Reverse Mortgage 101
What is a Reverse Mortgage?
I think the best way I can explain it is to tell you how it differs from what we all grew up learning about mortgage finance and that is when you buy a home you make a monthly payment, and the principal balance continues to go down and we gain equity over time. Right, that’s what we all know and have become accustomed to and why a reverse mortgage seems so foreign to many people. It’s also why there is so much mystery about it, it’s not normal so we are naturally skeptical. When in reality it’s just the opposite of what we are accustomed to and probably why so many reject it when they first heard about it.
A reverse mortgage is just that, it goes in the opposite direction as a regular mortgage in that principal increases each month instead of decreasing. Interest is added each monthand the loan balance grows for the life of the borrower. The reverse mortgage allows a homeowner with substantial equity in their home to borrow that equity using the home as security for the loan. No payment will ever be due on the loan while the borrower and spouse are alive. Once they die or move out the loan becomes due.
There are requirements for borrowers for a HECM;
1. Be 62 years of age or older.
2. Own the property as your primary residence.
3. Have enough equity in your home to qualify.
4. Your credit report will be obtained, to make sure you pay your debts on time, but
there is no minimum score requirement.
5. You cannot be delinquent on any federal debt.
6. Have the ability to continue to pay the property taxes, insurance, and association
due if applicable.
7. You must complete an HUD approved consumer information session with a HECM
1. Single family residents or a 2–4-unit home if the borrower occupies one unit.
2. Condominium projects that are HUD approved.
3. Manufactured home that meets FHA requirement.
There are several options with a HECM Reverse Mortgage, it is important to understand how each will work to better know how it can benefit your situation. When you choose an adjustable interest rate mortgage, you have five different options.
- Tenure is paid in equal monthly payments as long as at least one borrower is alive and continues to occupy the home as their primary residence.
- Term is equal monthly payments for a fixed period of months selected.
- Line of Credit is unscheduled payments or installments whenever you choose until the line of credit is exhausted. You can also see increases in your unused credit line as it gains interest over time.
- Modified Tenure this is a combination line of credit and scheduled monthly payments for as long as you remain in the home.
- Modified Term this is a combination line of credit and scheduled monthly payments for a determined period selected by the borrower.
When your rate is fixed the only option is a Single Disbursement Lump Sum payment.
Let’s talk about the cost of a HECM Reverse Mortgage and how the loan is determined. Let’s remember there are costs to all mortgage loans, a reverse mortgage loan is no different. If you are refinancing an existing loan into a HECM Reverse Mortgage you can finance the fees in the loan like any other refinance loan. This means you don’t have to pay out of pocket expenses to refinance, you will have a couple upfront costs like the appraisal and the credit report that will need to be paid at the time it’s requested. If you are purchasing a home using a reverse mortgage you will have to pay the closing costs at the time of closing. We will go over purchasing with a reverse mortgage in a later chapter. With any mortgage loan including the HECM you will have several fees.
1. Origination fees, this is a lender fee. The lender can charge the greater of $2500 or 2% of the first $200,000 of your home’s value plus 1% the amount over $200,000. The
origination fee is capped at $6000.
2. Third party fees, like title and escrow, credit report, appraisal, surveys, inspections, recording fees.
3. Mortgage Insurance Premium (MIP) everyone with an FHA loan either forward or reverse has to pay a mortgage insurance premium. On a HECM Reverse Mortgage it will
guarantee you get your expected loan advances. You can choose to refinance this fee into your loan.
4. The servicing fee is for the lender or there agents that provide servicing for the life of the loan. This includes sending you statements and disbursing loan proceeds and
monitoring to make sure you are paying your property taxes and insurance.
There are some restrictions on these servicing fees. If you have an annually adjusting rate or have a fixed rate the lender may charge $30. If you have a monthly adjustable rate the lender can charge no more the $35. Lenders may choose to add the servicing fee to the interest rate. After the close of escrow and you start your journey with your reverse mortgage it is important to note the ongoing costs that include interest, mortgage insurance and servicing fees as they are charged to your account each month. It’s also important to note these costs are compound meaning you are charged interest and fees on the interest and fees that were added previously to the loan balance.
Let’s talk about the spouse, we all want to take care of our loved one when we pass and it’s especially important to know the facts about what happens to your spouse and how the reverse mortgage will be effected. This could be a deciding factor in getting a reverse mortgage, it is important to understand what can happen and what is expected. If you have a spouse that is also on the reverse mortgage as a co-borrower, nothing happens, they too can stay in the home until they die or move out, the same requirements, paying taxes and insurance are the same. Any funds not yet disbursed will continue. For a non-borrowing spouse there are special deferment provisions but only if certain conditions are met.
- The non-borrowing spouse was property disclosed to the lender at the time of origination as the named non-borrowing spouse.
- The non-borrowing spouse must have been legally married at the time of loan closing.
- The surviving spouse must have been residing and is currently residing in the property secured by the HECM as their primary residence.
- The lender has received annual recertification of the borrower’s and nonborrowing spouse’s marital status and primary residence.
- The spouse must have marketable title to the property or a legal right to remain in the home for life.
Another note is that just like before the spouse is responsible for the upkeep and maintenance of the home to FHA standard over the life of the loan. If you live with a partner or someone who is not your spouse, consider making them a co-borrower if they want to remain in the home after you are gone. If this person is not a co-borrower, they will have to move out when you move out or die. If you designate them as an heir, they can either pay the reverse mortgage off or 95% of appraised value with cash or a new loan. Discussing all the ins and outs of a reverse mortgage is essential for the family you leave behind.
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