Until very recently, if one spouse is younger than 62 years old, in order to qualify for a reverse mortgage, the younger spouse had to be removed from ownership. This created a situation where the death of the borrowing spouse could result in a forclosure where the surviving non-borrowing spouse was left without a home. The FHA has address the situation and formulated guidance that allows the non-borrowing spouse to remain in the home as long as the terms of the reverse mortgage are fulfilled. This includes the requirement to pay real estate taxes, hazard insurance, and HOA payments, as well as keeping the home in good condition. The loan is due when the surviving spouse dies, sells, or is in a nursing home for more than 9 months.
New applications for a borrower with an underage spouse will allow for both spouses to be included in the mortgage, but the proceeds of the reverse mortgage will be based on the age of the underage spouse at the time of application.
If none of the heirs wish to keep the home, when the home is sold, the heirs receive the net proceeds in accordance with your parents’ last wishes.
Not really, when all attendant costs are considered. The truth is that closing costs average only a little more than that of a regular FHA mortgage on the same property. If you compared the reverse mortgage to many conventional mortgages, the reverse mortgage could actually be lower in cost due to the fact that conventional mortgages can charge more than the origination fee allowed by the FHA on all reverse mortgages.
When the cost of a reverse mortgage is compared to the average cost of selling your home, when you consider the cost of then purchasing a new home, it’s not even comparable.
Additionally, if a reverse mortgage allows you to stay in your home with no monthly payments for even five years, instead of going into an assisted living facility or nursing home, it more than pays for itself. When all aspects of both reverse mortgages and other mortgages are considered, we feel they’re not even comparable when the emotional value of one’s home is added into the equation.
Since February of 2010, reverse mortgages are available to purchase a new home. A reverse mortgage purchase allows you to purchase a primary residence without a mortgage payment, and helps you keep more of the sales proceeds from the old house or a larger amount of savings to use for other purposes.
A reverse mortgage purchase allows you to purchase a home costing approximately twice as much as you would plan to invest in a cash purchase.
For example, let’s say a 75-year-old woman sells her home in Pennsylvania for a $100,000 profit and wants to buy a new home in Florida costing $150,000. To avoid a mortgage payment on the new house, she would need to pay $50,000 in cash. This means she would have to use the entire $100,000 from the sale of her first home, plus another $50,000 from her savings to complete the transaction. If she doesn’t have the $50,000, she couldn’t buy the new house, unless she qualifies for a new home mortgage, which might be difficult and which in any event would require making monthly mortgage payments again.
Alternatively, the woman could qualify for at least a $75,000 reverse mortgage, purchase the new home outright, or nearly so, using money from the reverse mortgage, plus the $75,000 of the profit on her Pennsylvania home. She would be in her new home with no monthly payments and approximately $25,000 in her savings account.
This type of reverse mortgage might be used, for instance, by older homeowners, who want to sell their old home and move closer to their children, to a warmer climate, or move into a home that provides greater accessibility or easier maintenance.
The home to be purchased, however, must qualify under the FHA guidelines, including approved condominium communities. In addition, unlike a HECM refinance, the buyer/borrower must not have a foreclosure or bankruptcy in the preceding three years, nor a short sale in the last two years. It should be noted that unlike a reverse mortgage refinance, there is no rescission period in a reverse mortgage purchase.
Relax – even after you close your reverse mortgage, you still have a chance to reconsider. Should you decide for any reason that you no longer want the loan, you have three days to cancel.
The only out of pocket costs for a reverse mortgage are the required counseling session and the appraisal.
Additionally, many of the same costs that someone pays to obtain a home purchase loan, or to refinance their existing mortgage, apply to reverse mortgages as well. You can expect to be charged an origination fee, up-front mortgage insurance premium (for the FHA Home Equity Conversion Mortgage or HECM), and certain other standard closing costs, which reduce the net amount of the available loan proceeds.
In most cases, these fees and costs are capped and may be financed as part of the reverse mortgage. Of course, if these costs are financed as part of the loan, the net amount of available loan proceeds for the borrower is reduced by the financed amount. Below is a more in-depth explanation of each type of fee.
The origination fee covers a lender’s operating expenses, ”including office overhead, marketing costs, etc. ”for processing the reverse mortgage and maintaining the records.
Under the HECM program, which accounts for almost all of the reverse mortgages made in the U.S., You may pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge a HECM origination fee up to $2,500 if your home is valued at less than $125,000. If your home is valued at more than $125,000, lenders can charge 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000. With proprietary loans, borrowers are charged an origination fee that may not exceed 2 percent of the value of the home. With either product, the entire amount of the origination fee may be financed as part of the mortgage.
Mortgage Insurance Premium
Under the HECM program, borrowers are charged a mortgage insurance premium (MIP), equal to either .5% or 2.5% of the maximum claim amount, or home value, whichever is less, plus an annual premium thereafter equal to 1.5 percent of the loan balance. The MIP guarantees that if the company managing your account commonly called the loan servicer goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid.
Whether you pay the .5% upfront MIP or the 2.5% MIP, depends on your mandatory obligations. If your mandatory obligations exceed 60% of the principle limit, i.e. the total loan amount authorized, you will be required to pay 2.5%. If your mandatory obligations are under the 60% threshold, the lower MIP of .5% will apply..
Fee An appraiser is responsible for assigning a current market value to your home. Appraisal fees generally range between $450-$500. In addition to placing a value on the home, an appraiser must also make sure there are no major structural defects, such as a bad foundation, leaky roof, or termite damage. Federal regulations mandate that your home be structurally sound, and comply with all home safety codes, in order for the reverse mortgage to be made. If the appraiser uncovers property defects, you must hire a contractor to complete the repairs. Once the repairs are completed, the same appraiser is paid for a second visit to make sure the repairs have been completed. The cost of the repairs may be financed in the loan and completed after the reverse mortgage is made. Appraisers generally charge $50-$75 dollars for the follow-up examination.
Other closing costs that are commonly charged to a reverse mortgage borrower, include:
- Flood certification fee. Determines whether the property is located on a federally designated flood plain. Cost: Generally under $20.
- Escrow, Settlement or Closing fee. Generally includes a title search and various other required closing services.
- Document preparation fee. Fee charged to prepare the final closing documents, including the mortgage note and other recordable items.
- Recording fee. Fee charged to record the mortgage lien with the County Recorder’s Office. Cost: $50-$100. Courier fee. Covers the cost of any overnight mailing of documents between the lender and the title company or loan investor.
- Title insurance. Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against any loss arising from disputes over ownership of a property. Varies by size of the loan, though in general, the larger the loan amount, the higher the cost of the title insurance.
- Pest Inspection. Determines whether the home is infested with any wood-destroying organisms, such as termites.
- Survey. Determines the official boundaries of the property. It’s typically ordered to make sure that any adjoining property has not inadvertently encroached on the reverse mortgage borrower’s property.
Service Fee Set-Aside
The service fee set-aside is an amount of money deducted from the available loan proceeds at closing to cover the projected costs of servicing your account.
Federal regulations allow the loan servicer (which may or may not be the same company as the originating lender) to charge a monthly fee that ranges between $30-$35. The amount of money set-aside is largely determined by the borrower’s age and life expectancy. Currently, this charge is not being assessed.
All of the closing costs, with the exception of the appraisal, can be paid from your loan proceeds. By financing these costs, however, the proceeds of the loan will be, of course, reduced.
Reverse mortgages may have fixed or adjustable rates. The adjustable rate loans are tied to a financial index, LIBOR and will likely change according to market conditions.
For example, if a HECM loan is paid to the borrower in a monthly fixed amount, the interest rate on the outstanding principle and interest is adjustable either annually or monthly. The initial interest rate is based on the LIBOR rate + the margin, with a lifetime cap of about 5% or 10% above the initial interest rate. The interest rates of Reverse Mortgages are based on the relatively stable LIBOR index.
Fixed rate reverse mortgages are fixed at the rate at the time of the loan’s closing. The interest rates offered vary from over 5.06% to 4.50%. The lower interest rates are secured by “buying down” the rate through origination fees paid to the lender.
Before getting a reverse mortgage, you will first have to meet with an independent FHA reverse mortgage counselor. The cost to you varies by the counselor you choose. The counseling session is usually held over the phone. Your counselor will answer any questions you have, inform you about other alternative options for your unique situation, and help you decide if you even need a reverse mortgage, and if so, which type would be the best fit for you and your needs.
You may also choose to contact the following organizations:
U.S. Department of Housing and Urban
Development (HUD): toll free (888) 466-3487.
Federal Trade Commission (FTC): write to obtain a free brochure, “Reverse Mortgages Fast Facts.”
Consumer Response Center, FTC
600 Pennsylvania Ave. N.W.
Washington, DC 20580
Or call, (202) FTC-HELP
Fannie Mae: Call (800) 732-6643 for a free guide, “Money from Home: A Consumers Guide to Reverse Mortgage Options.”
You have several options in the adjustable rate mortgages:
- Equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. This type of payment is a tenure loan. If the borrower chooses, they can receive equal monthly payments for a specific length of time, rather than an indefinite time as is established in the tenure loan. A loan for a specific number of monthly payment is called a term loan. In this loan, usually the borrower wants a higher monthly payment than they would receive in the tenure loan. The risk in a term loan is that if the borrower outlives the term payments, they stop receiving the monthly payment when their term expires.
- A Line of Credit – unscheduled payments or in installments, at times and in amounts of borrower’s choosing until the line of credit is exhausted. Depending on the terms of your loan, the unused line of credit available will increase about 4% compounded annually.
- A combination of line of credit with monthly payments for as long as the borrower remains in the home.
- A lump sum payment for the entire amount.
- A combination of monthly payments, credit line, and lump sum.
You should be aware that the lenders are assessed a penalty if they do not pay you within 5 days of your request. The entire proceeds of a fixed rate mortgage must be dispersed at closing.
The different loan terms available are divided between loans with adjustable interest rates and fixed interest rates. In each category there are loans offered with different interest rates and different closing cost amounts. The amount you can borrow varies among the different loans. Your choice depends on what is most important to you. Most people select the loan that realizes the most money available, while some prefer lower interest rates or lower closing costs. If you are satisfying a mortgage balance, you most likely will be loaned the most money in a fixed rate mortgage. In a fixed rate mortgage, all the proceeds must be dispersed at closing. If you have no mortgage, you may select an adjustable rate mortgage. Unlike a fixed rate mortgage, an adjustable rate mortgage will usually result in the most money realized by the borrower. An amount lower than the fixed rate amount will be available at closing, AND after one year, the remainder of the principle limit, i.e. the total amount of the loan, will be available to the borrower in a credit line. The unused funds in a credit line actually increases by a compounded interest rate that is currently around 6%.
The interest rate on an adjustable rate loan consists of the margin and the index. In addition, an ongoing Mortgage Insurance Premium of 1.25% is added to create the actual interest rate. Since the margin and the MIP never change, the only adjustable factor in the interest rate is the index. Reverse Mortgages utilize the LIBOR as the index. Fortunately, the LIBOR has proven to be slow moving and has been stable for quite some time.
The amount of money you can borrow with a HECM reverse mortgage depends on several factors, including your age, the type of reverse mortgage you select, the appraised value of your home, current interest rates, where you live, and in the latest FHA formulation, the amount of your mandatory obligations.. In general, the older you are, the more valuable your home, and the less you owe on it, the more money you will net. To get an idea of what you qualify for, we recommend you use the Calculator link on the left side of the home page, or you may contact us at any time. You should also be aware that there is often a difference between the initial interest rate of the loan and the anticipated interest rate. The anticipated interest rate is utilized by the lender to determine the amount you may borrow, while the initial interest rate is the rate at the time of closing.
Mandatory obligation are borrower obligations that must be paid at closing. Outstanding mortgage balances and closing costs are the common mandatory obligations. Other mandatory obligations include IRS liens and judgments that effect the title.
With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. While since April 27 of this year, a reverse mortgage requires you to prove sufficient income to provide you with enough money monthly to pay your obligations and still have sufficient money to live on. The reverse mortgage is also different in that you do not make payments except for taxes, insurance, and HOA, if this payment is required in your community. Also, unlike a home equity loan, the lender cannot “call” the loan as long as you are current on your taxes, insurance, and HOA. The amount you can borrow, depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow. You don’t make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes and other conventional payments like utilities, but with an FHA-insured HUD Reverse Mortgage, you cannot be foreclosed or forced to vacate your house because you “missed your mortgage payment.”
There is currently only one “jumbo” proprietary reverse mortgage product available. “Jumbo” reverse mortgages have traditionally benefited homeowners living in higher-priced homes valued above the FHA and Fannie Mae lending limits which is currently $625,000. This type of loan works well for limited situations. The percentage of loan amount to value is much lower than that of FHA reverse mortgages, and the interest rate is also higher.
In February 2010, the FHA announced that they will no longer “spot approve” properties that are condominiums (either condo units or townhomes/villas that are legally condominiums). Since then the only way a condominium can be approved for a reverse mortgage is if the entire condominium association is approved. There are few such approved communities, however a condominium community can be approved through an application process to the FHA. The application review not only focuses on legal documents, but also emphasizes the financial details of the community.
Eligible property types include single-family homes, 2-4 unit properties where you live in one of the units, and condominiums and townhouses that are FHA approved. A simple way to check a property’s eligibility is to look at the legal description on the tax records. If the property has a Lot and Block in the description, it is definitely eligible.
On April 27, 2015, the FHA activated their directive requiring “financial assessment” of reverse mortgage borrowers as a condition of their loan approval. It is a significant change in terms of requiring this kind of credit history evaluation or a detailed assessment of cash flow to qualify borrowers, and it will rule out some borrowers who were previously able to get a HECM loan. This change is designed to ensure applicants can responsibly meet the obligations of the HECM loan including paying their taxes and insurance, but also that they can responsibly age in place and meet the essential expenses of living. When a reverse mortgage loan is secured, the borrower does not have mortgage payments, but is still responsible for paying the yearly real estate taxes, HOA or condominium association charges, and homeowner’s insurance. If the home owner fails to make these payments, they are actually in default of their reverse mortgage. The lender then may choose to foreclose on the mortgage and the home owner could possibly lose their home. The purpose of the financial assessment is to determine if the borrower should be capable of making the tax, HOA and insurance payments and still have money for other expenses. The underwriters will take into account all income and other available assets and will determine what debts have to be paid such as car loans, bank loans, monthly HOA or Condo association payments, etc. But even if the borrower’s income is deemed insufficient to maintain their responsibilities under the mortgage terms as well as their living expenses, there may be a “withholding” of the loan proceeds to be retained by the lender for future tax and insurance obligations.
To be eligible for a HUD reverse mortgage, HUD’s Federal Housing Administration (FHA) requires that the borrower is a homeowner, the youngest spouse must be 62 years of age or older; own your home outright, or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse loan; and must live in the home as your primary residence. You are further required to receive consumer information from HUD-approved counseling sources prior to obtaining the loan. The proprietary reverse mortgage loans generally have identical qualifications and also include counseling requirements for your protection. You can contact the Housing Counseling Clearinghouse on 1-800-569-4287 to obtain the name and telephone number of a HUD-approved counseling agency and a list of FHA approved lenders within your area. If you prefer, we can provide several approved counselors for you to consider. The cost ranges from 0 to $125 for the required counseling.