As many of you know, if you have been following my articles at all, is that I am a former mortgage broker and mortgage banker. Recently my father approached me about what he needs to know about getting a reverse mortgage. Like he said; “Son, I am not getting any younger and I just don’t think I can make it on social security alone.” After a lengthy conversation I decided that if my dad had this many questions perhaps my readers would as well. As such, here are the highlights of the conversation and what you need to know.
The loan program most commonly referred to as a reverse mortgage is the Home Equity Conversion Mortgage (HECM) which is the FHA’s program where by the FHA provides a guarantee on the loan.
First of all, thee most important thing you must know is this; EQUITY, EQUITY, and if you thought I was going to say Equity again, you are wrong, it’s your AGE! Pursuant to federal guidelines only homeowners who are 62 years of age or older can apply for a reverse mortgage. Now as to the first point, equity; you must have sufficient equity in your home to warrant refinancing into a reverse mortgage.
Now, unfortunately, due to the real estate bubble many homeowners do not have sufficient enough equity in their homes to qualify.
You have to sit down and figure this out. Figure out how much money you need, how long you are going to need it for and whether or not you want it in a lump sum. The way we figured this out is that my dad is going to get about $1,200 a month in social security because he is taking the early option and we figure that he needs about another $1,200 a month to live comfortably. So, we needed to calculate how much equity he had in his home and whether there was sufficient enough equity to guarantee him the additional monthly income he needed. He does not; he only has enough to cover him for about 13 years. Here is how the calculation worked out.
After paying the fees and closing costs there was about $200,000 in equity left. So at $1,200 a month payments that equates to $14,400 a year for about 13 years worth of payments. So, in short, dad is covered until he is 75 years old (62 years old plus 13 years of payments.) Not enough but its all he has.
What is more important to know here is the risks involved when you perform a reverse mortgage. In short, federal guidelines state that you can not be “upside down” in your mortgage. So we can only hope and pray that his house does not continue to loose value as bad as the housing market is right now. Here are some other key points to remember;
A REVERSE MORTGAGE CAN BECOME DUE AND PAYABLE IMMEDIATELY UPON THE FOLLOWING;
– the primary mortgage holder dies
– the home is sold
– Failure to pay property taxes or maintain adequate hazard insurance
– Violations of other mortgage requirements/obligations
– You move to a new primary place of residence
– Failure to maintain the property or perform necessary repairs
– Fail to live in the home for 12 consecutive months.
I want to take a moment to talk about that last one; failure to live in the home for 12 consecutive months. This is a huge one for senior citizens to consider in making their decision. Let me ask you this question because it’s the same question I asked my dad; “Do you know what will happen if you fall and break a hip or otherwise injure yourself and you are hospitalized or placed in a nursing home? Look Dad, if that happens you lose the reverse mortgage and have to pay everything back.” Make sure you look at all possible contingencies when thinking about a reverse mortgage.
The first step in getting a reverse mortgage is that you must fill out an application which is very similar to a standard 1003 (Uniform residential mortgage application.) Second, you MUST attend a reverse mortgage counseling class which must be performed by a HUD approved counseling agency. Then the process moves on to
– Loan processing which includes ordering an appraisal, which you have to pay for by the way.
– Loan Underwriting
– Loan Closing
– Disbursement of funds. Of course, just like a normal residential mortgage you have to wait three days. IT is called a three day right of rescission. You have three days to think it over and cancel if you decide after closing you no longer want the mortgage.
– LOAN REPAYMENT! This is the one area most people forget or don’t realize is a requirement. Ultimately the loan must be paid back. You can do this with the sale of the house and use the proceeds to pay back or your heirs can use another form of repayment if they so choose.
A couple of other key issues;
-You must pay upfront costs and fees. Thankfully in August of 2010 the HUD and the FHA took a look at the program fees and decided to implement changes to make the Reverse mortgage program more affordable.
-You are required to obtain a mortgage insurance policy for the loan. Unfortunately this requirement has not changed and remains at 2% of the loan amount.
As you can see, a reverse mortgage is not as simple as they make it out to be in the advertising. Ultimately my dad has decided to go with the mortgage but is rather disheartened by the amount he has to pay to get the loan, about $5,000 in fees and MIP (mortgage insurance premium) and the fact that his house lost so much value that he is getting a lot less than he thought he would. Which leads us to the final point, how you can get your money. You have five options;
-Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
-Term – equal monthly payments for a fixed period of months selected.
-Line of Credit – unscheduled payments or installments, at times and in amounts of you’re choosing until the line of credit is exhausted.
-Modified Tenure – combination of line of credit with monthly payments for as long as you remain in the home.
-Modified monthly Tenure – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
Ultimately my dad had no choice and opted to get the reverse mortgage. Of course, I had a couple of ideas on how to make sure he would get enough money to last his life time, but that is a topic for another article. But here is the secret; we are taking the money in lump sum ($200,000) and considering there is no limitation on what you can use the money for we opted to find a way to invest the money guaranteeing about a 6% rate of return on his money tax free. That pays him about $12,000 a year Tax Free! Not as much as the monthly payment option of the reverse mortgage but this way his payments will last his whole life and he still has the $200,000 principal in case of an emergency.
For more information:
Department of Housing and Urban Developments Website on reverse mortgages;
More from this contributor;
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First Person: Common Questions and Answers about Health Savings Accounts
Retirement Plan not working? Here may be why