CLE Alabama
33
rd
Annual
Bankruptcy Law Update
Hyatt Regency Wynfrey Hotel Birmingham, Alabama Friday, November 14, 2014
Reverse Mortgages
Dan Barksdale
FirstBank Mortgage Partners
Birmingham
Reverse Mortgages Explained Dan Barksdale
FirstBank Birmingham, AL
OVERVIEW
A Home Equity Conversion Mortgage (HECM, pronounced hek-um) allows you to take the equity in your home and turn into tax-free income. You are not required to make any monthly mortgage payments as long as you live in the home. A HECM is commonly called a reverse mortgage.
Introduced in the late 1980s, reverse mortgages can help homeowners who are “house-rich but cash-poor.” It allows seniors age 62 and older to remain in their homes and still meet their financial obligations. The proceeds of the loan are tax-free; there are no income requirements and the money can be used for any purpose.
The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular ‘forward’ mortgage, the lender makes payments to you.
While a reverse mortgage loan is outstanding, you continue to own the home and hold title to it. You will NEVER give up the ownership in your home! The money from a reverse mortgage can provide you with financial security.
Reverse Mortgage Facts:
• You and any owners must be at least 62 years of age, or older, to receive a reverse mortgage.
• The bank pays you!!! You are not required to make any monthly mortgage payments with a reverse mortgage. A reverse mortgage is a powerful planning tool that enables seniors to stay in their home and maintain or improve their standard of living without taking on a monthly mortgage payment.
• The most widely available reverse mortgage in the United States is the federally-insured Home Equity Conversion Mortgage (HECM), which was authorized in 1987.
• A reverse mortgage is different from a regular home equity loan or line of credit, which many banks and thrifts offer. With a regular home equity loan or line of credit, you must meet certain income and credit requirements to qualify, begin monthly repayments immediately, and the home can have an existing first mortgage on it. With a Reverse Mortgage, these requirements are not necessary.
• Borrowers have a choice of receiving the proceeds from a reverse mortgage in the form of a lump-sum payment, fixed monthly payments for life, or line of credit – or a
combination of any of these options.
• The size of reverse mortgage that a senior homeowner can receive depends on the type of reverse mortgage, the borrower’s age and current interest rates, and the home’s property value. The older the applicant is, the larger the monthly payments or line of credit.
• Unlike a regular mortgage or home equity loan, a reverse mortgage doesn’t require monthly repayments by the borrower to the lender. A reverse mortgage isn’t repayable until the borrower no longer occupies the home as his or her principal residence.
• The repayment obligation for a reverse mortgage is equal to the principal balance of the loan, accrued interest, plus any finance charges paid for through the mortgage. BUT – you can never owe more than what you home is worth. A Reverse Mortgage is a non-recourse loan.
• A borrower cannot be forced to sell their home to repay a reverse mortgage as long as they occupy the home, even if the total of the monthly payments to the borrower exceeds the value of the home. The borrower must continue to maintain homeowners insurance and pay their property taxes.
Reverse Mortgages and Bankruptcy:
Chapter 7 bankruptcies must be dismissed or discharged prior to closing:
• If the credit report says the bankruptcy was dismissed or discharged over
one year ago, no additional documentation is required.
• If the bankruptcy was dismissed less than one year ago, or if the credit
report does not show anything, the borrower must provide a court order signed by the judge as proof of the discharge or dismissal along with the discharge schedule. Obtain this documentation from the PACER system.
If a Federal Housing Administration (FHA) insured loan was included in the Bankruptcy, the borrower is ineligible for another FHA insured loan for three years from the date of the discharge.
There are two options with a Chapter 13 bankruptcy:
• The borrower pays the bankruptcy in full at closing. Obtain a payoff letter
from the trustee.
• The borrower continues with the bankruptcy and the reverse mortgage
with court approval:
o The borrower must pay off any liens against the property and any federal
debt.
o The court must provide written permission signed by the judge indicating
that the borrower does not need to pay off the bankruptcy to proceed with the reverse mortgage. This permission must specify that the mortgage may be an adjustable rate mortgage, if applicable.
Note: Request that the court not specify a rate. Approval should stipulate “current market rate,” or the current rate plus a stated percentage, such as “LIBOR plus 5%.” If the court allows a lower rate than the current rate at closing, we cannot close on the loan.
Chapter 11 bankruptcy is most prominently used by businesses, whether a corporation or sole proprietorship. Borrowers who have filed Chapter 11 bankruptcy must:
• Pay off any liens against the property and any federal debt.
• Receive court approval signed by the judge indicating that the borrower
does not need to pay off the bankruptcy to proceed with the reverse mortgage. This permission must specify that the mortgage may be an adjustable rate mortgage, if applicable.
Note: Request that the court not specify a rate. Approval should stipulate “current market rate,” or the current rate plus a stated percentage, such as “LIBOR plus 5%.” If the court allows a lower rate than the current rate at closing, we cannot close on the loan.
