A Definitive Guide on Reverse Mortgages

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1 A Definitive Guide on Reverse Mortgages A reverse mortgage is a process through which a loan is made available to senior citizens against their home equity. Unlike conventional mortgage or other traditional methods of loan, there is no income or credit requirement to obtain reverse mortgage loan. The repayment of the loan is deferred till the death of the individual, the sale of the home, or the event of the person leaving the home. In order to qualify for reverse mortgage, the individual must be at least 62 years old and he/she must have a home, which is his/her primary residence. History of reverse mortgage: Reverse mortgages were first started in Great Britain in the 1930s. In the United States, reverse mortgages have been available to senior citizens in various forms for the past five decades. The first reverse mortgage was given in 1961 by Deering Savings and Loan to a Maine resident named Nellie Young. She was a widow struggling to make ends meet. Nelson Haynes, an employee of Deering, created this loan especially to help her. In 1977, Arlo Smith, president of Broadview Savings and Loan, developed the Equi-Pay loan for the benefit of seniors in Cleveland, Ohio. The loan program allowed the homeowners to borrow 80% of the value of their home. According to the agreement, the borrowers were allowed to disburse the loan within a specified period. In the year 1978 the Wisconsin Bureau of the Aging funded the Reverse mortgage study project headed by Ken Scholen. In 1979 the Neighborhood Conservative Program of the Wisconsin Department of Development developed a new deferred payment loan program. The concept of reverse mortgages did not really pick up in the US until 1988 when the Federal Housing Authority Insurance Program was signed. The Federal Government started a reverse mortgage pilot program under this law in the same year. The first line of credit reverse mortgages was designed by the Virginia Housing Development Authority. The first federally insured reverse mortgage was given by James B. Nutter and Company. The program became a great success, and was expanded to many lenders throughout the nation. From 1988 onwards more than 1,000 lenders have given more than 500,000 reverse mortgages to aging people all around the country. These have made the federally insured programs popular among senior citizens with their own homes. The HUD (Housing and Urban Development) released new regulations in the year 1991 to make reverse mortgage insurance available to all FHA lenders. The first lifetime reverse mortgage program was devised by Peter Mazonas of Homefirst, San Francisco and Robert Bachman of Home Equity Partner, Irvine, CA. Under this program, the home owner was allowed to retain the title to his/her property without making monthly payments as long as he/she lived there. In the year 1992 the American Association of Retired Persons made attempts to gain support for the federally insured reverse mortgage development in several states. The initiative gained positive response, and it continued to arrange seminars. By the end of 1993, reverse mortgages were available to homeowners throughout the nation, except in the states of Texas, Alaska and South Dakota. W/C =

2 The National Reverse Mortgage Lenders Association was founded in the year 1997 by Jeffrey Taylor and Peter Bell to improve the scopes in the field of reverse mortgage. This association provides resources to lenders and also strives to educate consumers, so that both borrowers and lenders can get a positive experience. In 2005, Texas became the last state in the United States to authorize reverse mortgage programs. In 2009, HUD introduced the FHA reverse mortgage for purchase programs to help make the process easy for homeowners and to meet their needs. The loan limits were increased from $417,000 to $625,500 in the same year. In the present day, federally insured reverse mortgages are highly popular. It reduces the risk of homeowners significantly, thereby allowing senior citizens to live comfortably in their own homes. Features of reverse mortgage: Requirements: An individual needs to fulfill certain conditions to qualify for reverse mortgage. He/she needs to be at least 62 years of age. He/she needs to own a home that is his/her principal residence. The property should not be delinquent on any federal debt. Besides, the person also needs to take part in a consumer information session provided by an approved FHA reverse mortgage counselor. This session is conducted to ensure that the borrower understands all the features and clauses of the terms and conditions of reverse mortgage. The mortgage amount is based on the age of the borrower. The borrower gets a larger percentage of equity if he/she is older as older people have a higher mortality rate. This does not mean however that the person will get more money, if he/she waits and applies for the reverse mortgage later. This is because the changing interest rate and value of the property can make significant changes in the mortgage amount. The current interest rate and appraisal value or the FHA mortgage limit can also affect the amount of mortgage. The value of the property is determined by a licensed appraiser, who analyzes the value of similar homes that have been sold in the last six to twelve months within a radius of one kilometer. The homeowner will also get an estimate based on the number of rooms in the house. The interest rate of reverse mortgage loan may be either fixed or adjustable. If the interest rates are lower, the borrower will get a large percentage of the home equity. On the other hand, higher rates will ensure a lower percentage. Interest rates may vary according to the mortgage program selected by the borrower. There is no income or employment qualification required for the borrower. He/she also does not need to repay the loan amount, as long as he/she keeps the property as principal residence and meets the obligations of the mortgage. The closing costs may be financed by the ultimate mortgage amount. Generally, closing costs range from $5,000 to $20,000. This may include mortgage insurance premium, title insurance, bank fees, registry fees, attorney fees and appraisal cost. The mortgage insurance will be 2% of the appraisal value. The origination fee W/C =

3 is 2% of the first $200,000 and 1% of the amount thereafter. The cost of appraisal will range from $300 to $500. In addition to these costs, a monthly service charge will be added to the balance of the loan. The borrower also requires to fulfill some property requirements. He/she needs to own a single family home or a home with one to four units, in which at least one unit is occupied by him/her. HUD approved condominiums and manufactured homes meeting FHA requirements are some other property types eligible for reverse mortgage. Types of reverse mortgages: There are three types of reverse mortgages - Single purpose reverse mortgages, federally insured Home equity conversion mortgages and Jumbo reverse mortgages. Single purpose reverse mortgage: This type of mortgage is provided by state and local government agencies or non-profit organizations. The loans have a very low cost, but they are not available in all states. Senior homeowners who have a low or moderate income may obtain loan under this type of reverse mortgage. The loan amount can be used for some specific purposes like paying off property tax, meeting health expenses or improvement of the house. Federally insured home equity conversion mortgage: Home equity conversion mortgages or HECM are the most popular type of reverse mortgage. In fact, these account for 90% of the total market of reverse mortgage. The mortgages are underwritten by the Federal Government via the Federal Housing Administration, which is a division of the Housing and Urban Development (HUD). Jumbo reverse mortgages: Jumbo reverse mortgages were developed to meet the needs that could not be met by HECM reverse mortgages. This type is suitable for individuals who own high value properties. It is not insured by the federal government. However, it includes many benefits of the government programs like mandatory counseling. How much amount can the homeowner borrow? The value of the home is the major determining factor when it comes to the amount to be obtained in a reverse mortgage loan. The homeowner would get a higher amount based on three main factors: if the home is more valuable, if there is less debt on the property and if the homeowner is of a more senior age. FHA does not limit the values of homes to qualify for the HECM reverse mortgage. However, a limit is set on the maximum amount that can be borrowed. At present, the maximum loan amount that can be borrowed is $625,500. W/C =

4 HUD counseling: An individual needs to complete a counseling session with an HUD approved counselor to apply for an FHA insured reverse mortgage loan. This is to ensure that the person applying for the reverse mortgage loan understands all its aspects. The counselor explains the legal and financial obligations of a reverse mortgage. Reverse mortgage counseling will be done either face to face or on phone. The cost of counseling is $125 and the individual needs to pay this amount from his/her pocket. The borrower will receive a certificate of counseling after completing the counseling session. This certificate is an important requirement to obtain a reverse mortgage loan. How to find a reverse mortgage counselor: HECM counseling agencies are located in various parts of the country. Individuals looking for the loan can make use of the online service provided by HUD website to get the name and location of the agency in their city and state. They may also contact a HECM counselor from FHA s HECM counseling network. The main aim of reverse mortgage counseling is to protect the senior citizens from the consequences of a bad decision. This is why the Government makes it compulsory for seniors to attend a counseling session before applying for reverse mortgage. What to expect from reverse mortgage counseling? The reverse mortgage consultant explains to the borrower all the aspects of reverse mortgage loans and the way they work. Counseling takes one hour to complete. The counselor will explain HECM terminology including definitions that the borrower will find in the literature received from the reverse mortgage lender. The counselor also explains the roles of HECM, FHA and the Federal National Mortgage Association (FNMA) aka Fannie Mae in the reverse mortgage program. The counselor specifies HECM interest rates and explains how they are connected with all the reverse mortgage program options available to the borrower. He will review how the disclosure to the borrower by the lender will project the future cost of the loan. The counselor will also let the borrower know if the borrower s home needs some repairing work in order to qualify him/her for the reverse mortgage loan. The counselor will review the current income and expenses of the borrower and helps him determine which payment option works best for him. W/C =

5 The counselor also discusses with the potential borrower about his/her needs and situations. The counselors are not affiliated with any mortgage lender, so they do not recommend a particular lender to the senior homeowner. Instead, they simply analyze his/her financial options and help him/her to make the best decision financially. Some of the senior homeowners willing to take out a reverse mortgage loan may not be in desperate need of money. They apply for the loan in order to leave something for their heirs. The counselor also provides useful advice on this. The counselors are also expected to scrutinize the financial state of the potential borrowers to determine whether FHA insured reverse mortgage is the right option for them. As financial counselors, they are also required to point out other options to the borrowers and confirm whether they understand the information provided in the counseling session rightly. Once the counseling session is over, the counselor needs to take the certification exam. The official HECM website offers applications to register for the exam. The fee for taking the exam is $100 and it can be paid online. The counselors also need to provide follow-up service to check whether the clients require any further assistance. They also need to find out whether the counseling session was effective. The borrower can also call his/her counselor for further help at the end of the counseling session. HUD protocol: The US Department of Housing and Urban Development has laid out HECM counseling protocols to provide guidance to the counselor on the topics that must be covered during the counseling session. According to the new protocol, the counseling agencies need to provide an information packet to the clients at the start of the counseling session. They also need to give enough time to the client, so that they can review the information and prepare some questions they might have. The agencies can send the information packet through regular mail, priority mail, fax or . It should contain information like how to prepare for the counseling session, total annual loan cost and a printout of loan comparisons. The booklet Use your home to stay at home offered by the National Council of the Aging should also be included in the information packet. The most sensitive issue regarding the process of HECM counseling is that a counseling certificate can be withheld. The counselors are supposed to withhold the counseling certificate if they believe that the individual does not understand the features of reverse mortgage adequately. This has been done by the Federal Government to protect the interest of the senior citizens. Thus it is mandatory for them to understand the information provided in the counseling session properly to apply for a reverse mortgage loan. The counselor can also withhold the certificate, if he/she feels that the client is being forced to obtain a reverse mortgage by someone or is a victim of fraud. As per the new guidelines, the counselor needs to ask ten general questions about reverse mortgage and the particular situation of the clients. The recent rules of HUD say that the counselor can ask questions throughout W/C =

6 the counseling session, instead of conducting an exam at the end of the session. This also helps in avoiding situations where the client may feel intimidated. If the client does not provide correct answers to five out of ten questions during the first session, the counselors are supposed to withhold the certificate. They also need to make a note of it in the client s file, specifying the reason for withholding the certificate. The counselors can offer some alternatives to the borrower, so that they can understand the product well. If the borrower cannot answer at least five out of ten questions, the counselor can offer him/her additional time for understanding the process of reverse mortgages. The counselor also uses a flagging system in the certificate through which the lender can get to know the level of understanding of the borrower of reverse mortgages. Understanding important features of reverse mortgage: All reverse mortgages share a set of common characteristics, whether they are federally insured or not. Understanding the features can help the potential borrower protect his/her interest. The borrower must be at least 62 years old and must own a home. The borrower retains the title to the home even after taking the reverse mortgage loan. The lender cannot own the home, even after the borrower permanently vacates the home. The borrower needs to maintain the home properly and pay property taxes. If he/she is not able to pay property taxes, a special set of amount will be created aside from his reverse mortgage. The loan must be repaid, when the borrower or the last surviving spouse vacates the home permanently. The heirs of the borrower must arrange to pay off the loan either by using private funds or by selling the home. After the loan is repaid, any leftover proceeds from the sale of the home will go the estate. In case of HECM reverse mortgage, the county lending limit is the determining factor of the loan amount. Loan fees can be paid out of the available loan proceeds. Hence, the borrower needs to spend very little amount from his/her pocket to obtain a reverse mortgage. What the borrowers need to pay is the appraisal amount that costs around $350. W/C =

7 The amount owed to the lender grows every time the borrower accesses funds from his/her line of credit or receives a monthly payment. Moreover, the lender charges interest on the outstanding loan amount and a monthly servicing fee. The HECM program allows the borrower to live up to 12 consecutive months outside the home. If the borrower stays outside for more than 12 months, he/she needs to repay the loan. The reverse mortgages have a non-recourse feature, which means the total amount owed cannot exceed the appraisal value of the home. If the loan amount exceeds the home s appraisal value, the lender or the federal government will have to face that loss. Interest on reverse mortgage is not deductible on income tax until the loan amount is paid off partially or in full. Rules of reverse mortgage: The potential borrower needs to understand the rules of reverse mortgage, before applying for the loan. The reverse mortgage loan amount given by lenders is usually below the estimate of the property s full value. This is to reduce their risk of loss. Age is an advantage when it comes to reverse mortgage. An older homeowner is qualified for a higher amount. For instance, a 75 year old homeowner will be qualified for a much larger loan than a 62 year old homeowner. New federal rules: In the recent years there have been certain changes in the federal rules pertaining to reverse mortgage. In some parts of the country the maximum amount of HECM loans has been increased from $200,000 to $417,000. This has made many home owners eligible for the reverse mortgage program. The HECM program can be used for buying new homes. This provision will attract existing homeowners who want to renovate their old homes or move to a new retirement location. Many seniors are nowadays taking out a loan to buy a new home and paying it off with an HECM loan. This is also a reason why this program has been developed. The individuals who want to obtain reverse mortgage loans need to know the limits of such kind of loans. The reverse mortgages are backed by the Federal Housing Administration, so they will get the whole amount of money even if the lender prefers to give a lower amount than the estimated value of the property. The new housing law specifies the national loan limit to be $417,000, but in high cost areas it can be increased to $625,500. W/C =

8 Many borrowers of reverse mortgage loans find the cost of obtaining the loan very high. This has been evident in the survey conducted by AARP in the year Hence the new law limits the origination fees to 2% on the initial $200,000 of the property value and 1% on the remaining value. Overall, it should not exceed $6,000. The potential borrower also needs to be aware of sales pitches and kinds of loans. Some lenders try to sell financial products that are not suitable for the borrower. The new law restricts the lenders from forcing the borrower to buy annuities and other financial products along with a reverse mortgage. The homeowners must know that if they sell their home or do not use it as their principal residence for a continuous period of more than twelve months, they or their estate will need to repay the amount received as reverse mortgage along with interest and fees. Hence, it is important for the homeowner to consider whether he/she can stay in the home. If they cannot reside in the house for at least a few years, reverse mortgage is a bad deal for them. Again, the borrower must understand that he/she is responsible for paying property taxes, utilities, maintenance, insurance and other expenses of the property, once they take out a reverse mortgage loan. Rules for reverse mortgage lenders: As reverse mortgage loan is offered to senior citizens, the Federal Government takes extra precaution in safeguarding their interest. Hence, several rules have been set to prevent lenders from taking unfair advantage. The government policy prohibits the lender from receiving fees or any other benefits for referring applicants to other agencies or entities that sell products or services that can be financed with the proceeds of a reverse mortgage loan. The new rules specify that the lender should not offer reverse mortgage to an individual, if they know that it is not the right product for the client. Taking the loan may be unsuitable if the borrower does not intend to live in the home for a long period, or if he/she does not understand the terms and conditions of reverse mortgage. One should also not opt for reverse mortgage when its proceeds are to be used to finance other investments or annuities that are not appropriate for the borrower or when the disbursements do not cover the needs of the homeowner. How to apply for the reverse mortgage: In order to apply for the reverse mortgage loan, the individual needs to submit some documents. These are: W/C =

9 Copy of verification of date of birth. Birth certificate, passport or driver s license are some of the documents for date of birth verification. Copy of social security. The potential borrower can submit SS card, W-2 or Medicare card. Copy of deed Copy of homeowner s insurance policy Copy of recent tax bill Original HUD reverse mortgage counseling certificate Copy of death certificate, if any of the property owners is deceased Copy of trust, if applicable Copy of power of attorney, if applicable The interested persons need to contact a lending institution in their city or state and inquire about the options and interest rates available. You can also apply for reverse mortgage online. The applicant needs to give some important details like type of home, his/her credit profile, etc. to find lenders on the internet. Reverse mortgage options: The borrowers can choose from different options of reverse mortgage. The proceeds are offered as: A line of credit: A senior citizen can access this only when he/she needs fund A lump sum distribution of paying bills: The bills including the original mortgage amount will be paid off, if he/she chooses this option A monthly income: The lender will give an amount to the borrower every month, for a fixed amount of time. A combination of line of credit and monthly income for a specified period of time. Loan processing and underwriting: Once the borrower has submitted the application form, the lender orders an appraisal, credit report, title report and lien payoffs. The appraiser will call the homeowner and schedule a time for the task of home inspection. He would find out whether there are any structural faults or repairs required in the home. He ultimately decides the value of the home. In case there is any repairing work needed, the homeowner must hire a contractor to get it done after the closing of the loan. Once the lender gets all the essential information and documentation, they will finalize the parameters and submit the loan amount for underwriting. W/C =

10 Underwriting process: Underwriting for reverse mortgage is much similar to that of conventional mortgages. The only difference is that reverse mortgage does not require the income of the borrower. Hence, the appraisal of the home is the most important document and the reverse mortgage underwriters review it thoroughly for accuracy. Some other important aspects that are looked at during the reverse mortgage underwriting process are whether the potential borrower is at least 62 years old and owns a home. Mobile homes are not taken into consideration in reverse mortgage underwriting. Loan closing: The last step in the process of granting reverse mortgage is loan closing. The lender will schedule a closing date, time and location that are suitable for the borrower. The borrower needs to sign the papers. Before signing the papers it is important that the borrower reads the papers and confirms that the actual terms mentioned in the paper are exactly what he/she had agreed to with the lender. If there is any discrepancy, the borrower can ask for explanations from the lender. The borrower has the right to cancel the loan within three business days after signing. Once the three day period is over, they will receive the funds. The borrower can use the funds for anything he/she wants. The reverse mortgage lender does not restrict the borrower on spending the loan amount in any way. How a reverse mortgage comes to an end: The reverse mortgage loan ends when the homeowner dies or sells the home. The loan will also come to an end, if the homeowner moves out of the house and stays out for a period of twelve months at a stretch. This can happen if the borrower is unable to live in the home on which the loan has been taken due to some physical or mental illness. The reverse mortgage loan amount can then be paid off with the proceeds of the sale of the home. If the borrower dies, his/her heirs can refinance the property with a regular mortgage. If the proceeds are more than the loan amount, the borrower (in case of sale) or his/her heirs (in case of death of the borrower) will receive the difference. On the other hand, if the proceeds are not sufficient to pay off the loan the lender absorbs the difference of amount. If the borrower moves out of the home or dies, he or his heirs need to provide a proof to the lender that they are trying to sell the home or get finances to pay off the outstanding debt. The lender will then offer them a period of one year to do so. There is no further extension on expiry of this one year extension period. W/C =

11 If the homeowner decides to rent a part or whole of his/her home, then the lender will stop providing cash payments and claim back the loan. Additionally, if the owner adds a new homeowner to the title or files for bankruptcy, the reverse mortgage cash payouts will stop immediately. Things to do and things to avoid in reverse mortgage: A senior homeowner who wants to obtain reverse mortgage loan needs to talk to a professional, so that he/she can get all the essential information and gets to know the available options. You should avoid a lender who forces you to buy additional products that you really do not want. Some lenders may tell the senior citizens not to inform their family or financial advisors. This is a sign of fraudulent activity, and you need to stay away from such lenders. The homeowner can use the reverse mortgage advance amounts to pay any long-term expenses. Reverse mortgage provides a good planning option, if they face any health concerns in the future. It is not advisable to put the money from a reverse mortgage line of credit in your current account for compensating the interest due. Interest gathered on reverse mortgage amount accrues only to the reverse mortgage dues. It is worth to consider leaving the balance amount from the reverse mortgage loan in a line of credit. It can be deposited in a savings account which is totally free from tax. You can make a request for advance whenever you need money. It is also advisable to use the tax free proceeds of a reverse mortgage, instead of withdrawing from tax deferred investments. Largest reverse mortgage lenders: Those who are interested in obtaining a reverse mortgage loan need to know about the largest lenders in the country in this industry. Generation Mortgage Company: Generation Mortgage is one of the top five reverse mortgage lenders in the country. It offers outstanding turn times and is approved by the Government National Mortgage Association or Ginnie Mae. It has earned the highest accreditation standard A + from the Better Business Bureau. The Home Equity Conversion Mortgage is the most important reverse mortgage product offered by Generation Mortgage. Mortgage insurance premium is the most distinctive feature of the HECM loan provided by Generation Mortgage. The premium is required by and paid to HUD, as it insures mortgage against losses. HUD guarantees the borrower that the funds will be available to them, even if the lender is unable to make payments. Generation Mortgage offers several reverse mortgage options: W/C =

12 HECM fixed rate: Fixed rate reverse mortgage loan gives complete peace of mind to the borrowers, as they are assured that the rate is set for the entire loan term. Again, they can get more money with fixed rate than a variable rate product. However, the borrower must take the entire profits as a lump sum. HECM variable rate: This option is ideal for those who want to receive money in monthly installments, line of credit, lump sum or any combination. This reverse mortgage product carries a lower rate than the fixed rate products. This is why the borrower may get less money than in fixed rate products. HECM for purchase loan: The Housing and Economic Recovery Act of 2008 creates a significant opportunity for individuals aged 62 and above to use the HECM for purchasing something. They can use the loan amount to buy a home. The maximum loan amount is $625,500. Jumbo reverse mortgage: Jumbo reverse mortgage loan is great for seniors who possess homes of high value ranging between $500,000 and $6 million. Generation Jumbo reverse mortgage loan allows borrowers to access hundreds of dollars in equity. Genworth Financial Home Equity Access: Genworth is one of the largest reverse mortgage companies in the nation. It is a part of Genworth Financial, a Fortune 500 company, and has excellent resources as back up. It provides personalized service to each customer. Live Well Financial: Live Well Financial is another of the largest reverse mortgage lenders in the country. It offers HECM monthly adjustable line of credit, HECM Fixed and HECM for purchase. HECM monthly adjustable line of credit allows the senior homeowners to access their proceeds in the way they want. HECM Fixed is another popular product that gives peace of mind to the borrowers, as the interest rate remains fixed and does not rise. HECM for purchase allows seniors to upsize or downsize without making any mortgage payments in the future. It allows them to buy their next home easily, covering a significant portion of the home purchase price. Wells Fargo: Wells Fargo reverse mortgage is one of the largest lenders in the reverse mortgage scenario. One of their key aspects is that they do not charge any initial fee for consultation. A specialist explains the pros and cons of reverse mortgages. He/she also gives all the essential information, detailing the features of reverse mortgage. A reverse mortgage consultant will then examine the unique financial situation of the client and tailor a program to suit his/her specific needs. Well Fargo has banks all over the United States. They also provide online service. W/C =

13 Reverse mortgages have a number of advantages. They allow the senior homeowners to remain in their home and retain its ownership. They also help guard senior citizens from foreclosures and bankruptcy. The loan amount obtained through the reverse mortgage program can be utilized for almost anything. As there are no income or credit requirements, the senior homeowners can easily qualify for the loan. Senior citizens can apply for the reverse mortgage loan with a partial outstanding balance of their existing mortgage. They can use that money to pay off the balance amount first, thus saving their home from foreclosure. They can use the money they receive from the lender to pay the closing costs. This leaves the borrowers with only a little amount to spend out of their own pockets. In short, reverse mortgage helps the seniors enjoy financial freedom. W/C =