Reverse Mortgage

HECM - Home Equity Conversion Mortgage

What is a reverse mortgage (Home Equity Conversion Mortgage)?

It is a government (FHA) insured loan that either eliminates a mortgage payment or generates continual income from equity currently available. It allows a senior over the age of 62 to stay in their home as long as the home remains the primary residence.

Common Myths and Fears

For purpose of discussion we will address applying for a refinance HECM on a home that you currently own. A reverse mortgage can be used to purchase a home too, and the myths and fears are similar.

In general, mortgages and most certainly reverse mortgages are foreign concepts to most consumers. Given that there are some often repeated myths about what happens to someone and their home if they enter into a reverse mortgage contract with a lender. Most myths are perpetuated by fear and/or lack of knowledge. Let's look at some of the common ones.

Am I selling my home to the Bank?

No- Even before the mortgage meltdown, which through foreclosure, forced lenders into getting back many more properties than they wanted, lenders do not want to be in the business of owning homes. Lenders want to benefit from the interest on mortgage payments. In a reverse mortgage, you keep the title to your home in your name. The lender adds a lien onto the title, just like a conventional loan, so that the bank is guaranteed that they will eventually get paid back the money that they loan to you.

Can my heirs inherit my Home?

Yes- You and your subsequent estate still own the home and it is distributed, per a will, revocable living trust or court order. The lien on the house requires payment by the estate as part of selling the home and disbursing the sale proceeds (just as any loan would require). The lien is whatever proceeds you have received from the reverse mortgage plus any accrued interest. Let's assume that you take out a reverse mortgage and owe $100,000 after five years. When you pass away or move out and the estate sells the house for $250,000, the lender's lien of $100,000 is paid off and the estate inherits roughly $150,000. A huge positive for a reverse mortgage is that it is a "non-recourse" loan which means that you, as the HECM borrower (or your estate), will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt. Non-recourse simply means that if you, as the borrower (or estate), does not pay the balance when due, the mortgagee's remedy is limited to foreclosure and you and/or your estate will not be personally liable for any deficiency resulting from the foreclosure.

Here is an excellent website that details some of the issues discussed.

What if I don’t live in my home full time?

If you decide to relocate to a warmer or more desirable environment, and do not occupy your house as a primary residence, the reverse mortgage becomes due. If you, as an owner, are not in your home for up to 12 months due to circumstances out of your control, the loan remains safe and in place. If, for some reason you are only living in your home for six months each year, make certain that your occupancy is clear to the lender, so that through any missed mailing or inquiry from a lender, the loan does not become due and payable.

Will Social Security and Medicare benefits be affected?

Social Security and Medicare are not affected by a reverse mortgage. However, need-based programs such as Medicaid could be affected. To remain eligible for Medicaid, it is important to manage how much is withdrawn from the reverse mortgage in one month to ensure that you do not exceed the Medicaid limits. Consulting with a qualified financial adviser or Medicaid specialist is advised.

Reverse Mortgage ... continued

Can I be Forced Out of my Home? - probably the NUMBER 1 concern.

The FHA insured HECM was created specifically to allow seniors to live in their home for the rest of their lives. Because you, as a homeowner, typically receive payments from a reverse mortgage instead of making payments to a lender, you can never be evicted or foreclosed on for non-payment. But- You will still have the responsibility to maintain the home in good condition and keep property insurance and property taxes current.

Is ‘income’ from the Reverse Mortgage subject to Income Taxes?

No- Proceeds from a reverse mortgage are not considered income and are not taxable. In addition, the interest on a reverse mortgage can be tax deductible when it is repaid. Due to 2018 Tax Reform it is best to consult a tax advisor for more information.

Are their large out-of pocket expenses that accompany the establishment of a Reverse Mortgage?

In most cases, the only out-of-pocket expense is the cost of the counseling prior to the loan. This cost of the counseling is usually provided on a sliding scale based on household income. We normally agree to pay the appraisal fee upfront and finance that cost into the loan.

Is a Reverse Mortgage the same as a Home Equity Line of Credit?

While there are similarities, the major shared point is that both a reverse mortgage and a home equity loan use the home's equity as collateral. There are far more limitations on a reverse mortgage than those in place for a Home Equity Loan.

The reverse mortgage enables senior homeowners to convert the equity in their home into a monthly stream of income, a lump sum payment or a line of credit. This can be an excellent option for the qualified homeowner who is trying to decide if remaining in their home is the best option for their current financial situation. We'll also review options that allow seniors to purchase a primary residence if they are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property they are purchasing.

A home equity loan or line of credit or traditional mortgage cash out refinance has the borrower using the equity in their house as a large ATM. In this case, the mortgage loan or line will immediately begin charging interest on the equity used and monthly payments will begin within the next 60 days on the portion of funds used. A reverse mortgage lets the borrower receive the equity from their home in the form of a monthly payment or in one lump sum from the lender using the home as collateral to insure eventual repayment. The loan doesn't have to be paid back until either the death of the last remaining borrower or the borrowers no longer are using the home as their primary residence.

Typically at the stage of life a homeowner may consider a reverse mortgage, they may be retired or nearing retirement and living on a fixed income through pension, retirement funds and/or social security. They may find it difficult to manage their monthly obligations due to unexpected medical expenses or a rising cost-of-living.

The reverse mortgage program can provide the homeowner with an additional stream of income without adversely affecting their current benefits. Social Security is not reduced to offset the income from the reverse mortgage and can provide the homeowner with a more comfortable life.

Who is Eligible?

The Home Equity Conversion Mortgage is FHA's reverse mortgage program that enables a homeowner to withdraw some of the equity in their home. They choose how they want to withdraw the funds, whether in a fixed monthly amount or a line of credit or a combination of both.

The HECM program has very specific eligibility requirements for the borrower, mortgage amount and the property being mortgaged. Not everyone is eligible for a reverse mortgage. There are age requirements associated with the program and it is obviously targeted to the growing U.S. senior population. The youngest applicant in the household must be at least 62 years of age to qualify to be on the loan.

There are two basic requirements in order to successfully obtain a reverse mortgage and they are that the applicants meet the age requirements, plus the home must have sufficient equity to accommodate the loan request.

What are the eligibility requirements? Can I qualify?

Borrower Requirements

One owner must be 62 years of age or older
The borrower(s) must own the property outright or have a small mortgage balance
You must occupy the property as your principal residence
You must not be delinquent on any federal debt
You must participate in a counseling session given by an approved HECM counselor

Non Borrowing Spouse (under the age of 62) can be protected even though they are not qualified to be on the loan. (details here)

Mortgage Amount will be Based upon

Age of the youngest borrower
Current interest rate
Lesser of appraised value or the HECM FHA mortgage limit (currently $1,089,300) or the sales price ( if a purchase)
Current outstanding balance of any existing loan

Financial Requirements

Income or employment qualifications are required of the borrower. It is important that the ability to maintain the home and keep ongoing obligations paid. The established HUD /FHA residual income after paying ongoing obligations is about $1050/month.
The income test is usually supported by a copy of a recent tax return, benefit letter and asset accounts.
No repayment as long as the property is your principal residence and the obligations of the mortgage are met
Closing costs may be paid upfront or financed into the mortgage

Property Requirements The following eligible property types must meet all FHA property health and safety standards and flood requirements:

Single family home or 1-4 unit home with one unit occupied by the borrower
HUD-approved condominiums ( The Villages Golf and Country Club is approved )

The Application Process

The process for entering into a reverse mortgage is a thoughtful, structured review of an applicant's situation and full disclosure to the applicant of the ramifications of the use of their home's equity - short and long term. The process for achieving a reverse mortgage does not differ tremendously from applying and getting a traditional home equity loan with the exception that there is a required upfront counseling component. From the beginning, applicants for a reverse mortgage should plan on the process taking approximately 45 days from start to completion. The process begins with counseling.

Counseling

HUD approved Home Equity Conversion Mortgage counselors discuss program eligibility requirements and the financial implications as well as alternatives available when obtaining a HECM. Counselors will also discuss the provisions for the mortgage and under what conditions the mortgage may come due. The result of the counseling is not only a HECM Counseling Certificate which the applicant will need to continue the process, but also the information for the applicant to make an informed decision about whether a HECM is for them. Counseling can be done by a nationwide network of counselors available face-to-face or over the phone by local agencies.

Counselors can be found on the HUD website or by calling (800) 569-4287

SEVEN DAY COOLING OFF PERIOD

Pursuant to California Civil Code section 1923.2(k), the reverse mortgage loan application can’t be started prior to the expiration of a seven-day cooling off period. This starts after the borrower(s) have completed the counseling session.

Application

Once the counseling has been completed and the 7 day cooling off period has passed, the borrower will provide the HECM Counseling Certificate to a HUD/FHA reverse mortgage loan officer who will then start the application process. As with most mortgage applications there are disclosures regarding the fees for the mortgage, interest rates and their impact on long term payback and the proceeds a successful borrower can hope to achieve. The application is not binding if approved and the homeowner is not responsible for any fees or expenses for the application. The amount funds available from an approved application will be determined from the next step.

Underwriting and Approval

Again, like most mortgages, title work will be updated and review any liens, judgments or other issues connected to the home or the potential borrower including bankruptcy or other items that could lessen the potential equity in a home. Additional information may be gathered at the direction of the underwriter to satisfy the need for the loan. Once underwriting is completed, the status of the borrower is cleared and a determination can be made on how the borrower would like to access the funds of the reverse mortgage. A major difference for underwriters is several factors that are not considered for reverse mortgages including the availability of income, borrower credit scores, or a discharged bankruptcy. Under normal conditions, a mortgage underwriter would rely on full disclosure of these items. Fair Housing, of course, makes certain that these borrowers are not discriminated based on age but another factor that must be ignored is the health of the borrower.

Closing and Funding

At closing, a notary meets with the borrower to review and sign all the loan documents. This loan, unlike other mortgage loans, does have a three day right of rescission period where a borrower could cancel the loan without any penalty occurring. Once the three day period has passed, the borrower will be provided access to the proceeds for the mortgage in the method they have chosen.

Payment Options

Your Equity Is Used to either stop making monthly payments to the bank or to receive payments from the bank.

This is a list of income options you can choose from:

Tenure

Your receive equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.

Term

You receive equal monthly payments for a fixed period of months selected.

Line of Credit

You can choose unscheduled payments or installments, at times and in an amount of your choosing until the line of credit is exhausted.

Modified Tenure

You can receive income from a combination of a line of credit and scheduled monthly payments for as long as you remain in the home.