Reverse Mortgage Guide

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Basic elements of a Reverse Mortgage

What is a Reverse Mortgage? Reverse mortgages are becoming increasingly popular financing options for older Americans.

Reverse mortgages can be difficult to understand for seniors. The FHA’s reverse mortgage program provides counselors to discuss eligibility requirements, financial implications and alternatives. Seniors considering a reverse mortgage should always talk with a qualified expert about whether these mortgages make sense given their unique financial situation.

In short, a reverse mortgage allows homeowners to convert parts of the home equity into tax-free payments that can be taken as a lump sum, in monthly installments or through a line of credit, all without having to sell their home or cede their title. They are called “reverse” mortgages because the flow of capital essentially runs in reverse – instead of paying on a monthly mortgage, homeowners receive payments from their lender.

But, in essence, reverse mortgages are relatively straightforward. Seniors who obtain a reverse mortgage continue on the same path of homeownership. They are required to pay property taxes and stay current on homeowner insurance. Failure to maintain these traditional responsibilities can result in a loan becoming due in full.

These mortgages are for senior citizens at least 62 or older who either own their home or have a low mortgage balance. The Federal Housing Administration (FHA) insures about 90 percent of all reverse mortgages in the United States through its Home Equity Conversion Mortgage (HECM) program.

Seniors who qualify for a reverse mortgage (eligibility will be covered in Section X) can choose to take their money in three ways – as a lump sum, through regular monthly payments or as a line of credit. The homeowner’s debt increases and equity decreases as the payments continue.

Reverse mortgages can provide significant financial breathing room for seniors who have spent decades building equity in their home. For most reverse mortgages, the income generated can be spent with no strings attached. Seniors can use their hard-earned equity to pay for medical expenses, to make home improvements, to supplement their Social Security and much more.

The amount of money a senior can obtain depends on a host of factors. Chief among them is the type of reverse mortgage program that best suits the applicant. Each program carries its own costs and prerequisites. In most cases, the FHA’s Home Equity Conversion Mortgage (HECM) program doles out the largest cash advances.

Reverse mortgages also come with a degree of certainty for seniors. Homeowners do not have to begin repaying a reverse mortgage until the homeowner sells the home, relocates or passes away. Seniors also cannot borrow more than what their home is worth, meaning older Americans cannot somehow lose their homes.

Generally, the final amount will also depend on the applicant’s age and estimated home value. Older applicants and more valuable homes typically translate to more available cash. The oldest homeowners 1

• A Home Equity Conversion Mortgage. The majority of reverse mortgages are this type of loan guaranteed by HUD and the Federal Housing Administration. This loan may include a line of credit that can grow larger, various payment options for receiving your money and a maximum limit that is different depending on your location.

living in the costliest homes often garner the most money. Closing costs, interest rates and other geographical concerns can also affect the final dollar amount. But one of the benefits of a reverse mortgage is that seniors can use the money to cover loan financing costs.

• The Homekeeper reverse mortgage through Fannie Mae includes a maximum lending limit as well but does not have growing credit limits. This reverse mortgage is guaranteed by Fannie Mae and often comes with lower closing costs than HUD reverse mortgages.

Another key aspect is that lenders typically mandate that a reverse mortgage be the sole debt against an applicant’s home. A senior with debt against the home usually pays off the debt before receiving a reverse mortgage or uses the reverse mortgage to cover the debt. This is where the lump sum payment becomes a popular option for many seniors.

• The Private Cash account is often used for homes worth more than $500,000. These types of reverse mortgages often have growing credit lines and flexible payment options but higher closing costs.

Upon the loan’s completion, the homeowner is required to repay the payments along with any interest. In the event of a homeowner’s passing, his or her estate or heirs will assume the responsibility of repayment. In many cases, the lending institution will be reticent to take the home, as most are more interested in simple repayment.

The federally backed Home Equity Conversion Mortgage (HECM) mortgage is the nation’s most popular and widely available reverse mortgage. Depending on geography, some governmental agencies also offer reverse mortgages, which are often issued only for specific purposes, like paying property taxes. In many cases, these public-sector loans are geared

Types of Reverse Mortgages There are three major types of reverse mortgages. Here is a snapshot of each:

Total Dollar Amount of HECM Loans FY 00 - FY 08 $30,000,000,000 $25,000,000,000 $20,000,000,000 $15,000,000,000 $10,000,000,000 $5,000,000,000 $0

2000

2001

2002

2003 2

2004

2005

2006

2007

2008

toward low- or moderate-income homeowners.

There are structure restrictions for many reverse mortgages, including those obtained through the HECM program. Single family homes are all eligible for reverse mortgages. Some federal programs accept 2-4 unit owner-occupied homes, along with some condominiums. Mobile homes have special requirements and are often excluded, as are vacation homes.

Private-sector loans from commercial lenders, mortgage companies and others are often more expensive but have no usage restrictions. Total costs for reverse mortgages can be difficult to pin down at the outset. Loan costs vary depending on the type of mortgage. In short, reverse mortgages will cost seniors more in the beginning, then become less expensive as the loan period extends.

Thousands of seniors meet these eligibility criteria. But reverse mortgages make better sense for some seniors more than others, depending on a host of factors.

Who Should Consider a Reverse Mortgage? To be eligible for a reverse mortgage, an applicant must be at least 62 years old, occupy the home as a principal residence and either own the home outright or have a small mortgage balance remaining. Homeowners seeking a reverse mortgage through the government’s HECM program must also utilize free loan counseling with an agency approved by the U.S. Department of Housing and Urban Development (HUD).

Itching to move?

The HECM program has no asset or income limits. There is also no limit on home value, which is determined by an appraisal.

Seniors who live in expensive homes, especially those with middling to low incomes, are prime candidates for reverse mortgages.

Those considering a reverse mortgage should think about a few key issues during their deliberation process, including:

Given the upfront costs, it makes little sense for homeowners to obtain a reverse mortgage if they’re looking to move within a couple years.

Expensive digs?

Common Income Uses Healthcare Costs

67%

Repay Existing Mortgages

55%

Reduce Burden on Children

50%

Home Repair & Improvement

50% 38%

Pay Property Taxes Daily Expenses

29% 14%

Travel, Something Special Gifts

3%

3

Passing on the property?

The line of credit option is the most popular among seniors. Recipients can use the bulk of the line of credit immediately to cover home repairs, repay debts or for a host of other reasons. The rest can be kept in reserve or used to create a monthly payment.

Seniors interested in passing on their homes to children might want to consider other options, as lending institutions often sell the home to repay a reverse mortgage.

How’s the market?

But for others, the monthly payment plant makes more sense from a budgetary standpoint. Seniors can also change their payment options for a $20 fee, allowing borrowers to convert monthly payments to lines of credit if necessary.

Some seniors may decide to wait on a reverse mortgage, hoping their advancing age and the passage of time will increase their home value and lead to a larger cash advance. But a rise in interest rates could nullify that bump. Many online resources offer reverse mortgage calculators that can help seniors better determine what their age and home value might mean in terms of their reverse mortgage.

Online resource ReverseMortgage.Org has an excellent breakdown of the pros and cons of each of the five payment options. Borrowers can reconsider their decision to obtain a reverse mortgage up to three days after closing. All cancellations must be in writing using a lenderprovided form and filed before midnight of the third business day after closing. Cancellations cannot come by phone or in person.

As with any major financial decision, seniors should take their time to thoroughly examine options in light of their own unique needs. Financial counselors are available at nonprofit groups and governmental agencies in communities across the country.

Payment Options

Reverse Mortgage Repayment

The federal HECM program gives reverse mortgage holders five ways to receive their cash advances. This is another area where seniors should conduct due diligence and talk with experts about what makes the most sense for them financially.

The way reverse mortgages are structured, seniors generally do not have to worry about owing more on a loan than their home is worth. Most lenders are limited to the home’s value when seeking repayment and cannot attempt to obtain it through a borrower’s heirs.

The five payment options are:

A borrower’s total debt will be the sum of all advances plus interest. Seniors or their estates keep any leftover money if the amount is less than their home is worth at the time of repayment.

1. Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. 2. Term - equal monthly payments for a fixed period of months selected.

Reverse mortgages become payable when a senior sells the home, moves permanently or passes away. But there are a handful of scenarios that can trigger loan repayment at any time, including failure to pay property taxes and home insurance or failing to maintain and repair the home.

3. Line of Credit - unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted. 4. Modified Tenure - combination of line of credit with monthly payments for as long as you remain in the home.

The loan could also be jeopardized if a borrower starts renting out part or all of the home, takes out new debt against the home or is subject to a zoning change. Other more drastic conditions can result in loan default on a reverse mortgage, including a dec-

5. Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower. 4

laration of bankruptcy, fraud or misrepresentation on the part of the borrower or if the home is condemned for health or safety reasons.

the FBI. Scammers have lured seniors with grandiose offers of investment opportunities and free homes, part of a ruse aimed at stealing equity from a property.

How to obtain a Reverse Mortgage Seniors should carefully evaluate reverse mortgage lenders and their programs before making a decision. Make sure to compile a list of questions and obtain concrete answers from prospective lenders. A lending institution that fails to answer your questions satisfactorily may not be a good fit.

The FBI and the U.S. Department of Housing and Urban Development offer the following advice: • Do not respond to unsolicited advertisements. • Be suspicious of anyone claiming that you can own a home with no down payment. • Do not sign anything that you do not fully understand. • Do not accept payment from individuals for a home you did not purchase. • Seek out your own reverse mortgage counselor.

The Internet offers a wealth of resources for seniors interested in learning more about reverse mortgages. Several reputable websites provide comprehensive search options for lenders nationwide. They are also multiple sites that offer current rates on reverse mortgages. Resources like online mortgage calculators can help give prospective borrowers more realistic ideas of how rates and equity will impact their final cash advances.

Seniors who believe they are victims of reverse mortgage fraud can file a complaint through the HUD website or with their local FBI field office.

Final Checklist

But seniors may also want to consider a lending institution’s reputation, history and other qualifiers. Borrowers may choose to avoid lenders and loan officers who fail to adequately answer questions or concerns or who do not work to maximize the loan amount. Seniors should expect exceptional and expert service.

Seniors preparing to obtain a reverse mortgage will have to gather an array of financial documents and papers before submitting a loan application. The experts at MainStreet.com have put together an excellent checklist of forms and paperwork most applicants will need. Here is a list of a few necessities:

The loan application process itself is relatively straightforward. Prospective borrowers need to remember that loan servicing fees will be due upon closing. At that point, most lending institutions will turn the loan over to another company for servicing needs. It is incumbent upon the borrower to determine who will be servicing the loan and to obtain all the necessary information about the chosen payment plan.

1. Income and expense records. Before you visit a reverse mortgage counselor, you'll need to have an idea of how much money you have coming in, how much you owe, and how much more you'll need. You'll need to verify your expenses including housing, utilities, food, transportation and health-care costs.

Rising Fraud on Reverse Mortgages

2. Existing debt information. If you have an existing traditional mortgage (or two), you'll need to provide documentation showing how much you still owe, since this amount will be paid off with the proceeds of your reverse mortgage and ultimately determine how much cash or credit will be available. If you have any other existing debts, such as a lien on your home, you'll need to disclose that and have documentation, as well.

The FBI recently issued a warning to seniors regarding an increase in reverse mortgage scams. These increasingly popular financing options have become a regular target for scammers, who use seminars, church bulletins and other methods to target senior citizens. Reverse mortgages have increased by 1,300 percent since 1999, according to 5

3. An estimate of your home's value. Next to your age, the value of your home is the most important factor determining how much you can get out of a reverse mortgage. Before counseling, you don't need to pay to have an official appraisal of your home, according to Sue Hunt of the Consumer Credit Counseling Service of Greater Atlanta.

you've received counseling, and it's required when you apply for a Federal Housing Administrationinsured reverse mortgage. Borrowers are not obligated to sign any binding agreements, and lenders charge any fees until the certificate of counseling is received by the lender. 9. Homeowners insurance. In order to get a reverse mortgage, you'll have to have homeowners insurance. You're essentially tapping the value of your home for cash, and lenders want to make sure your home retains its value.

She suggests calling a real estate agent who does business in your area for an estimate of your home's value. Or you can check Zillow.com. Later, when you actually submit your application to a lender, you'll have to get an official appraisal. This can be arranged by your lender, and it's required before any binding papers can be signed, says Johnnie Vineyard, a certified counselor at the Consumer Credit Counseling Services of Greater Greensborough in Greensborough, N.C.

10. If necessary, proof of an immediate hardship. If you have major medical expenses or another type of immediate hardship, or if your expenses and debt payments are more than your income, you may not have to pay a counseling fee, or you may be able to pay it out of the proceeds of your reverse mortgage, but you'll need to provide proof of your hardship.

4. Power of attorney. If you have power of attorney for someone else, you'll need to provide copies of documents verifying this, says Vineyard.

11. If necessary, partner's death certificate. "If the property was held jointly and one of the spouses has passed away, you'll need a death certificate which gets submitted with the reverse mortgage application," says DeMarkey. If you don't already have a certified copy of your spouse's death certificate, you can get one through the city or municipality where your spouse passed away.

5. Payment. Before you go into counseling, find out how much you'll have to pay for it and when you'll have to pay. You may have to pay at the time of your counseling session, or it may come out of your reverse mortgage proceeds. In some cases, such as a financial hardship, you may not have to pay a counseling fee at all. You should not have to pay any fees to a lender before you've received reverse mortgage counseling. 6. Proper identification. You'll have to provide a photo ID, such as a driver's license or passport, which will also prove that you're at least 62 years old. Joe DeMarkey, a regional director and reverse mortgage specialist for MetLife, says you'll also need a copy of your Social Security card to further verify your identity. 7. Proof of ownership. Additionally, you'll have to provide proof that you own your property and that it's your principle residence, using, for example, a property tax bill or deed to your home. 8. Certificate of HECM counseling. After your reverse mortgage counseling session, make sure you have a certificate. This is written proof that 6