Out of Sight, Out of Mind

InvestorDirector.com

This largely unpublicized (and widely misunderstood) form of home lending may be the key to financial stability for not only the senior citizens with whom you’re close to…but for your entire family.

Banks have tightened up loan guidelines for every type of borrower – but not so much for those that qualify for a reverse mortgage: senior citizens age 62+. If more families knew how truly remarkable this type of financing is for their senior citizen loved ones, many untimely financial hardships could be avoided.

 Reverse Mortgage 101

A reverse mortgage is a very useful financial tool for senior citizens who own their home and have built up a lot of equity over time. Unlike traditional mortgages, which put homeowners in debt until their house is paid off – usually after a term of thirty years, reverse mortgages are a special type of home loan that allows a homeowner to convert the equity in his or her home into cash.  Reverse mortgages can give older Americans greater financial security to supplement social security income, meet unexpected medical expenses, make home improvements, travel and much more. The qualifications for reverse mortgage loans are listed below:

Reverse Mortgage Borrower Requirements:

• Borrower must be 62 years of age or older.
• Borrower must own their home, generally for a year or more before refinancing to a reverse mortgage.
• Borrower must occupy their home as their primary residence.
• Borrower must participate in a consumer information session given by an approved HECM counselor, and show a certificate of completion of this session before closing on their reverse mortgage.
• Reverse Mortgage Loan Amount is Based On:
• The age of the youngest borrower in a married household (unless the younger candidate willfully agrees to be taken off the title of the subject home so the older spouse can hold the reverse mortgage in their name).
• The age of the borrower; older seniors get higher loan to value (LTV) loans.
• The zip code the  loan candidate lives in.
• Current interest rates (lower market interest rates = higher loan amount)
• The lesser of the appraised value of the home being refinanced or the FHA loan insurance limit

Borrower Financial Requirements:

• No income or credit score qualifications are required of the borrower. Even borrowers in current foreclosure situations or those with very bad credit can qualify for a reverse mortgage!
• No repayment of the reverse mortgage is required as long as the property is the senior citizen’s primary residence.
• Closing costs may be financed in the mortgage. There are no out of pocket expenses except for property appraisal fees (usually $300).
• Borrower should be able to afford annual property taxes, insurance and property upkeep.

Reverse Mortgage Property Requirements:

• Single family home or 1-4 unit home with one unit occupied by the borrower.
• HUD-approved condominiums.
• Manufactured homes and leased land.
• Properties must meet FHA property standards and flood requirements.

Homeowners age 62 and older who have paid off their mortgage, or have less than roughly 65% of their mortgage balance remaining are eligible to participate in HUD’s reverse mortgage program. When refinancing to a reverse mortgage, homeowners are presented with three options:

Cash out Refinance: The borrower can receive one lump sum payment of their home’s unused equity up to roughly 65% of the value of the home.

Monthly Income: They can receive monthly payments against the equity in their home for a fixed term or for as long as they live in the home. The monthly payments stop when the loan reaches roughly 65% of the home’s value.

Home Equity Line of Credit (HELOC): The third choice is to open up a line of credit secured by any unused equity up to about 65% of the home’s value. This works like a credit card, however the borrower can opt to skip monthly payments at any time with no penalties.

Senior homeowners whose circumstances change can restructure their payment options at any time.

Reverse mortgages are FHA/HUD insured and there is no risk for the senior.

There are four remarkable characteristics of reverse mortgages that senior citizens need to know:

1) There are no income, asset, or credit requirements. Nearly everyone qualifies. This is what makes the reverse mortgage so spectacular – all seniors qualify except those that have certain IRS tax liens or other large unpaid debts.

2) The senior citizen has no monthly mortgage payments…ever. The only expenses for the senior citizen are their homeowner’s insurance policy and their annual property taxes. You may be wondering how lenders can afford to lend money to senior citizens without any monthly payments coming from the borrower. It’s because the loan works backwards, building principal and interest against the home as time goes by. Because there are no monthly payments associated with a reverse mortgage, the loan balance of the loan goes up every month until the senior passes away. Then, the heirs or beneficiaries of the senior citizen have roughly a year to sell the house. If there are no heirs or beneficiaries designated by the senior citizen, or the remaining heirs or beneficiaries cannot sell the home for whatever reason, the lender will attempt to sell the house for the balance owed plus interest accrued according to the terms of the loan. If the senior citizen sells the house for whatever reason before passing on, the loan and any accrued interest must be paid back at the time the home is sold.

3) A reverse mortgage does not require repayment as long as the borrower lives in the home. Again, lenders recover their principal loan balance, plus any accrued interest (according to the terms of the loan), when the home is sold – either by the senior borrower during life, or after the senior borrower passes away. Assuming the home is sold at a price above the outstanding loan balance at the time of sale, the remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the outstanding reverse mortgage lender the amount of the shortfall. In other words; if the senior lives so long that more is owed on the house than the house is worth at the time of sale, the surviving family is not responsible for the loss – HUD is. Lenders love reverse mortgages because unlike regular mortgages they are insured by the government against any losses.

4) The older a borrower is, the larger the percentage of the home’s value that can be borrowed. The size of a reverse mortgage loan is determined by the borrower’s age, the current prime interest rate, and the subject home’s value. Go to www.reversemortgageguides.org and click on “mortgage calculator”. Begin to familiarize yourself with how a reverse mortgage loan size is calculated. The amount that may be borrowed is capped by the maximum FHA mortgage limit for the area, which varies from $81,548 to $160,950, depending on local housing costs.

When deciding whether a reverse mortgage is right for you or a loved one, you need to weigh all the benefits of a reverse mortgage and compare it to this one drawback: A reverse mortgage takes away from the net worth of the senior citizen from a real estate equity standpoint. In other words, reverse mortgages are a negative amortization loan. The homeowner’s equity is slowly being dissolved every month by the money the senior borrower decides to use against the home and the interest rate according to the terms of the loan they agree to. Though the reverse mortgage can immediately assist a senior citizen from a financial standpoint, it does deduct from the senior borrower’s net worth and the inheritance of the senior’s heirs/beneficiaries as equity is being continually reduced until the loan is paid off – either while the borrower is living or after the borrower passes on. Though a reverse mortgage is an outstanding option to create financial breathing room for a senior citizen, the parties involved in the decision making concerning a reverse mortgage need to evaluate the urgency of the senior citizen’s financial needs, before securing this type of financing.