408 $320,513 $441, $53,839 $4,914 $75,442 $159,957 $261,062 $381, $125,593 -$66,840 $3,688 $88,203 $189,308 $310, $212,038 -$153,285 -$82,757 $1,758 $102,863 $223,612 Annual housing appreciation Reverse Mortgage vs. Cash Purchase (15 year term)* Annual return of an investment account $32,255 $4,824 $47,244 $95,714 $151,028 $214, $75,716 -$38,637 $3,783 $52,253 $107,567 $170, $125,639 -$88,560 -$46,140 $2,330 $57,644 $120, $180,185 -$143,106 -$100,686 -$52,216 $3,098 $66,143 Annual housing appreciation Reverse Mortgage vs. Cash Purchase (10 year term)* Annual return of an investment account $64,919 -$44,115 -$21,431 $3,283 $30,187 $59, $93,167 -$72,363 -$49,679 -$24,965 $1,939 $31, $100,019 -$79,215 -$56,531 -$31,817 -$4,913 $24, $100,019 -$79,215 -$56,531 -$31,817 -$4,913 $24,351 Annual housing appreciation 24.

25 Conclusion If the assumptions we made in this scenario are accurate, it would be $88,203 more beneficial to utilize a reverse mortgage vs. paying cash. In the cash example, the home will have appreciated to $445,784 after 20 years, and to compare properly, we assume the Does will sell and have 10% transaction costs. That leaves them with a $101,205 gain on their original $300,000 investment. In the reverse mortgage example, the $152,600 investment has grown to $489,408 a $189,408 gain over their original $300,000 pool of funds. As the table illustrates, the reverse mortgage is a better strategy when one expects higher investment return and lower real estate appreciation. The alternative that is often discussed in this scenario is waiting to do a reverse mortgage or conventional loan at the age of 85 when the funds are needed. The benefits of that solution are that you may only end up living in the home for five to 10 years vs. the original expectation of 20 or more. Waiting to take out the loan takes that risk out of the equation. The danger is that a conventional loan is hard to come by at 85 with limited income (remember you ve exhausted your other assets by this point). Doing a reverse mortgage after owning the home for 20 7 years would provide a gross loan amount of $311,603. Obviously, that s still a large shortfall compared to the investment account balance of $489,408 in the original example. 7 If the home appreciated to $445,784 as suggested, an 85 year-old can obtain a loan amount of 69.9% or $311,603. The loan amounts are always subject to change. Reverse Mortgage for Purchase Guide - 25.

26 Exhibit C: Analysis of Investing in Real Estate vs. Other Investment Vehicles We feel It is important to touch on the expectations of different investment vehicles. We are using an average nominal, annual return in our analysis, when the likely return will be more variable than that. For a simple comparison of apples to apples, we decided to focus on average return. There will also be significant tax differences among the various investment vehicles, so your real return could vary. You should consult your accountant and/or financial advisor when discussing your options to get a better idea of potential real return. Now that we have all lived through the rapid rise and sudden fall of real estate prices from 2004 to 2008, expectations can be all over the map for future housing appreciation. The most important variable to consider is that home prices can only rise with income. Generally speaking, if people in a city or county aren t earning more each year, how will they continue to move up and purchase more expensive homes? If you have a general sense of where the economy and employment is headed, you might be able to make an educated guess about home price appreciation. Obviously, there are areas with a lot more variability (sand states) that might not have the same tendencies. The other piece of the puzzle is your investment window and how much market timing risk you should consider. If you bought your 26.

27 home in 1995, and needed to sell in 2006, you probably made out like a bandit. On the flip side, if you sold two or three years later, it s likely you barely broke even. Many of our examples illustrate buying a single piece of real estate, and having a forced real estate transaction exactly 10, 15, or 20 years later. The transaction could be because you have run out of funds, or you have passed away and your estate is being settled. Is real estate the best investment at this stage of your life or should you be looking at something more conservative? Economists Karl Case & Robert Shiller, two much respected minds on real estate, created the Standard & Poor s Case-Shiller Home Price Index. Here s an excerpt of Robert Shiller s thoughts from Wikipedia, He says that since homes are relatively infrequent purchases, people tend to remember the purchase price of a home from long ago and are surprised at the difference between then and now. However, most of the difference in the prices can be explained by inflation. He also discusses how people consistently overestimate the appreciation in the value of their homes. The US Census, since 1940, has asked homeowners to estimate the value of their homes. The homeowners estimates reflect an appreciation of 2% per year in real terms, which is significantly more than the 0.7% actual increase over the same interval as reflected in Case Shiller index. If the average real return of real estate is 0.7%, we ll let you speak with your financial advisor to figure out what the real return of a well-planned investment would be. You might collectively decide that a single piece of real estate is not the best place for you to invest your funds. Reverse Mortgage for Purchase Guide - 27.

28 Purchase checklist Educate Yourself Now that you ve read our guide, ask us for an estimate in your price range so you can help detemine what you can afford (and are comfortable spending). Get Prequalified Want leverage when you begin shopping for properties? If so, you ll need a prequalification letter. In order to issue you one, we ll need to verify the down payment funds, and pull your credit to check for past foreclosures, open bankruptcies, federal debt, tax liens, and judgments. Reverse Mortgage Counseling Contact us for a list of agencies that can do it face-to-face or over the phone. As long as you will be closing within six months, it s not too early to be counseled. It will also help confirm that you are making the right financing decision (or send you running)! Shop For Properties Once you ve found the one, put your realtor in touch with us for a quick consultation, and so we can pass along some forms to include with the contract. If it s a condo, make sure it is FHA-approved, or get us started on the approval process. Sign a Contract Make the purchase official and give your Realtor the earnest money deposit. Make sure you get a copy of the signed contract - on paper or electronically. Lender Application We will overnight you an application and review it with you via your preferred method (phone, Skype, Go- ToMeeting, etc.). You will need to return it quickly with copies of the requested documents and counseling certificate. 28.

29 Home Inspection If you are going to have the property inspected, this would be the time to do it. Ideally, you wouldn t move forward with an appraisal ($$) until you know for sure that you want to buy the home. Appraisal There is not much required of you during this part of the process, since you don t reside in the property. It is nice to find out that the home you are buying is worth at least what you are paying. Insurance If you are buying a single family residence, you will need homeowner s insurance at a minimum. If the property is in a flood zone, you will need flood insurance as well. Some properties, depending on state, may require an additional wind or hurricane policy. Condos will need an interior policy that covers your personal property. Underwriting Once we have the title and appraisal back, we will submit your loan to an underwriter that will approve (or decline) your loan, and let us know what else is needed before we can close. Preparing Funds Now that your loan is approved, it s important to get your funds ready to be wired over to the title company. If they are semi-liquid, you should begin the process of transferring them to your checking or savings account at least a week before closing. Final Walk Through If you are going to do a final walk through of the property, it s usually done as close to the closing as possible, just to make sure the home you are buying is still standing and hasn t changed significantly. Closing You will need to attend the closing to sign the final paperwork and make the transaction official. Once the loan funds and the keys are released, you are all set. Congratulations! Reverse Mortgage for Purchase Guide - 29.

30 About Us Premier Reverse Mortgage, LLC was founded by Matt Neumeyer, a Certified Senior Advisor, on January 13, After spending many years in the reverse mortgage industry working for others, Matt decided it was time to form a company around his own ideals. Those ideals are part of the Premier Reverse Mortgage logo. Experience - The reverse mortgage industry is a fairly young one, with growth being recent. You will want someone that focuses on reverse mortgages only and has been through most scenarios. Matt has closed hundreds of reverse mortgages since Integrity - Premier Reverse Mortgage is a member of the National Reverse Mortgage Lender s Association (NRMLA), and Matt follows their code of conduct. Companies offering reverse mortgages that are not members of NRMLA aren t held to the same professional standards. Personal Service - A positive of working with Premier Reverse Mortgage is the personal service that one will receive throughout the loan process. Matt will originate, process, and coordinate the closing of the reverse mortgage loan. He will be your only contact throughout the process. There will be no frustration about being handed off to a hard-to-reach assistant or processor. Reverse Mortgage for Purchase Guide - 31.

31 This document was created by Premier Reverse Mortgage and does not come from HUD/FHA nor has it been approved by any government agency. Matt Neumeyer, CSA