Home Equity Conversion Mortgage Basics

Transcription

1 Home Equity Conversion Mortgage Basics Kelly Zitlow NMLS# Vice President, CMPS Cherry Creek Mortgage Co., Inc. NMLS#3001 AZ BK# N Scottsdale Rd, #150, Scottsdale, AZ 85255

2 2 Understanding the basics Learn the facts and dispel the myths about Home Equity Conversion Mortgages (HECM) and find out why they have become a great financial tool for Realtors working with seniors. Let s see how much you may already know.

3 Knowledge 3 1. With a HECM, the borrowers own the home, just like a regular mortgage T or F 2. Only single family properties are eligible for a HECM T or F 3. Borrowers must pay taxes & insurance T or F 4. HECM borrowers are required to sign over the title/deed to the lender T or F 5. Borrowers must move when they run out of equity T or F

4 Knowledge Continued 4 6. If the home appreciates, the borrower benefits T or F 7. Funds from a HECM will have no impact on Social Security or Medicare T or F 8. The heirs are responsible for selling the home and paying any deficiencies T or F 9. A senior can not get a HECM if they already own other real estate T or F 10. The minimum age to qualify for a HECM is?

5 Market Opportunity million people 65 and older in the US in 2009 (US Census) 88.5 million people (projected) 65 and older in 2050 (US Census) 81% of householders 65 and older own their homes (Current Population Survey/Housing Vacancy Survey) $3.3 trillion in home equity held by seniors aged 62 and older in 2010 (Riskspan, Reverse Mortgage Market Index)

6 Factors Driving the Market 6 An Aging Population o 10,000 people turn 62 every day (US Census) Longer Life Expectancy o 50% chance of living beyond 88 o 25% chance of living beyond 94 Costs More to Live Income Sources have changed o Defined benefits go from 40% to below 20% o Low participation rates in defined contribution plans. Companies can no longer afford to match Liquid assets have declined from 50% to less than 20% of total net worth in last 10 years

7 HECM for Purchase Basics 7 The HECM for home purchase is a non-recourse loan that allows homeowners 62 years of age and older to purchase a home with less money down. Some of the benefits include: Limited income requirements Limited credit qualifications NO monthly mortgage payments required Borrower must remain current on property taxes, homeowner s insurance & HOA dues Borrowers will always retain title to the home

8 Advantages of HECM for Purchase 8 Seniors live in the home of their choice without renting Seniors retain ownership of the property Limited income & credit qualifications o Light underwriting required. Underwriting is mandatory if borrower owns other property or chooses to retain their current residence Preserves more cash assets No monthly mortgage payments required (borrower must remain current on property taxes, homeowner s insurance and HOA dues) Non-recourse loan

9 Eligibility 9 All borrowers on title must be at least 62 years of age Borrowers must complete counseling from a HUD approved counseling agency Borrowers must occupy the home as their primary residence within 60 days of closing and live in home at least 6 months of the year Borrowers are required to provide a monetary investment at closing from allowable funding source

10 Eligible Properties 10 Single family residence o Primary residence only no HECM loans on second homes permitted 2-4 Unit properties provided borrower occupies 1 unit FHA approved condominiums New construction Certificate of Occupancy (C.O.) must be issued PRIOR to application All properties must meet minimum FHA appraisal requirements 90 day property flipping rules apply

11 Ineligible Properties 11 Cooperative Units ( co-ops ) Manufactured Homes Bed & Breakfast Properties Boarding Houses Rental or Investment Properties

12 Loan Products 12 Refinance - available as a HECM fixed rate or adjustable rate option (based on LIBOR index) to meet a variety of needs HECM fixed rate option rate remains fixed for life of loan. HECM adjustable rate option based on the LIBOR index with multiple margins to choose from. Expected interest rate will determine the available principal limit on either option. (HECM = Home Equity Conversion Mortgage)

13 Loan Products Continued 13 HECM for Purchase - o Available in both fixed rate & adjustable rate options o Limited Income & Credit Qualifications o Provides more purchasing power o FHA Insured o Security of ownership vs. renting

14 Loan Amounts 14 Many homeowners are surprised to learn that they cannot finance the entire purchase price of the property. To determine how much each borrower s loan amount will be, we use a unique combination of factors: Value of the home = lesser of appraised value or FHA lending limit (currently $625,500 for HECM loans) The age of the youngest borrower on sales contract Current interest rates Product choice fixed rate or adjustable rate

15 Examples of Purchase Funds* 15 PURCHASING Estimated Reverse Mortgage Available Funds minus Purchase Price equals the Estimated Funds needed from the borrower at closing. However each situation varies with sales price, date of birth and interest rate. Contact us at the number below for your personal senior analysis. PURCHASE PRICE $ 200,000 $ 300,000 $ 400,000 $ 500,000 $ 600,000 AGE OF YOUNGEST BORROWER ESTIMATED REVERSE MORTGAGE AVAILABLE FUNDS 62 $ 93,817 $ 142,937 $ 192,057 $ 242,177 $ 292, $ 97,617 $ 148,637 $ 199,657 $ 251,677 $ 303, $ 104,417 $ 158,837 $ 213,257 $ 268,677 $ 324,097 POWER 75 $ 112,217 $ 170,537 $ 228,857 $ 288,177 $ 347, $ 120,817 $ 183,437 $ 246,057 $ 309,677 $ 373,297

16 * Purchase Power Disclaimer* 16 This table shows the estimated funds available from utilizing an FHA-insured reverse mortgage to purchase a home. This information is provided as a guideline and does not reflect the final outcome for any particular homebuyer or property. The actual reverse mortgage available funds are based on current interest rates, current charges associated with the loan, borrower date of birth, the property sales price and standard closing costs. Interest rates and loan fees are subject to change without notice. Following the closing of the home purchase, no further principal or interest payments will be required as long as one borrower occupies the home as their primary residence and adheres to all HUD guidelines of the loan. Borrower must remain current on property taxes, homeowner's insurance and HOA dues. The cost of any reverse mortgage loan depends upon how long the loan is kept and how much the property appreciates in value. Generally, the effective cost decreases across the life of the loan.

17 Loan Costs 17 Most costs can be financed into the loan balance FHA Mortgage Insurance Premium (MIP) Origination Fee Standard third party fees such as: o Appraisal (typically collected at application) o Credit Report o Flood Certification o Title o Escrow/settlement fees Lender fees such as processing, underwriting and funding are not permitted

18 Financial Assessment 18 Purpose Minimize Risk Borrower Lender Investor Best Understand Willingness and Capacity to pay Taxes, HOI and HOA History Current Delinquent Ongoing debt to income ratios Payment History Varies by borrower Ability to maintain condition of property

19 Financial Assessment cont. 19 Proof Based on Documentable Facts Income Obligations Assets Potential Solutions/Outcomes Proceed with Loan as normal Good history of credit and payments Proceed with Loan with LESA (Life Expectancy Set Aside) Marginal past history Extenuating circumstances Decline the Loan based on assessment results Lack of income or capacity to pay Taxes, HOI and/or HOA Ability to pay ongoing debts

20 Consumer Safeguards 20 Third party counseling session with a HUD approved reverse mortgage counselor Open-ended term (150 th birthday of youngest borrower) Interest rate caps Origination fee caps No prepayment penalty FHA insured = non-recourse feature Borrowers are not personally obligated to repay the debt. Loan is repaid when house is sold or is refinanced. Any deficiencies are paid by FHA MIP.

21 Borrower Obligations 21 Must occupy the property as primary residence within 60 days of closing Must maintain property in its current condition Must remain current on property expenses: property taxes, homeowner s insurance, condo fees and HOA dues

22 Required Investment 22 Buyers must provide monetary investment at closing from acceptable source of funds Three months bank statements. Large deposits must be sourced Withdrawals from retirement accounts are acceptable source of funds, however LOANS against those accounts are not Gifts are allowed according to FHA s gift policy must be from immediate family ONLY Copy of HUD-1 statement, fully executed from current/previous home sale is acceptable Earnest money deposit must also be verified

23 Unique HECM Purchase Features 23 No subordinate liens against property permitted Borrowers must occupy home within 60 days of closing. A Verification of Occupancy is signed at application Contract of sale required for current residence even if funds are not required, to show borrower s intent to occupy If Borrowers plan to retain current residence for rental or second home, must complete Purchase Questionnaire and income/assets will be reviewed to verify there is sufficient income to support the other property

24 Unique HECM Purchase Features Cont. 24 Sellers concessions are NOT permitted. Sales price can be reduced and contract amended. Non-borrowing spouse Permitted POA NOT permitted All retained properties must be documented and income verified NO existing FHA loans/case numbers

25 FHA Clarification 25 Therefore to clarify, on the HECM for Purchase Program specifically, FHA prohibits any lender credits to the borrower, and any seller contributions to the borrower, even those that are normally paid on behalf of the borrower. This includes but is not limited to the owner's title insurance policy and the homeowner's warranty that have been traditionally paid on behalf of the borrower by the seller. FHA will allow No Exceptions to this guideline

26 Important Considerations 26 Prequalification Timing important items to do ahead of time Are you discussing all options with your purchaser? HECM Counseling o o Current property address on the certificate Expiration date (180 days) Existing vs. New Construction o o Certificate of Occupancy or equivalent Property repairs Must be done prior to closing Must be paid by seller

27 Contract of Sale 27 Fully executed contract of sale must be submitted and reviewed prior to the loan application Contract must include the following: o Amendatory/escape clause o Contingency for property appraisal o FHA Real Estate Certification o Language that indicates seller is responsible for safety and soundness of repairs o All addendums must be approved state specific forms

28 Contract of Sale Continued 28 The contract should also include: Mortgage contingency Contingency for sale of existing residence Sale contingency is mandatory for existing residences with FHA financing Please allow days for closing No personal property

29 Loan Repayment 29 A HECM loan does not have to be repaid until the last surviving borrower permanently vacates the property. Also known as a maturity event. Borrowers may partially or fully repay the loan balance at any time without any penalty. Upon maturity event, estate typically sells property to satisfy the current loan balance. Non-recourse limit = amount repaid is lesser of the loan balance or sales price of property (less Realtor fees and seller closing costs)

30 Maturity Events & Defaults 30 Failure to pay property taxes Failure to maintain hazard insurance policy Failure to maintain the property Failure to make required repairs Renting out the property, while maintaining title Permanently moving out of the property Sale or title conveyance

31 5 Simple Steps 31 We make it easy to become part of our HECM for Purchase family of customers 1. Education we meet with all borrowers and review program options as well as the HUD counseling package 2. Counseling once counseling is complete, we meet again to determine the best program to fit their needs 3. Application package is completed and signed 4. Processing we stay in contact throughout the entire loan process 5. Closing scheduled with borrowers & closing agent, documents are signed and loan is funded

32 Common Misconceptions 32 A HECM Borrower: * Does NOT give up title to their home The Lender DOES NOT take ownership of the house The Lender DOES NOT take the appreciation * Does NOT incur debt that is passed onto their heirs (non-recourse loan) Borrowers can NEVER owe more than the value of their home at time of repayment Other assets will NEVER be used/required by the lender to satisfy repayment FHA mortgage insurance will pay any shortfall from sale

33 Misconceptions Continued 33 A HECM Borrower * Does NOT have to move or sell until they choose to do so (provided they comply with the terms of the loan) * Does NOT have to be debt-free to qualify * Does NOT always utilize all of their home s equity with the reverse mortgage o All remaining equity belongs to borrower or their estate * Will NOT experience any impact on Social Security or Medicare benefits (they should always consult their trusted advisor) * Limited income and credit qualifications

34 Misconceptions Continued 34 Children are not typically against HECM s o Often children initiate first contact o Most are extremely supportive of the reverse mortgage concept HECM s are not as expensive as people think o Closing costs are typical to traditional mortgages and can be financed o Compared to what?

35 After the Closing 35 At the loan closing, Borrowers will receive the BORROWER INFORMATION &SERVICING GUIDE. Specifics include information on: o Servicing of their loan o Important phone numbers Important reminders & helpful suggestions o Property taxes & homeowners insurance policies - Borrowers are responsible for future payments Power of Attorney recommended that they select a trusted family member or advisor to be their power of attorney. Important if they ever become incapacitated

36 Disclaimer 36 This material is not from HUD or FHA and is not approved by the Department of HUD or any Government Agency. HUD does not approve the material presented. Cherry Creek Mortgage Company, is not endorsed by nor acting on behalf of or at the direction of the US Department of Housing and Urban Development, the Federal Housing Administration, the US Department of Agriculture or the Federal Government. Cherry Creek Mortgage Co., Inc. NMLS #3001. AZ: Licensing Mortgage Banker License #BK ; CA: Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, License # ; IL: Illinois Residential Mortgage Licensee LMB # ; KS: Kansas Licensed Mortgage Company, License SL ; MN: This is not an offer to enter into an agreement. Any such offer may only be made in accordance with Minn. Stat (3) & (4). NV: NV Mortgage Banker License #4195, NV Mortgage Broker License #4196; OR: License Number ML-4807; TX: This office is licensed and examined by the Office of Consumer Credit Commissioner of the State of Texas. Loan products may not be available in all states. To check the license status of your mortgage broker, visit

37 Questions??? 37 Please Contact: Kelly Zitlow, Vice President, CMPS, Certified Instructor ADRE NMLS # Phone: ~ E-Fax: kzitlow@ccmclending.com N. Scottsdale Rd., #150 Scottsdale, AZ 85255