Commonly asked questions by borrowers and financial professionals
For the purposes of these questions, since 95% or more of all reverse mortgages are HUD regulated, FHA insured Home Equity Conversion Mortgages (HECM), the below references to reverse are assumed HECM loans. Proprietary Jumbo Reverse Mortgages may or may not have similar provisions
A reverse is a government insured loan for borrowers who are 62 and over where a portion of their home’s equity value may be accessed with repayment at the borrower’s option. It remains the borrowers option as to repayment assuming the home remains the primary residence, the property is properly maintained and all taxes, insurance and other property charges are kept current.
Simply, this is one of the most misunderstood terms in reverse mortgages and is at the top of the FAQs to address it head-on.
A HECM reverse is a mortgage, just like any other. A lender will place a lien on a borrower’s home which, when due, simply requires that the mortgage balance be paid back. The deed/title remains in the name of the borrowers throughout the loan term, subject only to remaining in good standing.
Another reason for the bad reputation shared by older Americans and financial professionals, is that the mortgage is a loan of last resort. Can it be? Yes, however if a borrower has waited until they are desperate, many times they cannot qualify for the mortgage.
The larger problem is that for many years, marketing efforts were focused almost solely on the cash-strapped borrower. Who would want to get a mortgage when it’s for people who want to hock their house for cash?
The problem is the FHA/HUD HECM is nothing like this and, it is now considered the fourth leg of the retirement stool... joining income, investments and insurances as a primary retirement plan to help insure a portfolio outlasts the retirees
The basic qualifications for a reverse mortgage are:
- Youngest borrower must be 62 and over. A spouse less than 62 is considered a non-borrowing spouse and can be considered eligible or ineligible.
- The home must be the primary residence.
- The borrower must have significant equity in home
- The property type must meet FHA requirements
- Single family residence
- Two to four-unit properties, as long as one is the primary residence
- Condos, either in a HUD approved project or able to get single-unit approval (Spot approval)
- Planned Unit Developments
- Modular Homes
- Manufactured homes if meet FHA requirements
The amount of money that may be borrowed is entirely based on the following 3 items:
- The youngest borrower’s or eligible non-borrowing spouse's age. (The older the age of the youngest borrower the more that can be borrowed)
- The lower of the appraised value or purchase price
- The expected interest rate. (Typically based on 10-year Constant Maturity Treasury plus a margin. The lower the rate the more that can be borrowed)
Anything a borrower wants. There are no restrictions on how the funds can be used.
There are two types of FHA reverse mortgages
- Fixed rate – Until 2013, this was the most popular reverse mortgage option. Generally speaking, fixed rate reverse mortgages limit the amount of money that can be accessed to 60% of the total funds available and it must be taken at closing.
- Adjustable rate – about 90% or more of all reverse mortgages are now ARM loans. This is the only reverse that provides for a line of credit and does not limit borrowers to the 60% threshold.
Yes, a reverse for purchase is becoming more and more popular among those borrowers looking to “rightsize” their next home, whether it be to move closer to family, to sunnier climes or both.
If considering an H4P loan, there are certain restrictions that one should consider prior to putting the home under contract. Make sure a realtor and a qualified reverse mortgage consultant is consulted throughout the process.
The benefits of a reverse are nearly endless, and for the most part only limited by the familiarity of the loan by financial professionals. Generally, they can be used for:
- Immediate need, such as homeowners who are “house rich and cash poor”. This can be used for medical expenses or if they need cash flow to pay expenses.
- For lifestyle enhancement, such as to help with cash flow, to access the line of credit to pay for home upgrades for aging in place, travel or even as a tenure payment to provide cash while annuities are maturing, delay social security and other reasons
- For financial planning, by allowing for drawing of funds from home equity when needed to help retirement funds last longer. The primary advantage however is to utilize the line of credit as an emergency fund that grows over time.
A line of credit (LOC) is available on ANY adjustable rate HECM reverse and is available to any reverse that is less than 100% drawn. If at closing, the loan balance is less than the total amount available to be drawn, that remaining amount is held in a line of credit which can be accessed. Note: First year draws are limited to 60% of the total equity funds available.
There are two ways a LOC’s borrowing capacity grows with a reverse mortgage:
- First is a built-in growth rate identical to the reverse mortgage interest rate plus the annual mortgage insurance premium (.5%) charged by FHA (compounding rate) that is being charged on the outstanding balance on the loan.
For example, the loan rate on an adjustable rate loan consist of the margin (lender profit), say 2.75%, plus the CMT growth rate (.11% at 12/3/2020) at closing for a total loan rate of 2.86%. Every adjustable rate reverse contains a .5% annual mortgage insurance premium charged by the FHA. The combined total is 3.36% compounding rate charged on the outstanding balance on the loan as well as applied to the line of credit that is available to be drawn.
- Second is by making payments on the outstanding loan balance. Payments made to reduce the loan balance increase the amount available to draw on the LOC by 100% of the payment made.
Therefore, if there is cash available for the borrower to pay down the reverse mortgage, there is a double benefit… the payment reduces the loan balance that is being charged the compounding rate and increases the line of credit available which is growing by that same rate.
Reverse mortgage costs are similar to a “forward” mortgage except in the following:
- Initial Mortgage Insurance Premium mandated by the FHA. This premium equals 2% of the appraised value (or purchase price for a HECM for purchase, whichever is lower) and is what provides the items that make the FHA HECM the safest mortgage loan available anywhere.
- Loan Origination Fee is the amount charged by many lenders to process, underwrite and close your loan. Borrowers should expect to pay 2% of the first $200,000 in home value, then 1% of the amount over $200,000 to a maximum of $6,000. The minimum that may be charged by the lender is $2,500.
These costs, along with typical costs required to close the loan are usually rolled into the original loan outstanding.
Reverse mortgages are insured by the FHA and, just like all FHA loans, require a mortgage insurance premium that is typically rolled into the initial loan balance. These fees are part of the Mutual Mortgage Insurance Fund which is used by the FHA to pay insurance claims which may occur when the home sells for less than the home’s outstanding loan balance.
With forward mortgages, the insurance protects the lender from defaults. With a reverse mortgage it works similarly, however, more importantly to homeowners and heirs, this is how the FHA can provide a loan that is completely non-recourse (i.e., without any personal liability whatsoever). In other words, the homeowner will never owe more than the home is worth at the time the home is sold.
Knowing that the government is responsible for all outstanding debt above the value of the home makes the loan one of the safest loans available. No other mortgages provide this benefit.
Finally, this fee is also what allows the FHA to offer interest rates competitive with the best rates available in the forward mortgage market today.
Reverse mortgages are not for everyone. For instance:
- If there is no tangible benefit to the borrower. If the borrower still cannot afford to live in the home after the loan is closed, there is no benefit to the loan. This is why regulations were added requiring a financial test to determine whether the borrower will have enough money left over to pay property taxes and other property charges, can still maintain the property and can pay utilities, buy groceries, etc.
- If the homeowner does not plan to stay in the home long-term, a reverse mortgage does not justify itself. Like all loans, if the cost to secure the loan has no real payback benefit, the loan should not be considered. How long is a decent rule of thumb for remaining in the home? Three to five years is a good benchmark; however, every circumstance is personal to the homeowner.
- If the homeowner does not have a good understanding of the loan itself, they should not be considering a reverse mortgage. Nor should they close on a reverse if they do not have the competency to understand the product.
It is for this reason regulations now require independent counseling by a HUD approved counselor. In fact, the loan originator is not allowed to suggest a counselor… merely to provide the list and suggest the borrower shop around for the counselor they feel most comfortable using.
Further, every reverse mortgage professional should firmly recommend that heirs and other interested personnel be aboard the counseling call to make sure all have a firm understanding of the loan product and there are no other better alternatives to the reverse mortgage.
- If the homeowner wishes to leave a legacy to their heirs, the reverse mortgage may not be the best option. Many times, however, heirs far prefer that their parents have ready access to funds from the equity in their homes rather than rely on the children for emergency cash needs.
However, providing a legacy to children is a powerful influencer when considering a reverse mortgage.
HECM mortgages typically take longer than a forward mortgage. Why? There is a little more up front effort that must be put into the loan by the borrower and the reverse mortgage specialist before an official application can be provided.
What kind? A formal proposal must be provided, and the borrower and the originator should go through all the pertinent parts to help the borrower understand the loan itself. Then, the borrower must attend counseling (about 1 hour by phone) to make sure they understand the loan. This can easily take up to two weeks or more.
However, once the application is created, reviewed, and signed the process is pretty much the same as a forward mortgage.
Reverse mortgages are very similar to any other refinance, in that there is a 3 day right of rescission provided the borrower to give an opportunity to cancel the transaction. This does not come into play in a HECM for purchase transaction. These are table funded to close the purchase of the new home.
Reverse mortgages must be the only loan on a residence. Any existing loans must be paid off prior to or at closing of the reverse.
For a reverse mortgage to be a financially prudent option, regulations were adopted in 2015 to require a financial assessment. This was instituted because frequently homeowners were allowed to borrow against the equity in their home without proving the remaining monthly cash in-flows would be sufficient to cover the cost of monthly bills and living in the home.
This financial assessment means credit history, property charges and monthly cashflow remaining must meet certain thresholds to qualify.
Regulatory requirements are not unlike typical mortgage terms:
- Paying property taxes
- Paying homeowner’s and flood (if required) insurance
- Paying HOA and other property charges which, if not paid, could cause a lien to be filed against the home.
- Keeping the home in good repair.
Credit scores, while indicative of potentially significant qualifying issues, in and of themselves they are not the final determinant in qualifying.
Of greater importance is the payment history for the previous 12 months of mortgage payments and 24 months for all others. Even under these circumstances however there are exceptions to the rule.
What if the financial assessment is failed?
If there are blemishes on credit or there is insufficient remaining cash available to the borrower once the loan is closed, there remain avenues to close a reverse mortgage. Generally, the more equity that a borrower has in a home the more likely the loan can be closed.
Consult with your reverse mortgage specialist to discuss specific circumstances, specifically Life Expectancy Set-Aside (known as a LESA) as well as utilization of investments or the reverse mortgage itself to assist (known as asset dissipations).
Why is independent counseling required?
Yes. A reverse mortgage is a mortgage like any other, for the most part, with the primary differences being no monthly payments required and others providing far more security for the borrower. However, just like forward mortgages, if the borrower does not pay property charges (taxes, homeowners insurance, HOA dues, etc.) or fail to maintain the home in good working order causing a diminution of value to the mortgage holder, you may be subject to foreclosure.
What are the primary reasons for foreclosures on reverse mortgages? Failure to pay property taxes, thereby causing a 3rd party foreclosure as well as fraudulently claiming that the home is still the primary residence of the last borrower when it is not the case.
What are the disbursement options?
There are 5 different payout options in a reverse mortgage.
- Initial Draw
The initial draw is the amount of money available to the borrower at closing, which is subject to the 3 day right of rescission for all reverse mortgages except the reverse for purchase.
- Line of Credit
Easily the most popular disbursement option and hands down far better than a HELOC. It is an open line of credit that allows access to cash within 3-5 business days of request. It is replenishable, meaning 100% of the payments made to pay down the loan balance are then available to be redrawn if wanted. The Line of Credit does not accrue interest, as it is simply funds available for draw. And, it grows every year (technically 1/12th each month) by the current interest rate plus the mortgage insurance premium charged on the outstanding balance of the loan. This is extremely powerful.
- Tenure Payment
If desired, borrowers can elect to have a specific amount drawn every month, and it is provided for as long as the homeowner lives in the home. In order to receive this lifetime benefit, this amount is determined by the terms of the loan.
- Term payment
In the event a tenure payment is providing insufficient funds to the borrower monthly, there is an option to draw funds on a term payout. Term payouts may be as large as the borrower wishes; however, they only last until the line of credit is drawn to zero. This does not cause the loan to come due, it merely means there are no more funds available for draw unless some repayments have been made to reestablish a line of credit balance.
- Modified Tenure or Term
A modified tenure or term option simply means pairing one of those payout options with a line of credit. Under these options the borrower can increase cashflow yet still have a line of credit for use however the borrower may desire.What are the primary reasons for foreclosures on reverse mortgages? Failure to pay property taxes, thereby causing a 3rd party foreclosure as well as fraudulently claiming that the home is still the primary residence of the last borrower when it is not the case.
What are the disbursement options?
Like any mortgage, the loan can be repaid simply by repaying the loan to a zero balance. However, if the borrower wishes to retain the line of credit balance available for draw, simply pay the balance down to $150 or so to ensure the lender does not close the loan.
Repayments are applied in two different ways.
- From and accounting perspective, the repayments are first applied to mortgage insurance, then to interest, then to servicing fees and, finally, to principal. Note: If a borrower is paying servicing fees, they likely have gone to the wrong reverse lender. Ask us why.
- From a line of credit perspective, 100% of the repayments go towards the funds available for draw.
First and foremost, questions on government benefits should be asked of a CPA or a federal benefits expert.
The short answer is “yes”, however this is for means tested benefits, such as Supplemental Security and Medicaid among other government benefits, if the borrower carries a balance in their bank accounts that is deemed above the government’s permissible limits
Basic Social Security is not means tested and therefore reverse mortgages do not affect collection of the benefits. Medicare is based on a modified adjusted gross income and, as draws on home equity are not considered income, reverse mortgages do not impact Medicare either.
Regarding Medicare premium surcharges, these can be reduced or eliminated with a reverse mortgage to give tax-free cash flow to borrowers. The loan proceeds are tax-free and, therefore, are not included in the calculation of Medicare IRMAA surcharges.
An ineligible non-borrowing spouse:
- Does not occupy the home
- Does not have their age included in the calculations of the borrower’s principal limit
- Is not protected by the non-borrowing spouse due and payable deferral provisions
An eligible non-borrowing spouse:
- Is below the age of 62,
- Occupies the home
- Has their age included in the calculations of the borrower’s principal limit
- Is protected by the non-borrowing spouse due and payable deferral provisions
In order to qualify for the deferral period, an eligible non-borrowing spouse may be able to remain in the home if:
- They were the borrower’s spouse at closing of the loan
- Has remained the borrower’s spouse while the reverse was in place
- Was disclosed to the lender at origination
- Is specifically named as a non-borrowing in the loan documents
- Continues to occupy the home as their principal residence.
The rules for eligible non-borrowing spouses, specifically at the end of the life of the borrowing spouse are complex, do not allow further draws on the line of credit and requires specific actions be undertaken to continue to live in the home. Please contact us should you have further questions regarding this important topic.
Reverse mortgages are due and payable (maturity events) under the following circumstances:
- The property ceases being occupied as a principal residence of at least one borrower. It may be from the last borrower being deceased, or by simply abandonment.
- The last borrower moves into an assisted living facility for a period of 12 months consecutively.
- A borrower does not fulfill the terms of the loan, such as failure to maintain the home if good working order and failure to pay property charges that are subject to lien (such as property taxes, homeowner’s insurance, HOA dues, etc.)
First and foremost, the lender does not gain title to the home or in any way become an owner or any of the equity in the home.
Therefore, after the death of the last borrower, there are multiple options available to the heirs.
If the heirs want to keep the home:
- If the outstanding balance on the loan is greater than the value of the home, the heirs can purchase the home for 95% of the current home value.
- Simply payoff the outstanding loan balance via refinance or cash.
If the heirs do not want to keep the home:
- If the outstanding balance on the loan is greater than the economic value of the home, they are free to sign a deed in lieu of foreclosure and simply walk away.
- They can sell the home, repay the mortgage and keep all remaining equity.
NOTE: This is a perfect example of the value of the non-recourse feature made possible by the mortgage insurance premiums paid on the loan. The borrower and their heirs can never be held personally liable for any shortfalls on the loan, as the FHA insures the lender against loss.