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…….
Understanding the basics
Knowledge
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
Knowledge
Continued6. 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 __________?
Market Opportunity
• 39.6 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
Factors Driving the Market
• 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%
HECM for Purchase Basics
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
• 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
8
Eligibility
• 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
Eligible Properties
• 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
Ineligible Properties
• Cooperative Units (‘co-ops’)
• Manufactured Homes
• Bed & Breakfast Properties
• Boarding Houses
Loan Products
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)
Loan Products
ContinuedHECM 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
Loan Amounts
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
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.
P
O
W
E
R
PURCHASE PRICE $ 200,000 $ 300,000 $ 400,000 $ 500,000 $ 600,000 AGE OF YOUNGESTBORROWER ESTIMATED REVERSE MORTGAGE AVAILABLE FUNDS
62 $ 93,817 $ 142,937 $ 192,057 $ 242,177 $ 292,297
65 $ 97,617 $ 148,637 $ 199,657 $ 251,677 $ 303,697
* Purchase Power Disclaimer*
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.
Loan Costs
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
Financial Assessment
Purpose Minimize Risk Borrower Lender Investor Best UnderstandWillingness 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
Financial Assessment
cont.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
Consumer Safeguards
• Third party counseling session with a HUD approved
reverse mortgage counselor
• Open-ended term (150th 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
Borrower Obligations
• 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
Required Investment
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
Unique HECM Purchase Features
• 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
Unique HECM Purchase Features
Cont.• 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
FHA Clarification
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
Important Considerations
Prequalification
• Timing important – items to do ahead of time
• Are you discussing all options with your purchaser? • HECM Counseling
o Current property address on the certificate o Expiration date (180 days)
• Existing vs. New Construction
o Certificate of Occupancy or equivalent o Property repairs
Must be done prior to closing Must be paid by seller
Contract of Sale
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
Contract of Sale
ContinuedThe contract should also include:
• Mortgage contingency
• Contingency for sale of existing residence
• Sale contingency is mandatory for existing residences with FHA financing
• Please allow 30 - 45 days for closing
Loan Repayment
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)
Maturity Events & Defaults
• 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
5 Simple Steps
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
Common Misconceptions
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
Misconceptions
Continued 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
Misconceptions
Continued• 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?
After the Closing
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
Disclaimer
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-0904024; CA: Licensed by the Department of Business Oversight
under the California Residential Mortgage Lending Act, License #4130289; IL: Illinois Residential Mortgage Licensee LMB # 0005759.; KS: Kansas Licensed Mortgage Company, License SL-0000472; MN: This is not an offer to enter into an agreement. Any such offer may only be made in accordance with Minn. Stat. 47.206(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 http:www.nmlsconsumeraccess.org.
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