In general terms, a Reverse Mortgage is a FHA federally insured home loan that allows seniors age 62 or greater to convert a prortion of their equity into cash. Thus their program name, an acronym, "HECM",Home Equity Conversion Mortgage. You may have had a "HELOC" in the past, name based on another acronym, standing for Home Equity Line of Credit. So let us use that as a point of reference to compare to and build on. The first difference is when you had an outstanding balance on a HELOC you had to pay interest payments as a minium each month in addition to the P&I payments on your first mortgage. With a HECM (Reverse Mortgage) when you had an outstanding balance you do not have any payments to make. Nor would you have any payments to make on your first mortgage because the very first use of the loan proceeds from this converison process is to payoff your current first mortgage.
How Do They Work?
As their name suggest the "Reverse" Mortgage is a reversal of payments back to the borrower as compared to the relatively new name "Forward" Mortgage which involves the traditional collection of payments from the borrower. These payments reversing or converting back to the borrower always initiate with a lump sum to payoff any current liens on the property, such as a current 1st or 2nd Mortgage, possibly a lump sum for home repairs, and even monthly payments to the borrower to help with monthly expenses, or a special reserve fund (called a "Line of Credit") that grows at interest each year until you ask for some of it to be sent to you. Even though they call it a "Line of Credit" there will be no payment to make on it, but portion you draw will stop growing on your behalf.
What Are the Borrower Responsibilties?
The Responsibilities of a Borrower who has a Reverse Mortgage are not really that different then the rules in
any NOTE and DOT for any mortgage or any kind. These include:
Protect the collateral - By Maintaining the home in good condition.
Avoid tax Liens against the property - By paying your property taxes.
Protect the lender and yourself from loss - By paying your Homeowners Insurance Premiums.
You would think this would seem easy but for some reason it is not. Since Reverse Mortgages do not have mortgage payment which normally collect funds to pay taxes and insurance premiums, it only takes a "Senior Moment" a couple times times a year and these do not get paid.
When these rules, are followed, the borrower does not have to repay the loan while they live in their home.
When Is the Loan Due?
The loan is due when one of these maturity events occurs:
The Home was sold.
The home is abandoned.
The home is vacated.
The last suriving borrower has died.
FIXED VS. LIBOR ARM
Fixed Rate HECM Libor ARM HECM
Rate never changes Rate adjusts monthly
Lump Sum Only Multiple payout options
Closed End Open Ended / Allowing Line of Credit
Repairs Prior To Closing
Any repairs sited in the appraisal report considered critical or are safety isssue must be done prior to closing.
Examples of these would include but not be limited to:
No Heat in home.
Plumbing that does not work.
Electricity in house does not work.
Health and Safety Concerns.
Having a Stove.
Repairs Set-Aside / Completed After Closing
Must be done within 6 months time after closing.
Minium Set-Aside is generally $2,000.00 plus cost of appraiser's re-inspection.
A buffer or contigency reserve is required so we use the simple formula of multplying the contractors estimate by or X 1.5%.
Should we be using an appraiser's estimate then in such case we multiply it by or X 2.
Cannot exceed 15% of MCA.
Repair Bids must be itemized and done by a qualified professional and must include the contractor's:
Primary Residences only.
Borrower still retains ownership of their home.
Borrowers do NOT need to own their home "free and clear" in order to qualifiy for a Reverse Mortgage.
No Pre-payment penalty.
Social Security and Medicare generally not affected.
Non-Recourse Loan Feature means FHA guarantees that the borrower will not owe more thatn the home is worth at the time of sale.
(Lesser of Mortgage balance, or 95% of market value, includes special options for the heirs).
Payout option of the Reverse Mortgage Proceeds for the Fixed Rate HELOC: Lump Sum at close, only.
Payout options for Libor ARM: Any combination of these: Initial Draw from 0-100%, Tenure (lifetime payments), Term, and or Line of Credit.
FHA HECM programs options include: Fixed Interest rate HECM's and Libor ARM HECM's with multiple variations and configurations.
HECM Counseling session is required for All Reverse Mortgage borrowers which takes about an hour and can be done on the phone or in person.
Mortgage Professional will include in your disclosures a fully-compliant list of local and national agencies for YOU to select to get certificate.
A Reverse Mortgage is a Non-Recourse Loan.
FHA Insured Reverse Mortgages do not have a Pre-Payment Penalty.
Funds for repairs to the house can be side-aside to be completed after closing which are not critical to safety issues, other need to be done upfront.
TOP REVERSE MORTGAGE MYTHS
Only the poor, low-income or desperate seniors get Reverse Mortgages.
Broker/Lenders pressure seniors and take advantage of them.
Once a homeowner takes out a Reverse Mortgage the lender will own their home.
The borrowers chidren will be responsible to repay the loan.
Senior Homeowners with low credit score can not qualify for and FHA Insured Reverse Mortgage.
Not Tax or Legal Advice. Always consult Lawyer and Tax Professions. Content of website are the sole opinions of Robert Fulton & does not necessarily reflect those of Fulton Financial Consultants, Inc.'s Investor/Lenders. If the borrower does not meet loan obligations such as taxes and insurance, then the reverse mortgage will have to be repaid." The Terms, benefits and features shared as accurately as possible on best efforts basis and subject to change without notice. "This material is not from HUD or FHA and has not been approved by HUD or any government agency." Please discuss any decision making specifics with Robert Fulton 360-222-3236.