Reverse Mortgage
Is it right for you?
Reverse Mortgages are being hyped as a tremendous tool for retirement income. This type of mortgage uses part of the equity in a home as collateral.
A Reverse Mortgage, also known as the FHA (Federal Housing Administration) HECM (Home Equity Conversion Mortgage) is a federally insured loan that allows a home owner to convert a portion of the equity in a home into tax free cash.* The cash received from a Reverse Mortgage can be paid out in several ways:
A single onetime payment
A regular monthly payment
A “Credit Line” account that lets the homeowner decide when and how much of the available cash to withdraw
A combination of these payments
No matter how the loan is paid out you typically do not have make any payments until all people listed on the loan die, sell your home or permanently move out of your home. To be eligible for a Reverse Mortgage all people listed as owners on the home must be at least 62 years of age.
Before deciding on a Reverse Mortgage, several other factors should be explored. These are:
1. Will living at home work for me?
a. Is the house adequate for my needs?
b. Will I have adequate help if needed?
c. Will I be able to afford supportive services?
d. Will I be able to afford payment of Real Estate Taxes, Homeowners Insurance and maintenance?
2. Will a Home Equity Loan work for me?
In addition the following advantages, disadvantages and safeguards of a Reverse Mortgage should be considered.
Advantages:
Allows you to stay in your home.
Can pay off existing mortgage on the home
Simple to qualify because no minimum credit score is required and generally no minimum income is required.
No monthly mortgage payments are due as long as one person listed as owner of the home is living in the home and meets the financial requirements for
maintenance, Property Taxes and Homeowner Insurance.
Variable payout options.
Purchase a home with 44% to 50% down payment and never make a mortgage payment.
A Reverse Mortgage cannot get “upside down”. The heirs will never be personally liable to make up the difference if the loan is greater than the amount the home sold for.
Heirs inherit the home and keep the remaining equity after the balance of the Reverse Mortgage is paid off.
Loan proceeds are not taxable.*
Interest rates may be lower than traditional Mortgages and Home Equity loans.
Disadvantages:
The fees on a Reverse Mortgage are the same as a traditional FHA mortgage but are higher than a conventional mortgage because of insurance costs. The highest costs are the FHA mortgage insurance and the origination fees. Other costs are appraisal fees, counseling fees and other miscellaneous fees. These fees can be incorporated into the loan.
The loan balance increases over time and the value of the estate may decrease.
Social Security and Medicare are not affected, however Medicaid and other need- based government assistance programs can be affected if too much of the funds are withdrawn (and not spent) in one month.
If you are the only homeowner and you stay in an Assistant Living or Nursing Home for more than one year, you will be required to repay the loan.
You must keep your home in good repair, pay Property Taxes and Homeowner Insurance premiums. Proof of payments must be reported annually to the mortgage company. Failure to make these payments can result in foreclosure and the loss of your home.
Safeguards designed to protect the homeowner and the home:
Federal Housing Administration (FHA) insurance.
Reverse Mortgage loans are FHA insured, which means the homeowner is
protected against lender insolvency and can expect to receive all proceeds. This is critical if you choose to receive a line of credit payout.
Mandatory Mortgage Insurance.
Reverse Mortgage loans are required by HUD (United States Department of Housing and Urban Development) to obtain mandatory mortgage insurance. This insurance protects the homeowners and their heirs in the event that the loan balance exceeds the home’s value at the time of sale. The heirs will not have to make up the
difference between loan balance and sale proceeds.
Independent Counseling.
HUD certified counselors provide the homeowner with objective information and help you understand the process. At the same time the counselors will determine that the homeowner can meet all financial obligations required by a Reverse Mortgage.
Capped Interest Rates
If the loan has a variable interest rate there is a limit on how much the interest rate can change over a specific period of time.
Full Disclosure of Costs.
Lenders are required to disclose the estimated loan costs and fees upfront through the Good Faith Estimate (GFE)
Three (3) Days to Cancel.
After signing all loan papers at the closing the homeowner has three (3) business days to cancel the transaction. This “Right of Recession” applies only to the Reverse Mortgage for refinance option and not the Reverse Mortgage for purchase option.
Once the advantages disadvantages and safeguards have been analyzed and the decision has been made to apply for a Reverse Mortgage, then there are 5 steps that need to be completed.
Step 1 – Review and Call
Call the banking institution or mortgage broker to start the application process. They will provide you with a list of HUD (United States Department of Housing and Urban
Development) approved counselors. At this time you can also request payout information
based on a report using an estimated value of your home. This information will list all fees and provide you with detailed monthly payout, lump sum payout, line of credit payout and a combination of all three payouts.
Step 2 – HUD Counseling
The banking institution or mortgage broker is not allowed to influence you on which counselor to choose. You have to make that determination and contact a counselor and schedule a counseling session. The counseling session will last approximately 1 hour and is mainly designed to assure HUD that you have the financial resources to pay the
property taxes, homeowner insurance premium and make all necessary repairs. The counselor also will ascertain if you have explored other alternatives. If the HUD counselor is satisfied that you meet the criteria for a Reverse Mortgage, he will issue a Certificate of Approval and provide it to the lending institution and you. The fee for this session ranges from $0 to $125 with $125 being the norm. Some counselors will allow you to include this fee into the loan.
Step 3 – Application Started
Once the certificate of approval has been received, you can now fill out the Reverse Mortgage loan application. In addition to other general information, you will need to provide Driver’s License and Social Security Number information for all persons who will be listed on the loan. The application needs to be signed by all persons listed on the loan and all signatures need to notarized. At this time the lending institution will also disclose, again, every up front cost and fee, like Title Insurance, Mortgage Insurance, etc. These costs can be rolled into the loan, but you are not obligated to do so. These costs are typically approximately $12,000 but vary somewhat by location and lending institution.
Step 4 – Processing and Appraisal
Once the signed application and supporting documentation is received by the lending institution, the application will be submitted, title and appraisal services will be ordered. A local HUD certified appraiser will schedule a convenient time with you to come to the property and conduct an appraisal.
Step 5 – Closing
Once the appraisal has been received, the official financial information will be provided to you. At this time you choose which option you would prefer, either fixed rate or variable rate terms, but you can change your mind up to the closing. A date for closing will also be established. The closing will be conducted by a third Party Closing Company. The closing process takes approximately 2 to 3 hours to complete and you again will be required to provide a photo ID and Social Security information. When all documents are signed you will have an additional 3 business days to change your mind and cancel the transaction.
The only penalty will be that you will be required to pay the counselling and appraisal fees.
If no cancellation is made the monies will be dispersed after the 3 days. Approximately 1 to 2 weeks after the closing you will sent information, from the lending institution,
detailing the process to be followed for reporting and verifying that the Property Taxes and Homeowner Insurance have been paid and are current. You will also receive a monthly statement detailing interest rate and outstanding loan balance. This statement is for
information only.
A Reverse Mortgage can be a good financial tool, under certain circumstances, but all
options should be explored before committing to a Reverse Mortgage. As of the beginning
of 2014 a Reverse Mortgage may also be used to purchase a home with 44% to 50% down payment.
Frequently Asked Questions:
Do I still own my home?
Yes. You will retain the title and ownership during the life of the Reverse Mortgage loan, and you can sell your home at any time. The loan will not become due as long as you continue to meet loan obligations such as living in your home as your primary residence, maintaining the home according to the FHA requirements, and paying property taxes and homeowners insurance.
Does my home need to be clear of any existing mortgages?
No. Actually many borrowers use the Reverse Mortgage loan proceeds to pay off an existing mortgage and eliminate monthly mortgage payments.
Do I have to repay the loan?
Yes, eventually. Repayment is not due during the life of the loan provided you meet the loan obligations such as living in home as your primary residence, maintaining the home according to FHA requirements, and continuing to pay required property taxes and insurance. Repayment is limited to the lesser of the value of your home or the loan balance, provide the home is sold.
Do I have to make monthly mortgage payments?
No. Unlike a traditional home mortgage loan or equity loan, you do not make monthly mortgage payments, and any existing mortgage will be paid off using the loan proceeds.
What are the options for receiving my proceeds?
You can receive your money in a lump sum, a monthly check, a line of credit or a combination of these options.
Do I have to pay income taxes on the proceeds?
No. Reverse Mortgage loan proceeds are tax free as it is not considered income.*
However it is recommended that you consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
Is the use of my loan proceeds restricted?
No. The net cash proceeds from the Reverse Mortgage loan can be used for any reason.
Many borrowers use it to supplement their retirement income, pay off debt, pay for medical expenses or remodel their home.
How much do I have to pay out of pocket?
Costs such as origination fees, third party closing costs, and FHA mortgage loan insurance premiums, can be financed as part of the loan.
Does the loan affect my eligibility for Social Security or Medicare benefits?
A Reverse Mortgage loan usually does not affect eligibility for entitlement programs, such
as Social Security or Medicare benefits. Some needs based government programs, such
as Medicaid and Supplement Security Income (SSI), may be affected by the loan. You
should consult a qualified professional to determine if there would be any impact to your
government benefits.
What is difference between a Reverse Mortgage and a Home Equity Line of Credit loan?
With a traditional mortgage or Home Equity Line of Credit (HELOC), you must meet minimum income and credit requirements to qualify for the loan, and you have to make monthly loan payments. With a Reverse Mortgage loan, there are generally no credit score requirements, nor do you make monthly mortgage loan payments.
When will I be required to repay my Reverse Mortgage loan?
The Reverse Mortgage loan will come due when the home is no longer your primary residence. Below are additional examples of situations which would trigger repayment:
You sell your house or transfer the title to another person.
If you do not occupy your home for a majority of the calendar year.
You pass away and there is no other borrower on the title.
You do not maintain the home according to FHA requirements.
You do not pay required property taxes and/or homeowners insurance.
*Consult a Tax professional
Sources of Information:
Citizens First Bank Security 1 Lending
American Advisors Group National Council on Aging Liberty Home Equity Solutions
U. S. Department of Housing and Urban Development (HUD) Federal Housing Administration (FHA)
