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Reverse Mortgages 101: RVM Basics and Key Concepts.

What is a Reverse Mortgage?


In general terms, a Reverse Mortgage is a FHA federally insured home loan that allows seniors age 62 or greater to convert a portion of their equity into what I will call a more liquid state, such as cash, income for just used to free up their budget by having no P&I mortgage payment. 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 minimum 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 (prior) first mortgage because the very first use of the loan proceeds from this conversion process is to payoff your current first mortgage. 

Key Concepts

Primary Residences only.
Borrower still retains ownership of their home.
Borrowers do NOT need to own their home "free and clear" in order to qualify 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 than 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 Prepayment 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.

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 the portion you draw will stop growing on your behalf. 

What Are the Borrower Responsibilities?


The Responsibilities of a Borrower who has a Reverse Mortgage are not really that different then the rules to comply with in any NOTE and DOT for any mortgage or any kind, which you may have now.  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.
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You would think this would seem easy understand and follow 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 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.  It is this issue which has required me to have to display the disclaimer on this subject on the bottom of every page on my website. 

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 surviving borrower has died.
           The borrower has not paid the property tax or
           homeowners insurance.

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 issue must be done prior to closing.
Examples of these which may be allow may include but not be limited to:
.......................................................
Roof Repairs.
Mold Issues.
Structural integrity.
No Heat in home.
Plumbing that does not work.
Sewer Backups.
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.
Minimum Set-Aside is generally $2,000.00 plus cost of appraiser's re-inspection.
A buffer or contingency reserve is required so we use the simple formula of multiplying 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:
Name:
Address:
Phone number:
License number:

What Determines how much cash and/or income you can have from your Reverse Mortgage?

The things which determine how much cash and/or income you can have from your Reverse Mortgage are: 
 
Age.

Interest rate.

Program Selected.

Value of Property (amount of equity).

In some cases the Zip Code you live in.

FYI: For most of my clients the goal was just to just refinance the current mortgage to a RVM to get rid of the P&I payments. Oh, this is a good time to tell you at the bottom of this long page is a Glossary of Terms you in this industry. In this case "P&I payment" for an example means principal and interest payment. I feel for proper learning I should use the proper terms and industry acronyms and provide reference to their meaning.

ACRONYM

A Coded Rendition Of Names Yielding Meaning which for this industry are at the bottom of the page
These are the ways you can access money with your Reverse Mortgage

There are three ways the money can be taken or a combination.

Lump Sum Cash at Closing.

Monthly Income.

Credit Line allowing the money to sit on standby and grow waiting for you to request it.

Notice: The three benefit(s) and options listed above, on how to receive them are available only after your current first mortgage (if you have one) is paid off by the new reverse mortgage proceeds. That occurs first and foremost!

As I indicated above, some seniors only have enough equity to just enjoy having their "current" 1st mortgage paid off, with the proceeds of the new Reverse Mortgage, but they still get to enjoy having no "house payments!". The new reverse mortgage will not have any mortgage payments as long as you live in your home and meet the loan obligation including paying property taxes and homeowners insurance.
Reverse Mortgages can help extend years of financial independence
You have come to the right place to learn if that will apply to you. On a case by case basis I will help you explore that and see if one of these programs is suitable for you. Reverse Mortgages are very complicated, and have been evolving for some time now, but there are still a lot of misperceptions about them. Reverse Mortgages are no longer just for the house poor, and if you are you, you may no longer even qualify for the program. But for those who are struggling financially to keep their financial independence, we can often miraculously transform their lives. For those who are financially independent we can help them protect, maintain and extend their period of being so.  It is my objective to have this website help you see the big picture about Reverse Mortgages.

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 children will be responsible to repay the loan.
Senior Homeowners with low credit score can not qualify for and FHA Insured Reverse Mortgage.
This Site is Not Tax or Legal Advice. Always consult Legal Counsel and Your Tax Advisor. Content of website are the sole opinions of Robert Fulton & does not necessarily reflect those of Fulton Financial Consultants, Inc.'s, Investment Companies, Insurance companies or other product vendors. The content on this site, and ideas shared are published as accurately as possible, but still on a "best efforts basis" and subject to change without notice. Therefore please discuss any decision making specifics with Robert Fulton at 425-822-5600 beforehand.