Reverse Mortgage Information

REVERSE MORTGAGE BASICS

  1. The reverse mortgage allows a senior homeowner to borrow money, secured by the home, and does not require any payments to the lender until the senior leaves the home.
  2. The reverse mortgage’s purpose is to help the senior obtain funds to pay expenses or debt that could not otherwise be paid.
  3. A borrower cannot be turned down for a bad credit score unless the debt secured by the home is above the permitted amount.
  4. The loan is “non-recourse” so a senior or her heirs will not be liable for more than the value of the house pledged for the loan.

TYPICAL REVERSE MORTGAGE BORROWER

The typical senior that obtains a reverse mortgage falls into one of three categories:

  1. The senior’s monthly debt payments are so large they cannot pay for necessary living expenses.
  2. The senior has one or a few large debts that cannot or should not be paid from existing resources.
  3. The senior cannot pay for repairs, modifications or real estate taxes from existing resources, which, if not paid, would require the senior to move out of their home.

A senior should prepare a net worth balance sheet, cash flow analysis of current income and expenses and projected expense plan to determine if a reverse mortgage is appropriate.

REQUIREMENTS FOR A REVERSE MORTGAGE

HECM reverse mortgages require the following:

  1. All of the owners of a home must be over age 62.  If one of the owners is less than age 62 the homeowners must wait until all owners are over age 62 or the person under age 62 must transfer all ownership in the house to the person over age 62.
  2. The owners of the home must reside in the home at the time of application.
  3. The home must be a single family house or one of up to four unit structure in which the owners occupy one of the units.
  4. The home must have no lien or the reverse mortgage loan must be sufficient to pay all closing costs and pay off the existing liens.
  5. The maximum value of the house that can qualify for a HECM loan is now $417,000.  In some high housing price areas the limit will be slightly over $600,000 after January 1, 2009.
  6. The home can be a stand alone detached house, a townhouse, a condominium, or a planned unit development.  A cooperative unit is not eligible for a reverse mortgage.
  7. The home must meet certain HUD standards for value, structural integrity and maintenance.

KEY ISSUES TO DETERMINE IF A REVERSE MORTGAGE IS APPROPRIATE

Assuming the senior can qualify for a HECM reverse mortgage, the senior or his or her advisors should answer yes to the following questions to make sure a reverse mortgage is appropriate.

  1. Will this reverse mortgage loan allow the senior to stay in his or her home for at least three to five years?  The fees are too high for a reverse mortgage to be a short term loan.
  2. Does the senior have insufficient income, borrowing ability or assets, other than home equity, to pay off the current home mortgage or debts, pay current high-interest debt or pay for needed repairs or remodeling of the house?
  3. Does the senior own few, if any, investments other than the equity of the home?
  4. Is there is an immediate need for reverse mortgage funds?
  5. Is there a need to borrow at least twenty percent of the value of the house?
  6. Is it acceptable that the senior will not be able to transfer the house to heirs?

STEP BY STEP PROCESS TO OBTAIN A REVERSE MORTGAGE LOAN

The HECM loan the loan process can take between sixty and ninety days to complete.  The following are the steps to obtain a reverse mortgage loan.

  1. Homeowner must contact an authorized HECM lender.  HUD and the National Reverse Mortgage Loan Association “NRMLA” list approved lenders.
  2. The loan application must be completed.
  3. The homeowner must complete a counseling session on reverse mortgages.    The HUD approved counselor conducts a session, either in person or over the phone, to determine the homeowner’s need, how the loan will impact the senior and explore alternatives to reverse mortgages.
  4. After the lender receives a certificate from the counselor it orders a title report and credit report to determine if there are any liens.
  5. The lender orders a HUD approved appraisal to determine the fair market value of the house and what, if any, conditions in the house need to be remedied to bring the house up to a HUD’s Minimum Property Standards.
  6. After all reports are received the lender drafts the necessary closing documents and the borrower signs the documents at closing.
  7. A borrower has a three day right to rescind the loan after closing.
  8. Loan proceeds are distributed as provided in the closing statement.