© 2016 St. John Bannon CPA
All Rights Reserved
Published by Bannon & Associates
Reverse Mortgages for Retirement
Go Forward in Life with a Reverse Mortgage
A Guide for Consumers
This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The author is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency.
Aging-in-place is a challenge for older adults. Many seniors want to achieve a range of financial goals, including funding necessary home modifications, buying a new home, or creating a legacy through charitable giving. Some seek to fund long-term care, or create an annuity from their home equity. And many just wish to have a mortgage they can decide not to make a payment on in a particular month, or have a line of credit a bank will not withdraw from them should their income or home value decline.
I believe passionately that the “new” FHA reverse mortgages can provide a sound solution to many of these challenges. New regulations have changed the product significantly and brought it into the mainstream. If used properly, reverse mortgages are a viable way for borrowers 62 years and older to wisely leverage their home equity in retirement. The reverse mortgage permits a borrower, if they wish, not to make monthly mortgage payments, and to obtain an expanding line of credit until the line is needed. I provide a roadmap to influence the sophisticated consumer on their choices.
My goal is to create as much transparency as possible in this industry, help people to find and deal with someone they trust, and focus on a low-key, confidential educational process. I wrote “Reverse Mortgages for Retirement: (Go Forward in Life with a Reverse Mortgage)” to make it easier for many potential borrowers and their families to understand this complex product. And to help them feel confident in their choices and interaction with financial professionals who are assisting them.
Most importantly, this is debt. Potential borrowers should not base their decision on how much of a loan they can obtain on their home. Don’t simply rely on TV personalities to determine your financial decisions. Research. Talk with friends or family. Take your time. Reverse mortgages cannot always solve severe financial distress. Sometimes it is simply the best decision to sell your home and rent or downsize. It’s better to deal with the facts and circumstances of where you are in life, than it is to unwittingly surrender to a sales process. If you wish to further explore the complexities and benefits of a reverse mortgage, and get the answers to a lot more questions, you can read my book “The Reverse Mortgage Solution: (How to Turn Your Home Equity into Your Most Important Retirement Asset)”, which should be available at the same locations and sites where you found this book.
I am a Certified Public Accountant, and a Chartered Accountant. I helped found and was Chairman of a large Federal Savings Bank. I also helped create, as the Chief Operating Officer, a global consumer finance company that grew to over 6,500 employees in countries as diverse as Poland, India, and China. I was the Chief Operating Officer of Senior Lending Network, a pioneer in the reverse mortgage industry More recently, I contributed as the Chief Financial Officer, to the creation of Reverse Mortgage Funding LLC, one of the major reverse mortgage originators in the nation, together with Reverse Mortgage Investment Trust Inc., a REIT that exclusively invests in and manages reverse mortgages securities. I have left the executive suite behind me and now spend my time helping customers understand this terrific and amazing product.
St. John Bannon
New York, New York
How can a reverse mortgage help me to retire?
Aside from cost and related financial benefits, what are the critical questions I need to ask myself before I take a HECM?
What is a Reverse Mortgage?
What is a Home Equity Conversion Mortgage (HECM)?
What are the basic requirements to qualify for a HECM?
Do I repay a HECM?
Are proceeds from a HECM tax-free?
Are there any restrictions on use of HECM proceeds?
How can I get the proceeds?
What if I have an existing mortgage?
What if one of the co-borrowers passes away or must move out for health reasons?
What are the costs of a HECM?
Can I buy a home with a HECM?
When is a HECM “Due and Payable”?
Do HECMs impact Government Assistance Programs?
How do borrowers use HECMs?
What protections does a HECM come with?
How does a HECM work?
What types of homes are eligible for the HECM program?
How do I Qualify for a HECM?
What does Counseling involve?
What’s the Financial Assessment?
How do I show I have enough Capacity to meet my obligations?
How do I demonstrate my Willingness to meet my obligations?
How much can I borrow? Are there limits?
What can I use the proceeds of a HECM for?
What is a brief outline of the Origination and Servicing process?
Special HECM Terms
Improved Practices and Suitability
Why all the “Bad Press” for Reverse Mortgages?
When should I not take a HECM?
Should I be careful about other products being cross-sold to me?
Should I involve my children in this process?
Strategies and Usage
What are the best HECM financial strategies?
Should I sell my home or take out a HECM?
What alternatives should I consider before taking a reverse mortgage to access my home equity?
Should I use a HECM to purchase an annuity?
Are there any strategies which can limit the high usage Upfront MIP charge?
Other ways to use a HECM.
Do I need to do this quickly?
Product Features and Costs
What HECM products are available?
What type of disbursement is best?
What pricing options are available?
What are the components of pricing a lender uses and how should a borrower evaluate?
How does one chose between a Fixed and a Variable Pricing option?
How can a borrower compare the pricing options with so many variables?
What’s best? A Traditional HECM with possible Lender Credits to help with closing costs or a Lower Cost HECM where Lender Credits are larger, but a monthly service fee is charged?
How does one decide which Margin or Interest Rate Cap to take on a Variable Rate Loan?
Are HECMs more expensive than regular mortgages or HELOCs?
What can I expect to pay in closing costs on a HECM?
What’s the difference between a HECM and a home equity loan?
How are my partial prepayments applied to my loan balance?
Can I deduct the interest charges for income tax purposes?
Can I deduct the MIP for income tax purposes?
Borrower Protections and Obligations
What’s a Good Faith Estimate (GFE)?
What is a HUD-1 Settlement Statement disclosure?
What is a Truth-in-Lending (TIL) disclosure?
What is a TALC disclosure?
What is TRID and why does it not apply to HECMs?
Can anyone reduce the amount of Principal Limit I have in the future?
Can I ever be liable for more than the value of my home?
If there is any equity in the home above what is owed on the HECM or other liens, is it mine or my heirs?
If I take out a HECM, does the lender or bank own my home?
After I get the HECM, what are my financial obligations?
Do I still need to pay my property taxes and home insurance with a HECM?
Post Loan Closing Servicing, Defaults, and Remedies
How soon after loan closing do I have to complete repairs?
What happens if the repairs are not complete on the date specified on the Repair Rider?
Are any repair inspections required?
How will the lender pay any funds more than the cost of the repairs?
What constitutes a HECM Default?
What happens if one of us dies?
What happens if the last remaining borrower dies?
What if one of the co-borrowers has to leave the home and go to a nursing home?
What happens if I default on my property taxes or insurance?
If, after 24 months, I can’t repay delinquent taxes/insurance what happens?
What if my estate or I want to payoff my HECM Loan?
What if my estate/heirs want to buy the home?
What if my estate doesn’t want the house?
What if other people, not on property title or children, are living in the home when the last borrower dies?
Advice for Families of Seniors
Should my parents get a HECM?
What happens to our inheritance?
Suppose there is equity in the home. How does the estate or children get it?
Say there is no equity in the home, but one or all of us children want to keep the home?
If when my parents move or die and the HECM balance is more than the value of the home, am I then responsible?
What help might a HECM provide for a “sandwiched parent”?
Is it true that my spouse, if he/she is not on title he/she must payoff the mortgage to be able to own the home?
Should I take my spouse off the title to obtain a larger loan?
Can a Non-Borrowing Spouse (I.e. a spouse not on the property’s title) be a party to the HECM transaction?
What is the FHA rule on Non-Borrowing Spouse Deferral of Due and Payable?
Can a Non-Borrowing Spouse obtain a deferral for any other reason other than the death of the borrower?
What is the impact of a HECM on estate inheritance?
My home is in a living trust; do I qualify for a HECM?
Does the growth feature on the credit line mean that I am earning interest?
Once the loan closes, how soon can I access my line of credit?
Can I add anyone to the title for the home after obtaining a HECM?
If I am permanently disabled, can I qualify?
What happens if I file for Bankruptcy while I have a HECM?
Can I participate in a property tax deferral program?
May I participate in a tax exemption program?
Do I have to carry Flood Insurance in addition to my Hazard Insurance?
Can you identify other resources that can help in understanding reverse mortgages?
Department of Housing and Urban Development (HUD)
Due and Payable
Expected Interest Rate
Federal Housing Administration (FHA)
Maximum Claim Amount (Max Claim)
Mortgage Insurance Premiums (MIP)
Net Principal Limit
Principal Limit Factor
Residual Income (or VA Residual Income)
Right of Rescission
Total Annual Loan Cost – TALC
Unpaid Principal Balance (UPB)
Appendix 1 – Model HECM Financial Assessment Worksheet (FHA Guide)
Appendix 2 – Life Expectancy Table (FHA Guide)
Appendix 3 – VA Residual Income
It is estimated that around four out of every five seniors own their own home. And about one-third of them own that home outright. Many seniors have saved very little or nothing (it’s estimated that 40% have no savings) for retirement, and have only the safety net of Social Security to help in old age. The rest of our seniors have amounts set aside estimated at between $10,000 and $40,000. Obviously, the well to do have much larger amounts put aside, but even this group of people, on average, have far more in their home equity than in savings portfolios.
According to the Reverse Mortgage Market Index (RMMI) published by the National Reverse Mortgage Lenders Association (NRMLA), the amount of housing equity held by U.S. senior homeowners now stands at $5.9 trillion, reflecting a $135.2 billion gain during the second quarter of 2016 alone. In a world where pressures are on reducing government safety net programs, and seniors do not have adequate savings to get them through anticipated longer lives, it’s hard to avoid the equity tied up in a home in planning for retirement.
In retirement, you generally have your home equity, your safety net benefits, and possibly some savings to help you plan on how to live comfortably through your old age. Complicating the planning process are other considerations such as legacy goals (how much you would like to leave your heirs or leave to favorite charities?), dependency issues (such as spouses, children who still at home, disabled children who must be looked after, late in life divorces), emergencies and unexpected expenses (fix the home, medical, nursing home, sick spouse) and maybe elective life goals (such as take that one trip with all the grandkids). But overwhelming consideration is now the ability to age-in-place. This older generation has no desire to head to a nursing home any earlier than absolutely necessary. A reverse mortgage is one way of liquefying your home equity to help you meet that age-in-place goal.
More recently news organizations and social media are looking again at reverse mortgages. Partly this is because many deficiencies of the original Dept. of Housing and Urban Development’s (HUD) and its affiliated unit, the Federal Housing Authority ‘s (FHA), reverse mortgage program have been revised and more protections put in place for borrowers, spouses, and estates. This product referred to as a Home Equity Conversion Mortgage (HECM) represents about 95% of all reverse mortgages originated in the U.S. Also, many of the new Federal and state rules around origination, servicing, and foreclosure of reverse mortgages have afforded borrowers greater protection in the process.
A HECM specifically provides the option of making no mortgage payments for the life of the loan, does not require any deficits on loan payoff to be made up by borrowers or their heirs (if loan is larger than the collateral is worth), leaves the title of the home in the names of the borrowers, lets the owners of the home continue to retain any upside value if the home appreciates beyond the amounts owed, actually grows on a monthly basis the amount of unused credit available at the combined mortgage insurance and mortgage interest rates and the government guarantees the availability of funds even if the lender goes bust. All-in-all, it’s a comprehensive value offering. But it can cost you, depending on your borrowing pattern. Though the government uses a concept that the minimum age of the borrowers on title needs to be 62, they do provide for non-borrowing spouses, not on home title aged from 18 years onward. But they will calculate the available money based on the estimated life of the younger borrower or non-borrowing spouse.
Later in the book we attempt to answer the question “Why all the bad press about reverse mortgages?”, but it is useful to understand at this stage what problems were created in the past and incorporate that knowledge in having a basic understanding of the product and in making the right decision whether to use it or not.
Some previous borrowers were “desperate” and used the product as a “last resort”. The HECM program did not have minimum income or cash flow standards. (The government did a poor job on this element). So, borrowers who could never reasonably be able to afford their existing home’s taxes, insurance and maintenance got loans on which they very quickly defaulted and ended up in foreclosure. Others obtained the loan too early, and were required to take all the money out of the loan immediately (blame lenders and the investment community for this one), then spent the extra cash on discretionary items and ran out of money too soon to maintain the home over their retirement period. Borrowers were convinced to take their younger spouses off title to obtain more available credit under the program and rely on future home value increases to help a non-titled spouse refinance the HECM that came due when their titled spouse passed away. When the home didn’t go up in value or the accrued interest on the loan balance became too large to payoff, non-borrowing spouses found themselves facing foreclosure. (Poor sales practices were generally blamed. But it wasn’t always dishonest or overly optimistic salespeople. Many retirees made poor decisions and later either couldn’t remember their past choices or forgot them, despite the evidence of disclosure and acknowledgments. Why do you think calls into reverse mortgage call centers are rigorously recorded?). Additionally, heirs became upset when they discovered that all the equity in their family home was gone and nothing was left to pass on to them. This last complaint may seem selfish, but some heirs, especially disabled children, were dispossessed and forced out of the dwellings. This is not unique to reverse mortgages, but such interested parties should clearly be part of the process.
There is also fraud perpetrated on the elderly by unethical salespeople, contractors, and even dishonest family members. But these frauds are more likely due to the customer segment, than the actual product. Unlike most financial products, borrowers have to be counseled by an independent agencies approved by HUD in order to obtain a HECM. Not many financial products have mandated counseling.
You don’t need to make mortgage payments, but that doesn’t mean you cannot be foreclosed. You can be foreclosed if you don’t pay the taxes, insurance, and mandatory repairs or maintenance on your home. Also, foreclosure is sometimes the way an estate, or a spouse not on title or a spouse protected under the new rules surrenders their interest in the home (usually because there is no equity). In some states, foreclosure takes a long time and permits the occupants to stay in the home longer than if they just handed over the keys to the lender. Some estates attempt to see what they can sell the home for and if amount is not sufficient, then they walk away. Foreclosure may be necessary to establish the lender’s title to the property. Foreclosure is likely in about 50% of HECMs that are due to be repaid, but this process does not necessary represent an adversarial circumstance. Many times it just a way to transfer title or after an estate tried and failed to sell a property.
The HECM is not always inexpensive. But it does come with benefits. You get to decide if you wish to make any mortgage payments at all during the time the loan is outstanding. You always own the home. Not the lender or government. You will never owe more than what the home is worth at the time the loan is required to be paid back. Your heirs can owe your home for the lesser of 95% (and sometimes you might get this reduced based on new proposed legislation) of its then current value or what is owed on the HECM. Unless you don’t pay the taxes and insurance and required mandatory repairs, you can’t be thrown out. And even if your lender goes bust, the government guarantees your credit availability and payouts.
The cost of a HECM aside from the FHA Mortgage Insurance Premium (MIP) (which we shall discuss separately below) is comparable to other traditional forward mortgages. The interest cost is not as cheap as an amortizing monthly re-payment forward mortgage. The interest and the monthly mortgage insurance normally charged on an FHA loan is higher because you can choose not to make any payment at all. The big cost is the Upfront MIP which is risk weighted to cost a great deal more if you use more than 60% of the available credit in the first 12 months after loan closing. The Upfront MIP is charged as a percent on the home’s value (maximum value used is $636,150). If you use over 60% in 12 months of the available credit, you get charged 2.5% of that value. If not, you get charged .50%. You can see this is done to encourage borrowers to limit usage and spread out the HECM over time. Regrettably, if you have to pay off a large existing mortgage or purchase a home with a HECM, it will cost you a lot in insurance premium.
However, each borrower can decide, depending on planned usage, if the no payment option, the growth in unused credit, the no deficit on payoff, the government guarantee on funds availability and home occupancy is worth the cost in their circumstances.
Almost all these issues, from better protection of non-borrowing spouses, to pricing that encourages slow usage on the available funds, to making certain borrowers can really afford the home they take a HECM out on, to changes in compensation and making the FHA insurance fund more self-sustaining have contributed to the renewed interest in HECMs.
Most likely the best solution in liquefying your home equity is to simply sell it for cash. Of course, there may be some tax consequences and depending on the current level of your existing debt, the amount of equity left over may not be sufficient to buy a new home and leave enough to live on. Affording your home requires you pay (for the rest of your life, hopefully, but for sure while you live in the home) the necessary property charges. And you can expect that those property charges will increase over time and the home will need repair and maintenance.
If you have other substantial savings and income, then this question is possibly not that relevant. You can use a HECM to help with charitable giving, passing inheritance before you die, or just to supplement an already decent income stream. Or even to build up a large backup reserve for future health care costs or as a hedge against falling real estate prices.
But if all you have is social security benefits, then the question is paramount. If in the end, all you are doing is pushing a rapidly approaching inevitable exit from your home further out in time, be aware that time and risk are connected. The greater the time, the greater the risk. If you will have to leave the home in the near term, there is no point to incur large costs and not solve the problem.
This is critical. Regardless your need or motivation, using debt to raise money requires you have some self-control over the use of those funds. Too many people discuss the financial math of retirement but never discuss the associated discipline around how and when you use the money. Taking all the equity out in one lump sum, spending it on the kids or on cruises, and then claiming the sales practices were unfair is not an unfamiliar story in the reverse mortgage world. You can’t take a HECM and walk away from the responsibility to use the product wisely. You should spread this resource over as long as period as possible. It’s an amazing product and used carefully and thoughtfully can solve a host of retirement issues. But only if you use it the right way.
Some borrowers in the past have taken out reverse mortgages without discussing the transaction with their non-borrowing spouses, or children still living in the home, or with other family members who may have some expectations of an inheritance. Non-borrowing spouses now are afforded much greater protections and disclosures and their signatures are required on a few documents (including Counseling) to evidence their understanding. But children, especially disabled children, need to be considered as would other friends or relatives living with in the home. Unlike a non-borrowing spouse, they are not protected under the law. Of course, you are under no legal obligation to solicit their input. But due to the nature of the transaction, it does impact a family in general and it seems pointless to solve one problem yet create more issues later on.
If you are good with all three answers, then it’s worth your while to explore the possibility of a HECM.
A reverse mortgage is a type of mortgage that works in “reverse” of your regular forward type mortgage. With a regular mortgage, you pay it down with monthly or periodic payments of principal and interest. Eventually, you may pay it all off. With a reverse mortgage, the borrowers on title must be aged 62 or more, the mortgage may increase in size as you add interest and mortgage insurance that you decide not to pay down (you can opt to pay it down), and its balance outstanding may sometimes grow in excess of the value of your home, which must be your primary residence. It’s a regular mortgage. You own the home and any equity in the home.
With a Home Equity Conversion Mortgage (or HECM), which is a reverse mortgage insured and administered by the Federal government through the Department of Housing and Urban Development (HUD) and its sister entity the Federal Housing Authority (FHA), you may live in the home as long as you want. You can never be asked to leave your home provided you pay the property taxes, maintenance, and insurance. You or your estate can never be held liable should the home not be worth enough money to pay off the mortgage fully. Neither the lender or the government own your home. It’s always your home. Always in your name. If there is any equity in the home, it’s yours or your heirs.
The HECM is a government program established to help people “age in place” as they get older. HECMs allow seniors to access the equity they have built up in their homes but defer repayment (or make whatever repayments they wish) of any drawdowns, interest, and mortgage insurance on the HECM until they die, sell, or move out of the home. At any time, if you permanently leave the home, and there is no equity in the property, you can simply hand it back to the lender and walk away from any deficits.
The reverse mortgage is different in that it is not intuitively what you think of as a typical mortgage. HECMs have many features similar to a home equity line of credit (a HELOC). Some look like a regular mortgage, with an optional payment plan. Some look like an annuity. HECMs come, though, with far more protections. The HECM has a variety of disbursement options to suit every need.
Also since this is an FHA HECM, the government will guarantee that regardless of who your lender is or their financial condition, you will always have access to the funds available to you under the loan agreement.
A few other things to remember…
JUMBO Reverse Mortgage products are not government insured, have no Federal limits and their concept is dependent on those program’s separate rules.
The home must be the borrower’s primary residence.
Everyone on the title of the home must be at least 62 years of age. At least one of the borrowers must live permanently in the home.
The borrower must pass a financial assessment that mostly makes sure the household has the minimum required Residual Income to live on after all property charges are paid. The borrowers may not have to make any repayments on the HECM loan, but if they don’t pay the taxes and insurance, they may (and probably will) lose the house or be forced to sell and repay the HECM loan. The house must also meet certain FHA minimum standards for safety, soundness, and security. And certain repairs can be mandated after a HECM loan closes.
Because of the HECM loan complexities, FHA requires that before an application is processed, all borrowers are counseled by an approved counselor. Depending on the state, counseling is available over the phone or face-to-face. Costs vary from free to around $200. Certain agencies want payment at the time of counseling. Others can bill the cost to the closing of the HECM loan. After the counseling is completed, a HECM Counseling Certificate is issued. It is good for six months. When applying for a HECM, the Certificate is given to the lender as proof the required counseling is completed.
How much money you get depends on (a) the home appraisal (with some limits), (b) the age of the youngest borrower and © a qualifying or Expected Interest Rate of interest that establishes how much of the appraised value of the home must be set aside to reserve for the accruing interest and MIP on the HECM. The calculation assumes the borrower drew all the money immediately and made no payments at all during the life of the HECM loan.
The higher the appraisal, or the older you are, or the lower the Expected Interest Rate, then the larger the amount of money available to you. The opposite is also true. To give you some idea, at age 62 you can get approximately 52% of the property value (property value is limited by the maximum Federal limit of $636,150). At 72 years’ old, you might get 59% of the property value. Why the increase? Because, at 72 years old versus 62 years old, we put aside a smaller interest and MIP reserve as the youngest borrower’s expected life is ten years shorter. Consequently, more money is available to the older borrower to use, as less money is set aside for the lifetime interest reserve.
The FHA insurance protects the borrower and his/her heirs from owing more on the HECM than the home is worth. The insurance also protects and guarantees the availability to the borrower of any unused funds in the HECM. (Unlike a HELOC, which a bank can cancel for various reasons such as declining home values or loss of borrower income). Should the lender fail and not be around to disburse unused funds, the FHA guarantees it will advance the monies to the borrower.
The FHA insurance also guarantees that the borrower can remain in their home even if the balance of the HECM starts to exceed the value of the home, and provided the borrower pay the required taxes and insurance on the home.
The borrowers own their home. The lender nor the FHA own the borrower’s home. The HECM loan is like any other mortgage in that it is a lien on your property. Property ownership is not transferred. The HECM may be repaid at any time, either partially or in full. There are no prepayment penalties.
While the loan does not need to be repaid with monthly payments as in a traditional forward mortgage loan, you can make payments. And get the tax deduction for interest and MIP if you qualify (always check with an independent tax consultant). But if you don’t make repayments, the interest and MIP and any additional draw you make on the line of credit (or monthly payments you take out) are added to the loan balance and the balance outstanding grows each year as a result. After a period of years, it’s possible that balance on the loan could exceed the then current value of the home.
You may walk away from the home at any time and hand the keys to the lender even if there is no equity in the home above the balance owed on the HECM. If for instance, you decided to go live with your children and leave the house, you can hand the home to the lender if no equity remaining in the home.
If you don’t immediately use all the proceeds available in the HECM, each year that you do not use those funds, their availability grows by the rate of interest on the HECM mortgage note plus the MIP rate. So if you had an available line of credit of $100,000 and you didn’t use the line, each year it would grow annually at a HECM note rate plus the annual MIP rate of 1.25%.
There are no restrictions on how you use a HECM. You can refinance an existing traditional mortgage, pay off a HELOC, purchase a new home, refinance an existing HECM, take the available cash out monthly or leave it in place as a line of credit or obtain an annuity type monthly payment, or spend available proceeds on basically anything you want. The loan proceeds are usually tax free (but I always recommend you discuss with your tax advisor).
The upfront costs to get a HECM loan are in fact quite similar to traditional mortgages and depending on how much money you need in the first 12 months can be quite small. Most of the upfront costs are familiar items, such as appraisal, or settlement service charges or title insurance. The one significant cost is FHA Upfront MIP. If you use more than 60% of the available line of credit in the first 12 months, you will incur a 2.5% Upfront MIP based on the value of your home (subject to the Federal limit). Otherwise, any usage below this (down to zero usage) in first 12 months will incur a 0.5% Upfront MIP based on the home value (subject to the Federal limit). Traditional forward FHA mortgages bear a 1.75% Upfront MIP, generally on about 95% of the homes appraised or sales value value (subject to the Federal limit). Therefore, depending on usage, your FHA Upfront MIP could be substantially lower in a HECM compared to a traditional loan.
On monies borrowed and not paid back, ongoing HECM note interest and annual MIP is charged on outstanding balances. The annual MIP is a constant 1.25% and may not be canceled. One can expect that the HECM note rate will be 0.5%-0.75% higher than traditional mortgages due to the negative amortization risk aspect of the loan (regular monthly payments are not assured to investors, and the cash flow is deferred until loan is called due). The MIP on a HECM at 1.25% annual rate is higher than an FHA traditional forward mortgage which usually has annual rates closer to 0.80%-1.05%.
The very first thing the application process requires is a look at your credit report to get an initial viewpoint of the borrower’s willingness to repay their debts. If this credit report indicates significant issues, the HECM may not proceed. However, a good loan officer can help find practical solutions.
The application process requires valuing the home with an appraisal. The appraiser must be FHA certified and is hired independent of the sales person and borrower involved. The appraiser will also conduct a safety inspection. The value will is determined by comparing three recent sales of similar properties close by within the last six months, or preferably the last 90 days. Assuming the appraisal is sufficient, and there are no significant issues that can’t be solved on the credit report, we give the package to the underwriter. The underwriter will review the appraisal and determine if the borrower’s willingness and capacity to repay contractual debts and pay the property charges on the home meets the necessary minimum Residual Income requirements.
After a HECM loan refinance is closed, a borrower has three business days to rescind. If the borrower rescinds, the transaction is canceled, and the borrower is not charged any penalty or costs. If the closing goes forward, the legal documents are recorded with the city or town clerk. Any funds requested for the closing are disbursed to the borrower. In the case of a HECM used to purchase a home, there is no rescission or 3-day delay in paying funds to the home seller.
Tax and/or Insurance Delinquency: If during a HECM loan period, the borrower does not pay the required taxes or insurance, the lender will advance funds on behalf of the borrower to pay these amounts. Depending on the size of these advances, borrowers will have 24 months to repay the lender (FHA requires the lender to do their very best to help borrower find ways to meet the monthly/annual tax and insurance burden). But should it become evident that the borrower is unable to meet the tax and insurance requirements, and amounts are delinquent, the lender may ask FHA to grant permission to call the loan Due and Payable and start a process of foreclosure.
The loan comes Due and Payable (i.e. the HECM must be repaid) if the home is (a) sold, (b) the borrower changes principal residence, © the last borrower in the home dies, (d) the last borrower leaves the home longer than a 12-month period (say, for a nursing facility or to live with relatives), (d) mandated repairs are not made, or (e) taxes and insurance advances paid by the lender on behalf of the borrower remain unpaid despite a concerted effort to help the borrower meet this obligation.
In the event of the death of the last borrower in the home, the estate has an initial period of six months, with the possibility of two 90-day extensions to sell the house, repay the HECM and take any remaining equity. The estate or the heirs can decide if they wish to retain the house and may own it for the lesser of (a) 95% of the current market value, or (b) the amount due on the HECM loan. There are no payments to the bank required of the heirs during the time they are trying to sell. However, the estate or heirs are responsible for maintenance, paying the property taxes and keeping the home adequately insured. During this period, interest and MIP will continue to accrue on the HECM, until payoff.
The HECM loan is a non-recourse loan. Only the current value of the home can be made available to repay the mortgage. Even if the loan is greater than the value of the home, it doesn’t matter. Neither the borrower or the estate will owe any deficit that might arise when the home is sold to payoff the HECM. Even better, the estate or heirs can buy the home at 95% of its current market value (as stated above) and is still not liable for any deficit on the payoff of HECM loan.
When the outstanding unpaid balance of the HECM reaches a certain level, the lender will transfer the loan back to FHA for its face value. From that moment on, FHA will be your lender and servicer. This transfer makes no difference to the borrower. By this time all money is disbursed on the HECM and most borrowers are quite elderly. This “assignment” of the HECM back to FHA is a very critical element of why lenders make the product available, and can it sell to investors. If someone discovered the secret to seriously extending life, investors would not see the HECM paid off for a very long time. Nor would anyone know how to price such a product correctly as the life of the HECM would be unclear. This buyback by FHA provides assurances there is a payoff on the loan for lender or investor purposes.
The requirements are set by HUD, and include:
Yes! The HECM must be repaid. Borrowers generally repay a HECM when they or their heirs sell the home. Regular monthly or periodic payments are not required on a HECM, but they can be made at the borrower’s option. A HECM can be paid off at any time, without penalty and can be refinanced with another reverse mortgage or traditional forward mortgage.
Yes! But always check with your tax advisor. You never know when tax conventions change.
No! After you pay off any obligations that must be satisfied as a condition to obtaining the HECM, such as an existing mortgage or delinquent Federal debt or closing costs, you may use the HECM any way you wish.
You can have the available proceeds paid to you as a lump sum, a line of credit, a monthly term payment, a tenure payment similar to an annuity, or a combination of a line of credit and a term or tenure payout.
Provided that the HECM approved is sufficiently large enough to pay off an existing mortgage and possibly other obligations attached to the home, and any delinquent Federal debt, having an existing mortgage is not an issue. HECMs are an excellent way to refinance an existing mortgage and obtain the ability to defer monthly payments and add to your retained monthly cash flow.
The other borrower continues to own and live in the home — and enjoy all the benefits of their HECM. All borrowers on title and on the HECM mortgage enjoy the same protections and privileges. Assuming all other terms of the HECM are met (like paying property tax and insurance) it is only upon the leaving of the home of the last borrower that the HECM is called Due and Payable.
HECMs are generally more expensive than traditional forward mortgages or Home Equity Loans/HELOCs. Why? Because the HECM affords you the option to never make another mortgage payment as long as you live in the house, protects you from any cross over risk (i.e. the home is worth less than the amounts owing or could be owed if all money drawn, on the HECM), leaves you and your heirs any remaining equity in the home, and guarantees the availability of your HECM funds regardless the financial condition of your lender. With the exception of a fee for government-required reverse mortgage counseling, most of the costs associated with a reverse mortgage can be financed with your loan, so there’s no immediate out-of-pocket cost. The costs are added to the loan amount (“principal”) and paid along with the accrued interest when the loan becomes due.
Depending on the loan option you choose, initial costs may include an origination fee, closing costs, and an Upfront Mortgage Insurance Premium (MIP) (required for HECM loans). There are available what are called “Lower-Cost HECM” pricing options, which eliminates nearly all origination and closing costs in exchange for a monthly service fee and/or a higher mortgage rate than normal.
Ongoing annual costs charged on the HECM outstanding balance include interest, mortgage insurance premiums (MIP), and if you selected a Lower Cost HECM, you may have a monthly service fee of between $15-$30.
The largest single cost can be the Upfront MIP. If you borrow more than 60% of the credit that is available to you in the first 12 months after loan closing, that fee will be 2.5% of the lower of the appraised value, sales price or Federal limit of $636,150. If you borrow less than this 60%, that fee will be 0.50%. This MIP is paid to HUD, not the lender. It is the cost of the HECM features and HUD’s guarantees. HUD believes its risks are greater the faster the credit is used up, and accordingly offers a much reduced Upfront MIP to borrowers who use the HECM much less in the first 12 months. Other closing costs are typical of a traditional mortgage loan.
Yes! You can. You may read that the HECM market is not a true market and somewhat closed. And there is some truth to that. The HECM is uniquely tailored to the behavior and circumstance of each borrower and frankly would be more accurately priced on an individual basis. After all, a borrower who plans to buy a home or pay off an existing mortgage has a different lender profitability than a borrower who merely wishes to build up a backup line for future healthcare costs. Regardless, you can get comparable pricing.
The section Product Features and Costs in this book will show you how to request a “par” price (I.e. a price for each product you wish to consider that ignores all the “bells and whistles” of Origination Fees, Lender Credits or Lower Cost options and will permit a “like to like” compare. Then you can safely evaluate the cheapest lenders’ separate options. If a lender won’t give you a “par” price, do not deal with them.
Second, and while this may be hard to do, invest in Counseling before you commit to a lender. Usually, the process is you input data or give it to a salesperson, who sees what you qualify for, and then they provide you a list of independent counselors to go talk with. If you like what you hear, you generally go back to the lender. But consider the position of the counselor. They know that the lender will recognize they discouraged a borrower from getting the loan. If this happens a lot, it impacts that lender suggesting that counselor. This is not supposed to happen. Counselors are independent. But borrowers only end up at counseling after they have met the lender. Counselors are listed in the initial disclosure and there is usually a long list of them for the borrower to select from. But let’s be clear, everyone has favorites and counselors really only get this referral from the lender’s list provided. This counseling process is vastly improved over the years and the overwhelming majority of independent counselors are highly professional and caring. So this risk of being improperly counseled is very low. But, I assume you are reading this book because you’re smart and curious. So be aware of this connection.
Yes! You can. A HECM for Purchase is a product specially created for buying a new or existing home. It’s a terrific way for buyers age 62 and older to find their dream “age-in-place” home, and either upgrade using their current home’s equity or keep some of that equity for the future by using the HECM. The no mortgage payment option of the HECM makes a HECM for Purchase a very attractive alternative to a traditional forward mortgage.
The HECM is Due and Payable (i.e. a demand is made upon you or your heirs for repayment) upon a Maturity Event. A Maturity Event occurs when:
Non-Borrowing Spouses in certain circumstances do have protection and a Due and Payable may be deferred. Children or other people living in the home do not have protection.
With the growing number of homeowners choosing a HECM, many are also concerned about the impact of this option on their eligibility for Social Security, Medicaid, or Medicare. A HECM does not affect the homeowner’s Medicare or Social Security coverage. However, if you have Medicaid, this might be a little more complicated.
Medicare is the medical coverage automatically provided for seniors over 65, while Medicaid is the health insurance for low-income individuals. If you are on Medicaid and are looking to qualify for a HECM, a large sum of money could change your eligibility for the medical assistance.
Individuals who have liquid resources over $2,000 or couples that have liquid funds over $3,000 would no longer be eligible for Medicaid. Receiving your HECM payment in one lump sum is helpful if you can spend it all at once so that no money is left over for future months (such as using all funds to simply payoff the existing mortgage or cover extensive repairs or household emergencies. Unused HECM proceeds would count as an asset and may push you over the Medicaid eligibility limit.
If you cannot spend the entire lump sum at once, then it may be better for you to receive your HECM as a line of credit or in payments. A line of credit is a lump sum that has been set aside for you. You have full access to it, but it’s not counted as an asset because you don’t have the money until you withdraw it.
It’s important to check with your local Agency on Aging or a Medicaid expert to know your options. While HECMs are an excellent way to relieve financial stress, there’s also no reason why you should lose medical coverage to pay for other necessities in life. Keep in mind that it is entirely possible to qualify for a HECM, and also keep your Medicaid eligibility.
For homeowners with Medicare and Social Security, there are no financial eligibility requirements that prevent you from obtaining a HECM.
Most borrowers take a simple line of credit to have for emergency funds or help with daily expenses. But many borrowers also us a HECM for the reasons below:
HECMs are complicated, and borrowers should be well educated on how to use them and what responsibilities they have once they get one. But they are a very creative product if used thoughtfully, and they do solve particular financial problems that face older borrowers.
One can obtain a typical FHA forward mortgage loan for as little as 3% down payment and obtain a 97% loan to value on the mortgage. However, you need a certain minimum credit score and monthly income to meet the monthly cash flow requirements and the credit evaluation. The forward mortgage loan will generally amortize down as principal and interest are repaid. And the risk of loss from a default on that mortgage to FHA declines annually (all other risks aside).
A HECM is also a mortgage. If regular payments were made monthly, it would look and feel like a regular forward mortgage. But because there are no required mortgage payments on a HECM, the mortgage interest, and the related FHA Mortgage Insurance Premium (MIP), if not paid off by the borrower, will be added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home. This can be true in times of declining home values, rising interest rates if a variable rate loan was chosen, or if the borrower continues to live in the home for many years longer than anticipated. However, the borrower (or the borrower’s estate) is not required to repay any additional loan balance more than the value of the home. And any equity in the property in excess of the HECM balance is always due the borrowers or their heirs.
So the FHA takes all the loss exposure, but none of the upside. And, if no repayments are made by the borrower(s), FHA’s risk of loss could increase every year. Consequently, the HECM starts with lower loan to value ratios (50%-75% depending on the age of the youngest borrower), and therefore HECMs have a higher equity or cash down payment requirement, and will generally cost more in mortgage interest and insurance premiums than a typical forward mortgage. But the protections a borrower can get for this higher cost are substantial.
And as long as you stay in the home as your principal residence, and pay your regular property charges, such as taxes and insurance, regardless if the loan exceeds the home value, you can never be forced out of your home. And HECMs can offer a low-cost solution to many financial problems, such as long-term health care or upgrading to an age-in-place elder community.
A lender will appraise your residence. The value to be used (the Maximum Claim Amount) will be the lesser of the sales price (if being purchased), $636,150 (the Federal Loan Limit) or its actual appraised value. It must be your primary residence.
Based on the age of the youngest borrower aged 62 or older on title (or if a spouse not on title, and younger than 62, then we use his/her age), the lender calculates the estimated remaining years the borrower(s) might remain in the home.
Using this period of time estimate, the lender calculates the amount of money to be made available to the borrower(s) so that when all the mortgage interest (regardless of possibly lower current rates, FHA uses a minimum 5.06%) and MIP (of annual 1.25%) is added to the money borrowed over the years estimated, the total will equal the original appraised value, plus some estimate for the increasing real estate value over time.
Let’s make a simple example. Assume the youngest borrower is aged 75. And the house is worth $400,000. According to the FHA, at 75 years of age, the estimated remaining life of a person is 12 years. Per the FHA the borrowers get approximately 60% (based on 2016 tables) of that appraised value, or $240,000.
If the borrower were 90 years old, FHA would permit a 75% advance of the $400,000 appraised value. Why? Because a person aged 90 has a smaller remaining expected life and will, therefore, use less of the home value in accruing unpaid interest and MIP. So, more of the home value is available to older borrowers.
Borrower(s) do not have to repay the HECM during their lifetime. They can opt not to make any repayments, and let their heirs (if there is remaining equity in the home), or the lender (if no equity left) sell the home to fully satisfy the HECM. But they must pay the home’s taxes and insurance and make mandatory repairs while they occupy the home. If they do not, they face foreclosure.
If the HECM you took is a variable rate open-end credit (like a Home Equity Line of Credit (HELOC)), any repayments a borrower makes against the outstanding balance may be re-borrowed. And if you make partial or full repayments on any HECM, there are no prepayment penalties.
FHA eligible property consisting of:
If you have questions regarding your property and whether it is eligible, discuss them with your HUD-approved counselor before paying for an appraisal.
You must be 62 years or older. All borrowers on property title and the HECM must also be 62 years or older.
And because a HECM must be, under the rules, a first position mortgage on your primary residence (and with some exceptions, FHA will not generally allow a debt to be subordinated to it), you must have sufficient equity in your home (based on the appraisal) to payoff existing mortgages or any delinquent Federal debt. The government doesn’t want to lend you money and give you certain guarantees if you are already delinquent with them. If the HECM you can qualify for is, per our example above, $240,000 in amount, but you already have existing mortgage and Federal debt greater than this, then to get the loan, you have the option to bring cash into the closing to satisfy a remaining balance.
In addition, and critically, you need to have demonstrated both a capacity and a willingness to meet your previous and future mortgage obligations (including tax and insurance) and also other contractual payments (like a car loan). The lender completes a Financial Assessment to address these two elements.
So, underwriting a HECM requires an appraisal, validation of income or other resources that demonstrates you can reach the minimum income required, and a review of your credit history to evaluate your desire to meet your obligations. Valuation. Capacity. Willingness.
And you must be counseled.
The Department of Housing and Urban Development (HUD) certifies housing counselors around the US to help homeowners with impartial education about HECMs. Counseling is a mandatory part of the HECM application process and is usually completed after submitting an initial application for a HECM to a lender.
Even though the application has been completed, the lender is not legally permitted to incur any costs on the applicant’s behalf (such as ordering the appraisal) until the borrower has submitted a signed HECM Counseling Certificate. This is proof that you have completed the mandatory counseling session with a HUD-approved counseling agency. The counseling can be completed before or after the initial application in most states. Counseling can be done over the phone, or it can be done face-to-face with a regional agency.
The loan application process cannot begin until counseling is completed and a fully executed counseling certificate is provided to the lender.
The cost of the counseling is an average $125 but varies. Lenders are not permitted to pay this fee for applicants. Homeowners can also contact the counseling agency to request a “hardship” approval to pay a reduced fee.
Loan originators are not permitted to direct you to a particular counselor or counseling agency. They are required by HUD to provide a list of counselors, including local agencies and national intermediaries who are selected by HUD to provide counseling by telephone across the country.
You should assume it will take possibly will take three to ten business days from the time you place the call to the counseling agency for the counseling to take place.
Before being counseled, you will receive an information packet from either the counseling agency or the lender, depending on who you contact first. This information packet will include the following materials:
Counseling must be done before application in the following States – RI, TN, CA, and VT.
Personally, I recommend you are counseled before you find a lender. Even if independent, FHA Counselors still depend on lenders for referrals and since their business may depend on these referral, Counselors might be slow to turn away potential borrowers.
The Financial Assessment is the process the underwriter follows to evaluate your capacity and willingness to meet your obligations. It is not the same as the typical income debt ratio underwriting on a conventional or other FHA type loans but it does require validation of income and other scheduled obligations to ensure this product is suitable for your situation.
These Financial Assessment rules won’t cause you any problem if you have always paid your taxes, insurance, and other bills on time, and you have enough income (or savings, or unused HECM proceeds) to cover your living expenses and debts. However, if you have been struggling to pay bills, especially taxes and insurance, or your income is insufficient to pay the ongoing property charges, some of your HECM proceeds may have to be set aside to cover your future taxes and insurance. We call this set aside a Life Expectancy Set-Aside (LESA). This money will be used to fund future tax and insurance on the home. But it will reduce what cash is immediately available to you.
You must have a certain level of monthly Residual Income (i.e. income remaining) after you meet the cost of maintaining, insuring and paying property taxes on your home. The required minimum Residual Income is calculated according to your family size and where you live in the United States. In general, you should have a monthly residual of between $540 and $1,160 depending if you are single, or have a family size of 4 or more, and live in one of 4 major regions of the country. But there are many ways to help you meet the minimum. We can use your savings spread over time, any unused HECM proceeds, even income from a Non-Borrowing Spouse. We can even figure ways to reduce your family size.
If you want to estimate if you have enough minimum Residual Income, you can use the forms at the back of this book in the appendices to calculate it yourself.
You don’t have to get it perfect. It’s just an indication for you.
Do you have good credit? The HECM credit evaluation is not based on your credit score. So you can qualify with a low score provided you paid your obligations on time in the last 12-24 months. If you did not pay your obligations on time, it’s possible you may not qualify for a HECM unless you can explain the circumstances. Emergencies, like losing your job, or a sudden illness, are things we can help with. Remember, the HECM program is to aid you, not make life harder.
In general, you should have (a) no late mortgage or installment payments in last 12 months, or (b) any 2×30 day lates on mortgage or installment payments in last 24 months. For specifically a revolving credit, you shouldn’t have (a) more than 3×60 day late payments in last 24 months or (b) any more than 1×90 day late payments in the previous 12 months.
Be aware though, that you must have been current on your Property Taxes, Home Owner Association dues, PUD, Condo dues, Special Assessments or Ground Rents for the past 24 months. Property Tax deferments are allowed provided they are documented and will last until the house is vacated or sold.
If you have judgements or delinquent Federal debts you are ineligible for a HECM until your debts are resolved (either paid off or a valid repayment agreement is in place and after 3 monthly payments were made…and no, you cannot just prepay all 3 months). You may payoff these debts with a HECM, but you must be current on repayments or performing under the terms of a repayment agreement.
If you had a Bankruptcy, it will depend. Generally HECM requirements are more lenient than forward loans and a borrower does not always have to wait the 2 year period after discharge or a 24 month payout period. However if you plan to buy a home using a HECM for Purchase product, FHA insists 2 year seasoning after Chapter 7 discharge or 12 months payout period after a Chapter 13 bankruptcy.
You should go to AnnualCreditReport.com to request your credit report if you do not already have a current report. It’s free to obtain.
If you do have late payments, don’t panic! Many times we can solve these issues
To get a sense of how much money you may be able to get from a HECM, use the simple, online calculator at NRMLA Reverse Mortgage Calculator. The advantage of using NRMLA’s calculator is that no salesperson will start chasing you or asking you for personal details.
If you now owe any money on a debt against your home or any other Federal obligations, you would have to payoff those amounts to get a HECM. You could use money from the HECM to do that. Any remaining funds you can use as you wish. There are no restrictions. The proceeds from a HECM can be used for anything, whether it’s to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, cover property taxes, or possibly prevent foreclosure.
Before we get into this discussion too far, there are six terms unique to HECMs under the FHA HECM program. It’s helpful to get a solid understanding of them to get a proper appreciation of the essential elements of the HECM product. These terms get used by all the lenders and the misunderstanding of them can lead to major confusion.
Let me describe a process for you in “plain English” and then “translate this to “HECM Speak” You will get the picture. I’ll use the example we had earlier so we are consistent.
We figure out the appraised value of your home at $400,000. Using the sum of the FHA internal or qualifying rate (not the mortgage rate you may have on your actual loan) which is currently a minimum of 5.06%, and the mortgage insurance rate of 1.25%, and considering the age of the youngest borrower, we look at the FHA advance rate tables to identify a loan to value of 60%. That table provides us the % of the appraisal we shall advance or in our example, $240,000. If this is a variable rate open-ended credit, we draw $100,000 to pay off the existing mortgage, Federal debt overdue and closing costs, and we have an unused line of credit of $140,000.
In “HECM Speak”
We figured out the “Maximum Claim Amount” of $400,000, using the sum of the “Expected Interest Rate” and mortgage insurance rate, and the age of youngest borrower, we found the “Principal Limit Factor”, applied that factor to the Maximum Claim Amount, and came up with the “Principal Limit” of $240,000. We paid off $100,000 of “Mandatory Obligations” and what were left with was the “Net Principal Limit” of $100,000.
I hoped that helps. The definitions are below.
Maximum Claim Amount[_:_] This refers to the appraised value of the collateral, as limited to Federal limit of $636,150. i.e. no matter if property worth $1 million, the program restricts the amount to $636,150.
Expected Interest Rate: This is the interest rate used by FHA to estimate how much interest might accrue on the HECM over the expected life of the youngest borrower. Right now the minimum Expected Interest Rate required by FHA is 5.06% regardless of loan type. It is either the fixed interest rate (if a Fixed Rate HECM) or a market formula if a Variable Rate HECM is selected. If the interest rate you choose for a fixed product, or the margin plus an index for a variable product, is higher than the minimum FHA rate, then the higher rate is used. For adjustable-rate mortgages, the Expected Interest Rate formula is the sum of an underlying index rate (10-year LIBOR swap) and the selected lender’s index margin.
Principal Limit Factor or “PLF”: Refers to the percentage of Maximum Claim Amount that creates your Principal Limit. E.g. a PLF factor of 50% on a Maximum Claim Amount of $200,000 means you have a Principal Limit of $100,000
Principal Limit[_:_] Refers to the initial estimated available borrowing capacity the borrower has. It’s based on the borrower’s age or a co-borrowers youngest age, the Expected Interest Rate and the value of the property (as limited by the Federal limit, if a HECM loan)
Mandatory Obligations[_:_] These are the financial obligations a borrower must payoff (normally out of the HECM proceeds). They include existing mortgages, delinquent Federal debts (like your income taxes) not subject to a repayment plan, and costs associated with closing the HECM. They will also include 1st 12 months’ payments into a LESA and withholds for necessary repairs.
Net Principal Limit[_:_] This is the net amount of Principal Limit available to the borrower after payment of Mandatory Obligations (this is what you must payoff first with your HECM proceeds). After this initial draw, the Net Principal Limit (i) can decline as more draws are made, (ii) it can increase if repayments are made by the borrower on the HECM, or (iii) if unused, the Net Principal Limit can actual grow in size of availability at the combined HECM rate of interest plus the annual MIP. The HECM has that unique feature that unused lines of credit (which is essentially what the Net Principal Limit is) grow over time if not drawn down against.
That’s a good question and one we should spend a few minutes on it before we go too much further.
To be sure, borrowers were not always treated properly or fairly. Fraud was caused primarily by abusive loan officer compensation, poor appraisal practices and the design of the product itself. The rules surrounding the HECM were, in some cases, poorly conceived, leading to unintended consequences. The most common of these issues related to Non-Borrowing Spouses, who were removed from title to increase borrowing capacity of the older borrower, and who upon their partner’s deaths were foreclosed out of their home. They had been led to believe they would be able to refinance.
The practice of securitizing these loans into Government National Mortgage Association (or as it’s called for short ….Ginnie Mae) mortgage-backed securities, instead of retaining the loan in the lender’s own portfolio, led consumers in the period from 2008-2012 to be encouraged to take fully drawn Fixed Rate loans even though they did not immediately need the money. Consequently, some people ran out of resources way too early in retirement.
Things have hugely improved. Many positive changes have been introduced.
It’s now illegal for a salesperson to influence or collude with an appraiser to change or alter the value of the home.
Loan officers used to get paid higher commissions, the larger the amount borrowed, or the higher the interest rate. These inducements for the loan officer to act NOT in the best interests of the borrower is now removed. In the case of a Reverse Mortgage, the loan officer is agnostic to the loan terms or the amount that is drawn, even if the amount drawn is zero.
FHA got smart. They have made changes in the HECM program to control disbursements, limiting what a borrower may draw in the first 12 months. This policy returned the program to a slower payment over time (as originally intended) using the Variable Rate loan option versus the lump sum cash out Fixed Rate option. Now, only 10% of the current loans are fixed versus variable (although the growing popularity of using HECM for Purchase will increase the fixed HECM percentage over time, these are purchase transactions and not “cash out” events and inherently, less risky).
The FHA HECM program also now protects a Non-Borrowing Spouse and made provisions retroactive to address previously originated loans with spouses not on the title.
FHA issued much clearer rules on how to mitigate risk and deal with customers who are delinquent or heading to Default. They made the rules fairer and on a level playing field for family members to buy the property once the last borrower has died or left the home.
The problem in the past was that everyone paid the same Upfront MIP. Everyone always pays the same annual 1.25% rate on the unpaid loan balance. If a borrower took all the loan out as a “cash out” versus, say, someone who took the loan as payments over their remaining life, this borrower paid the same Upfront MIP as a percentage of the appraised value of the home as the less risky borrower. The “cash out” transaction was inherently more dangerous for the lender (the money is gone and likely spent) and these HECMs had a higher rate of default. Now, with the new rules, if the borrower draws less than or equal to 60% of the amount of money available to the borrower , the upfront closing costs of the Upfront MIP is a much reduced 0.5% (i.e. ½ of 1%) of the value of the home. If the borrower draws more than 60% of the available money in first 12 months, they will pay upfront a whopping 2.5% of that home value. Future draws, past the first year, are not subject to the Upfront MIPs. This pricing is a reflection that FHA wants this product used by people who wish to supplement their income, versus drawing all the money in the first year.
FHA permitted lender risk overlays. i.e. the lender can add other risk rules in addition to the FHA guidelines when making a HECM. In the past, once someone applied for the HECM, lenders had no choice but to follow the FHA Program rules slavishly. But those rules could at times permit an untenable circumstance (like making a loan to a person in jail!). Now, lenders can apply their additional risk rules (provided they don’t abuse fair lending and similar laws) and avoid higher risk situations.
All these changes introduced badly needed reforms. Borrower’s suitability and protection are substantially improved.
If any of the statements below fit your circumstances avoid taking a HECM, at least for a while:
If you don’t need the money right away, don’t rush to take out a HECM. The interest on a HECM is low, but it’s not free money. If you have other funds that you can use such as CDs or savings accounts, use those before getting a HECM. However, there are exceptions to this advice. You may wish to protect your liquid assets or defer taking a pension or Social Security until it grows to a certain level. Or you may be concerned this program will end, and you may not be able to access in the future.
Be wary of “Sales Pitches”. Some lenders or brokers may offer you goods or services, like home improvement services, and then suggest that a HECM would be an easy way to pay for them. If you decide you need what’s being offered, shop around before deciding on any particular seller or lender.
Some who offer HECMs may pressure you to buy other financial products, like an annuity or long-term care insurance. Resist that pressure. You don’t have to purchase any products or services to get a HECM (except to maintain the adequate homeowners or hazard insurance that FHA and other lenders require). In fact, in most situations, it’s illegal to require you to buy other products to get a HECM.
And FHA does not permit the payment of anything of value to a HECM borrower to induce a borrower to take the loan. This prohibition does not stop a borrower taking a higher mortgage rate HECM to allow the lender to pay some or all of the borrower’s closing costs.
The bottom line: If you don’t understand the cost or features of a HECM or any other product offered to you – or if there is pressure or urgency to complete the deal – walk away and take your business elsewhere. Consider seeking the advice of a family member, friend, or someone else you trust.
All reputable lenders will want you to engage your kids in the HECM loan choice. Many children do not want their parent(s) to take out a HECM out of concern for the product and its impact on their parents’ financial situation going forward (it is debt after all, and debt generally should be avoided if at all possible).
No one should enter this transaction lightly, but especially if your kids have doubts. Sure, it would be nice to leave something to the kids, but first, you have to take care of yourself. If your children object because they lose some inheritance but won’t or are unable to help support you in old age, then their objections are possibly a secondary aspect to basic needs. It’s hard for kids to lose their “home”.
Here are a few examples of what I consider are the smarter ways to use a HECM.
As one gets older and you get down to the last 5-7 years of mortgage payments, those mortgage payments are always quite large compared to the actual debt outstanding as you are now amortizing the outstanding unpaid balance over the remaining life of 5-7 years. You may owe $50,000 with a $1,000 monthly payment on a home worth $300,000. If your monthly income is $3,000-$4,000, that $1,000 payment is significant. Increasing your available monthly cash flow by upwards of 25% by taking a HECM out to repay the existing mortgage makes sense. You would also likely have a line of credit of around $100,000 remaining that could be tapped to pay future property charges or pay a monthly Term payment of around $500 assuming you had another 15 years of life expectancy.
Using your debt free home to create a HECM that pays you a monthly amount until you leave the home (the Tenure option), regardless how long it lasts or how old you become, is a smart idea if you are healthy and have a favorable family history that indicates you may live a long time. You can also get the HECM and delay the Tenure payout, and the available monthly payout will increase the longer you wait for the disbursements. Unlike traditional annuities, this has no taxable income associated with the payment, and you may find its more tax advantaged (check with a qualified tax advisor) than a regular annuity you paid from savings. This plan carries a low Upfront MIP, and you can likely reduce costs further through a Lower Cost HECM.
However, be aware that while opting for the Tenure payout does eliminate the uncertainty of living longer and you may continue to draw even though you may actually run out of Principal Limit, it does come at the “cost” of a significantly reduced payout over an equivalent term payment that is calculated to use up all of your Principal Limit over your life expectancy. For example, assume you are 70 years old. The Life Expectancy Table indicates a life expectancy of 15 years. However, the Tenure payout would have to continue for over 25 years (with an all-in interest and MIP rate of approx. 4.25%) to use up all available Principal Limit. If you were to leave the home after 15 years, you would have borrowed less on the HECM and possibly, assuming the home is worth at least the original appraised value, you would have more equity to bequeath to your heirs. So you don’t necessarily lose this equity that you did not draw on the HECM.
Also, never forget you can alter payment plans at any time. You can go back and forth to a Tenure payment anytime. Your lender will recalculate a payment based on the existing Net Principal Limit available and your then current Life Expectancy.
If you have retired and have less income, and now also have to pay off an amortizing HELOC, using a HECM is a brilliant solution. You have minimum income requirements, guaranteed availability of funds, and an optional payment plan. Many older borrowers who have borrowed on first lien HELOCs may find this solution very helpful.
Say you live in Chicago and want to live in sunny Georgia in a retirement community, but not sure you can afford it. Well, imagine you can sell the home in Chicago, and those proceeds plus a HECM for Purchase can help you buy that home on the golf course. And no mortgage payments if you select that option, or use that no payment option periodically to go on an annual vacation. It’s possible with the HECM. Though this HECM will cost more in the Upfront MIP as you likely took the full amount of Principal Limit available to you. Still, it’s a very nice scenario.
According to the American Association for Long-term Health Care the rate of decline in policy applications for LTC in 2015, looks as follow:
[Percentage of applicants turned down for LTC insurance coverage
__]Below age 50: 14%
Ages 50-to-59: 21%
Ages 60-to-69: 27%
Ages 70-to-79: 45%
Keep in mind; these are people who the insurance agent felt might have a chance of qualifying. They filled out a lengthy application only to be rejected.
With an average age of 72, HECM borrowers would have slightly better, on average, of a 50/50 chance of being approved. But the premiums will be higher if you are not in good health and the benefits can be sometimes limited to a per day amount and are also restricted to a maximum payout on the policy. There are a lot of unknowns in waiting to buy a LTC policy.
You can use a HECM to finance those premiums or to “self-insure”, which is a nice word that means “I shall use my own money.” Whichever option you choose, it’s good to get advice and discuss with people you trust. Taking out a HECM to address the issue is at least being proactive. And if the HECM is to be used for no other reason, then a borrower could take a Lower Cost HECM, get the highest closing cost Lender Credit by taking one of the higher rate options on a variable loan, and permit the unused Principal Limit (line of credit) to grow annually and compound with the highest possible interest rate and the lowest possible upfront cost. The available line of credit can eventually surpass the original Principal Limit and possibly the then current home value.
If your investments always make a high return, and you do this at an acceptable risk, it may make sense to reduce your investment accounts. As you get older, you may not want to take the risk required to make a larger return than your mortgage rate. You need to be careful here. Nonetheless, taking that risk can be hedged somewhat by using a HECM’s available Line of Credit (or Principal Limit) to make sure you have available resources should something go wrong with the investment. I do NOT recommend borrowing and investing the proceeds. It just never seems to work out. But an unused HECM line of credit does provide some risk hedge in the event those current investments proved a bit risky.
If you have the money and resources, but simply prefer not to make any more home payments, and also want a 2nd home, a HECM on your primary residence can facilitate this for you. But you have to be careful of so much debt if your cash flow is not strong.
Using the optional payment feature of a HECM, more carefully manage the efficient matching of taxable income from one year to another with possible income tax deductions for interest and MIP. You can better manage taxable distributions, if anticipated, by delaying payment of accumulated mortgage interest and MIP until income available to use against. Always remember that you may not deduct interest on debt more than the value of the home. (Always consult a qualified tax advisor. There are rules and restrictions associated with deductible mortgage interest and MIP.)
Avoid cash flow deficits during the year by delaying mortgage and MIP payments until cash available.
Unfortunately, the rate of divorce is increasing in older married couples. As we all live longer and see “new” lives in front of us, many older adults find they are seeking more fulfillment and that also includes separating from relationships they find no longer rewarding or intimate. Using a HECM on an unencumbered home permits the “cashing out” of the family home without having to outright sell it, if one partner prefers to stay living in their home.
This is a very personal decision. In many cases, downsizing can be the most economically best way of securing money from your home in retirement. However, the costs of moving vary by region and circumstances, and declining home values and a soft real estate market may make your home difficult to sell. Nonetheless, it might be worth your while to consider how much you might be able to sell your house for and how much less you could spend on another home. If considering downsizing, you will also want to factor in the costs of using a realtor to sell your existing house and buy a new house, moving costs, as well as the emotional attachment you or your heirs have to your current home.
The second major issue is any tax you would have to pay if selling your home would result in a taxable gain that far exceeds the exemption for taxable gain under the tax rules ($250,000 for singles, $500,000 for married joint-filing couples). If you paid $40,000 for your home, and it’s now worth $450,000, if you were a single borrower, you could face capital gains taxes on the profit of $410,000, less the IRS exemption of $250,000. That tax bill plus all the other costs of selling and moving could well give you pause to consider a HECM instead.
If taking out a HECM allows you to hang onto your valuable property until either you or your spouse dies, your heirs might be entitled to a significant tax basis step-up that could reduce or eliminate any taxable gain when the property is finally sold. In some cases, the tax savings could be far higher than all the costs associated with the HECM.
The best advice is to seek help from a qualified tax advisor who can work out all your various scenarios and help with estate planning.
If you are considering a reverse mortgage, other options will permit you to gain access to the equity in your home. These options might (or might not) be preferable to a reverse mortgage. Or you may not qualify for an alternative financing approach.
Of course, you can also delay retirement, or go back to work full or part-time if you are already retired. Many people are doing this nowadays. All of these options should be fully evaluated when you are considering a reverse mortgage.
Many potential borrowers looking at a HECM wonder if using their funds to buy an annuity might be a good idea. But buying an annuity might be risky for senior citizens. It should be done with care.
Under no circumstances is the approval of a borrower to obtain a HECM ever on obtaining any other financial product, such as an annuity.
An annuity is a financial product that is usually sold by an insurance company or agent that is designed to provide monthly payments to the recipient at some future date or immediately. There are many factors to consider in deciding upon an annuity investment. It is not recommended that borrowers take out a HECM and then use the proceeds to invest in a separate annuity. Why?
Adding an annuity to a HECM results in a higher level of debt as usually the HECM is fully disbursed to obtain the annuity. With a HECM alone, the debt increases gradually over time, as long as the homeowner chooses periodic payments rather than a lump-sum. Additionally, incurring a large upfront debt will cost more in Upfront MIP (if disbursed over the 60% Principal Limit level) and interest charges than if the same amount of money was distributed via loan advances or a tenure payout from a HECM. And most annuities lock in a fixed monthly payment for an indefinite period of time, whereas HECMs offer the flexibility of being able to alter the amount or frequency of the payments should the homeowner’s needs change (in the case of unexpected medical bills, for instance).
; Annuities can have high-cost structures; though immediate annuities will have smaller commissions. Some though can have annual fees, investment purchase expenses and “surrender” charges. Cash advances from annuities are also partially taxable as the principal investment earned a return, and that return is taxable. Advances from a HECM are not taxed.
[++] ; Payment from a HECM does not usually affect the amount of Social Security benefits for an individual, but this is not necessarily the case with annuity payments. Annuity money might reduce Supplemental Social Security Income (SSI) benefits on a dollar-for-dollar basis. The more countable income you have, the less your SSI benefit will be.
; HECMs allow seniors to begin receiving money immediately, but some annuities may not. Annuities can defer payments for many years — meaning that borrowers may not live long enough to receive any of the benefits, or the distribution is impacted by market value movements that reduce or increase payments. Other annuities, though, will offer plans that will refund unused or unpaid out premiums back to the estate of the customers after they pass away. But those payouts are substantially reduced.
; while the HECM is guaranteed by the Federal Government’s Home Equity Conversion Program, there have been plenty of examples of annuity providers going bankrupt, leaving customers “high and dry.”
[++] ; The law calls for potential HECM applicants to undergo financial counseling from a Federally-approved agency before this type of mortgage can be obtained. There is no similar legislation for annuities, and there is no doubt that the absence of counseling and the typical mortgage type disclosures have led to some annuity customers being treated unfairly.
There is no question that the high Upfront MIP charge of 2.5% of Maximum Claim Amount for drawing over 60% of Principal Limit in the first 12 months is a major cost hurdle. You can avoid the initial shock of this and other closing costs by taking a higher rate HECM and receiving Lender Credits toward your costs. But in the end, you will pay regardless in the higher interest rate. The only real away to avoid the higher MIP in higher usage circumstances is to stagger your drawdown and take only 60% of the Principal Limit in first 12 months and then take the balance of 40% (or whatever you need in excess of 60% limit) after that one-year anniversary. You need the liquidity to manage that structure, but this is a genuine cost saving. For example, on a $500,000 Maximum Claim Amount and a $300,000 Principal Limit, deferring $120,000 of the draw for 12 months saves you $10,000 (the difference between the higher 2.5% Upfront MIP on draws over 60% of the Principal Limit and the lower 0.5% Upfront MIP on lower initial draws). Basically, you get a $10,000 “return” on that $120,000. If you have the resources, you should do this.
The New HECM is a versatile retirement funding tool that can be utilized in many ways. Here are just some of them:
There is no particular reason to take a HECM if you do not currently have the need. However, though, you should consider the following:
The one circumstances I do recommend people take out a HECM well in advance of when they anticipate using it is if they really believe they will need a HECM in the future. Why? Well, it has to do with the FHA Principal Limit Factors (which determine how much you can borrow of the appraised value of your home).
At age 62, at the minimum qualifying rate of 5.06%, the Principal Limit Factor is as of October 2016, 52.4%. At 82, that same factor would be 67.4% of the then current home value. However, if you simply took the 52.4% and waited and let it grow annually at the rate of interest and MIP (and let’s assume that might be around 5% all-in), the 52.4% might exceed 140% of the original home value). To obtain the same credit availability at age 82 using 67.4% as the factor, the home value would have to increase at an annual, (monthly compounded) rate of more than 3.5%. That’s a lot higher than historic rates over the same length of time. And if interest rates increase over the term (recall they are limited by Lifetime Caps), you would get likely far more then applying for the HECM at age 82, because should rates have risen, that Principal Limit Factor declines as a percentage of home value, when rates exceed the current minimum. Also to get that amount of credit at age 82, the Federal maximum home value limit would have to grow so as to ensure you weren’t capped out. But suppose, the home was worth a lot more, and the maximum Federal value limit was raised and interest rates remained the same, you could simply refinance and borrow more. You only pay the additional Upfront MIP on the incremental home value used in the previous HECM (whether you draw down on the loan or not).
So if you have current capacity, and want a hedge against values declining, rates rising or the program going away, the HECM is a good financial tool.
Remember if you do take a HECM now and property values increase, you might be able to refinance into a larger HECM. But I would not recommend anyone count on this.
There are three basic HECM products.
This is the most common form of HECM. Most borrowers are refinancing an existing mortgage to eliminate future mortgage payments or are seeking to pull cash out from a home, whether it currently has a mortgage or is owned free and clear.
The major factors considered in a refinance loan are:
1. Existing amount of debt
2. Age of youngest borrower (if birthday within six months, the borrower will be considered a year older)
3. Appraised value of home
5. The Expected Interest Rate on the loan
6. The type of disbursement chosen
7. Income or savings to support future taxes, insurance and home maintenance
Borrowers with an existing HECM may qualify for a HECM to HECM Refinance, usually referred to as a Streamline. Although all origination services (appraisal, title, flood, etc.) are required, borrowers only pay the increased MIP on the increase (if any) in Maximum Claim Amount over the refinanced HECM. Counseling can be waived, but most lenders want the borrowers to take again. The Financial Assessment standard of sufficient Residual Income must be met. Borrowers may not qualify if the original loan is in Default.
There is a National Reverse Mortgage Lenders Association (NRLMA) mandated protection on churning with HECM to HECM Refinances. Reputable lenders will only permit if the loan is at least 18 months old, is putting a Non-Borrowing Spouse on the title as a new borrower, or meets certain threshold benefits to the borrower (such as the net cash available benefit to the borrowers is 5 times the incremental cost). Some exceptions may be made in certain cases where the borrower’s circumstances are extenuating.
Please be aware:
The HECM for Purchase product allows eligible seniors to purchase a residence using the proceeds of a HECM. Because you must have at least some equity in the home in order to obtain a HECM, a down payment on the new home will be necessary. Borrowers are required to occupy the new residence within sixty days of closing.
There are a couple of critical things to know if you plan to use a HECM for Purchase.
This is a highly personal choice and depends on your circumstances. You best approach here is to define your needs and discuss with a professional loan officer.
Types of HECMs Disbursement
A tenure payment option is really a terrific way to buy an annuity using your home equity. You avoid all the annuity commission costs, and all the income is paid to you as tax-free proceeds (always check with your qualified tax advisor). Granted you do not have a death benefit, but nothing is stopping you from purchasing such a benefit from your monthly payment. And, unlike annuities which can have significant termination penalties, you can change this disbursement and convert to a line of credit for payment of a small administration fee.
The line of credit option is the most popular among seniors. Borrowers can use the bulk of the line of credit immediately to cover home repairs, repay debts or for other reasons. The balance of the money can be kept in reserve or used to create a monthly payment.
For other borrowers, the monthly payment plan makes more sense from a budgetary standpoint.
Seniors can also change their payment options for a small fee.
HECMs can be adjustable (ARMs or Open Ended) or Fixed Rate (Closed End).
Variable Rate HECMs (or ARMs) have a variety of margins over a monthly or annual LIBOR index, with either a monthly or annual adjustment, and may have Periodic Caps, as well as Lifetime Caps, depending on the product or options chosen. These are “Open Ended” loans, which mean if you repay the credit line, you are, assuming you are not in Default, able to redraw the money again using various disbursement plans.
This HECM’s interest rate is established at the loan closing — and fixed for the life of the loan — you’ll always know exactly how much interest is accruing on your loan. However, with a HECM Fixed Rate, you are required to take all of your money at closing in one lump sum (what we call a Single Lump Sum Disbursement). This may be a desirable choice if you’re using your HECM to pay off a larger existing mortgage or cover other Mandatory Obligations, or buy a home and use the largest credit available. If you partially repay the balance, you are unable to draw it back down again. All the proceeds of a Fixed Rate loan (subject to restrictions) are drawn at closing, and there is no associated line of credit or future payout plans.
There are basically seven (7) componets a borrower should consider in evaluating pricing:
A Fixed Rate option is probably the best option available if you plan to take a Single Lump Sum Disbursement and almost all your Principal Limit is essentially used up in the first draw. The Fixed Rate is a closed ended product. Pay downs will not provide any future line of credit. The calculations to compare options are simpler. There is no unused Principal Limit to have to figure into in your reckoning. The product provides certainty of the interest rate charge and is favored by HECM for Purchase borrowers or borrowers who refinance an existing mortgage and have no remaining credit line available, and do not ever intend to repay the HECM prior to leaving the home or the death of last borrower.
A Variable Rate option will provide possibly, depending on how much one draws, an open ended line of credit or availability that can used and repaid and used again, and the unused portion will actually grow over time. The interest rate can increase or decrease depending on the market.
It seems complicated, but here is what you do. Ask at least three (3) lenders to provide you “par” pricing on your selected products. What’s “par” pricing? It’s the interest rate you would pay if you received no Lender Credits, no Lower Cost HECM option credits, and were charged no monthly service fee and no origination fee. If your lender cannot or won’t provide that pricing, best to just walk away.
With this “par” rate in hand, a borrower can now compare the costs and benefits of other elements, like Lender Credits or costs like Origination Fees. Almost all the time, any analysis will involve how you plan to draw money and how long you believe you or your spouse will be able to live in the home. Let me show you. We are going to keep this very simple and ignore concepts like present value and other highly complicated calculations.
Say we have an appraisal of $400,000, and that the advance rate is 55% or $220,000. And the “par” rate on our selected loan option is 3.5%. You expect to stay in the home for another 10 years and have reason to believe this is very possible due to family life history and your income levels. You also believe you will draw $2,000 @ month over this period. Or $24,000 @ year, or $240,000. Or an average over the period of $120,000. At 3.5% interest, that’s $4,200 @ year.
Let say also, one option is you pay an extra $2,000 Origination Fee and get a 3.25% interest rate.
The cost of the 3.25% interest on the $120,000 is $3,900, or $300 less than the “par” rate. If you live in house for 10 years, that’s $3,000 less in interest. If you pay $2,000 then that seems like a good deal.
Suppose they offer a 4% interest rate, but you get a Lender Credit of $3,500 toward Closing Costs. It’s the same analysis. At 4% the annual cost on the $120,000 is $4,800 or $600 @ year more, or $6,000 more over the estimated 10 years. That’s a lot more than the $3,500 credit in Closing Costs. So, if you could avoid this option, you would.
It’s the same analysis as in the previous question, Get the “par” rate and compare. Generally Lower Cost HECMs should only be considered if you plan to exit the home soon (within 2-4 years), or do not expect to use the HECM availability much, or if you do use, plan to repay almost immediately, or are seeking to build a higher growth factor in the Net Principal Limit or unused line of credit.
The lower the Periodic Cap or the Lifetime Cap, the better protection the borrower has. Products with these interest limiting features would be your best choice. But there are “costs” to your choice. The Secondary Markets, into which most HECMs are sold (through the creation of mortgage securities with HECM mortgage collateral inside of them), are quite efficient in pricing the various terms of these mortgages. Mostly the markets will pay more (and you get a higher closing cost Lender Credit) for a higher margin loan, with no Periodic Caps and a high or no Lifetime Cap, versus a HECM with a lower margin or lower caps. If the market fears rising interest rates, then lower caps will be penalized in the Secondary Market pricing. If this is the case the lender will seek to recover that lost value through higher loan origination fees (though these are limited to a maximum of $6,000 and sometimes less if a smaller Maximum Claim Amount size). There is some ability to use a higher margin and initial rate to offset a lower Periodic or Lifetime Cap. But this adds to the cost.
How does one choose when the variables include Annual versus Monthly LIBOR indices, different Periodic and Lifetime Caps, Principal Limit Factors, life expectancy, Principal Limit, initial and long term usage, different lender margins, and various origination fees and Lender Credits? It’s impossible to estimate the best possible deal accurately without the lender’s pricing models and the FHA’s HECM calculator. You will rely on the loan officer to give you the best options for your needs.
But let’s educate you a little, so you have some sense of the inputs and tradeoffs. You will not need to be an expert. If this flies over your head its ok. But knowing as much as you can be the best form of consumer protection.
First, we deal with the future anticipated interest rate environment. Let’s apply some general concepts:
Your decision here is based on what risks you are comfortable taking based on your usage, your ability to repay or if you just want that Principal Limit to grow. You can ignore all the Lender Credits or stuff like that for now. If rates rise rapidly and long, I can assure you that no Lender Credit is going to offset that increased cost. Initially, evaluate your purpose and your risk appetite in light of what you think will happen to interest over your remaining life. It’s a tough one. And the best advice is; if you don’t know, then assume the worst. Rates will rise. Probably faster than you want!!
But if you are pretty sure you just want a backup line, or can make repayments quickly on the line, maybe growth in the line available is what matters; possibly rising rates may even be a help to reach your goal.
Take your risk temperature and decide.
Taking a decision on the best options within that variable rate product requires the borrower simply get the “par” rate and compare the benefits and costs of the various options, after considering usage and remaining time in the home.
It’s complicated. More than a regular forward mortgage. But follow this order:
Easy? No! It’s complicated. But just have a general idea and a good loan officer can help you through the analysis.
The short answer is, in some circumstances, “yes”. But not in all cases. HECMs in general cost more than regular mortgages especially if you borrow more than 60% of the Principal Limit in the first 12 months. But you do get a lot of very specific high-value features for that extra cost.
Borrowers will pay a slightly higher rate of interest than traditional forward type mortgages, and in the FHA HECM product, will also pay Upfront MIP based on the Maximum Claim Amount, as well as a monthly MIP on the outstanding unpaid balance.
When compared to a traditional FHA loan, the annual MIP paid to FHA on an unpaid principal balance on a HECM is 1.25%. versus 0.80%-1.05%. Why more expensive? You basically borrowed the full appraised value of your home. The loan balance, when we take into account MIP, draws and interest, can grow to 100% of the appraised value and could likely grow in excess of this value. A traditional FHA mortgage will decline as a percentage of original value as it amortizes.
The Upfront MIP payment is entirely different between traditional and HECM products. In traditional FHA forward mortgages, it’s always 1.75% on what you borrowed, regardless any increase or decrease in risk as a result of borrower behavior. In a HECM the borrower pays a significant 2.5% versus a .5% of the Maximum Claim Amount, in Upfront MIP if the amounts borrowed in the first 12 months exceed 60% of what credit is available. Other closing costs, such as origination fees (which are limited to $6,000), settlement and recording fees, title insurance and the like are comparable to regular mortgages.
Ongoing costs such as property taxes and insurance apply to any home ownership and related mortgage and the failure to pay these have similar consequences. A borrower can lose their home. There is no difference between a HECM and a traditional forward mortgage in this regard.
Closing costs on a HECM are generally higher as a percentage of disbursed funds than regular mortgage loans. Why is this? Essentially the FHA and the Lender are giving you a loan for virtually the full appraised value of your home (as limited by FHA guidelines to a max of $636,150). However, they are not disbursing the full amount to you. They retain an amount equal to the interest, FHA MIP, and servicing costs that are applied monthly to your loan, for its estimated life, that are not repaid by you, but instead are cumulatively added to the balance. This original loan balance, if the calculator used had all the right factors input, will grow to an amount equal to the appraised value of your home and maybe beyond this amount, if you made no payment. This is why the lesser of full appraised value, sales price or Federal limit of $636,150 (or what we call the Maximum Claim Amount) is used to calculate certain industry fees, such as Origination Fees and MIP. You are technically borrowing the full appraised value. Due to the optional payment on a HECM, this calculation is unique to the HECM product.
The three significant closing costs are the FHA mortgage insurance, the origination fee, and title fees. However, the only cost that is typically paid out of pocket is counseling or possibly the appraisal
[++] [++] [++]
For the HECM product, the upfront insurance premium is either 0.5% or 2.5% of the lower of appraisal value, sales value or up to the HUD property value limit of $636,150, depending if the draw taken in the first 12 months (including closing costs and Mandatory Obligations ) is at or below 60% or above 60% of the Initial Principal Limit .
The origination fee is part of what the lender earns on the loan. The FHA has the formula to calculate what the lender can charge.
Title insurance policies assure the homeowner’s legal ownership of the property and is required for all mortgages whether reverse or forward. The largest part of title fees is the title insurance premium. Title fees are usually broken down into:
The appraisal establishes the legal value of the home. A HECM appraisal must be completed by an FHA-approved appraiser and follow FHA guidelines that can sometimes require more documentation than a typical appraisal. A typical FHA appraisal costs $475-$550 depending on the location. Remote locations, such as rural areas, and properties with unique circumstances will cost more.
Usually, a home equity loan, a second mortgage, or a home equity line of credit (HELOC) has the requirements for the borrower of a monthly income, a higher credit score, and a stated repayment schedule.
In the past, there was no income or credit requirement for a HECM borrower. However now, under Financial Assessment, the originators of HECMs must assure that the borrower can afford to meet normal living expenses and other obligations, as well as be able to pay the taxes and insurance on the home. Savings, pensions, Social Security, proceeds from the HECM and other assets are taken into account in making this determination.
With traditional HELOCs or Home Equity loans, the homeowner is still required to make monthly payments, but with a HECM the loan is typically not due as long as the homeowner lives in the home. With a HECM no monthly payments are owed. However, the homeowner is still responsible for real estate taxes, insurance, and maintenance.
The critical difference is this: In a traditional HELOC a lender can limit any further disbursements under the line of credit if they believe the property has declined beyond a certain amount in value or if they believe the borrower will be unable to repay the loan. Additionally, the lender or bank itself may not have sufficient financial resources to meet its obligations to pay out additional draws on the line of credit. With a HECM the government guarantees the funds due you, and can never limit the amounts or call the loan due until there is a Maturity Event.
Each HECM product has specific sequences for applying partial prepayments. For HECMs your payments are applied in the following order: first, to that part of your loan balance representing all the accumulated MIPs to date; secondly, to that part of your loan balance representing accumulated servicing fees (if added to your loan separate from the interest charge); thirdly, to that part of your loan balance representing accumulated interest charges; and finally to that part of your loan balance representing principal advances. Before you make any repayment, double check with your lender how they will apply the payments.
Interest expense can only be deducted on your tax return once those interest charges have actually been paid. As long as you have not made any payments to your HECM, you are not allowed to deduct those interest expense for income tax purposes. If you have made partial prepayments, then you must be assured that your prepayments have been applied to your interest expense. Your lender will send a full accounting of this at the end of each year for tax purposes. Obviously, a fully paid off loan (even one paid off by refinancing into a new HECM) might have the interest deducted for tax in the year of the payoff. (As in all tax matters, please consult with a qualified tax advisor).
In some cases, yes. But be careful. There are restrictions.
This tax deduction was created as part of the Tax Relief and Health Care Act of 2006 and originally applied to PMI policies issued in 2007. But because the housing market has been slow to recover, lawmakers have extended this tax break. As part of the Protecting Americans from Tax Hikes, or PATH, Act of 2015 that was enacted in December 2015, this tax deduction is in effect for premiums paid through 2016. For future tax years, Congress must renew it.
The MIP deduction can be taken for policies issued by the FHA, the Department of Veterans Affairs and the Department of Agriculture’s Rural Housing Service. As a result, HECMs are included in this rule.
The deduction is allowed only if you took out the mortgage on which you pay MIP on or after Jan. 1, 2007. No MIP are deductible if they were made in connection with a home loan that was made before that date.
Any associated MIP on new mortgages issued through 2016 will qualify for the deduction.
If you refinanced your home since Jan. 1, 2007, you also qualify for the PMI deduction on that loan. Be careful as to how you structure your refinance. The MIP tax deduction applies to refinances up to the original loan amount, but not to any extra cash you might get with the new home loan. . Clearly, a HECM for Purchase loan would, assuming no additional cash out, qualify for a possible MIP tax deduction.
Finally, while there is no statutory limit on the amount of MIP you can deduct, the amount might be reduced based on your income. The deduction begins being phased out when the homeowner’s adjusted gross income, or AGI, is more than $100,000. This income limit applies to single, head of household or married filing jointly taxpayers. The phase out begins at $50,000 AGI for married persons filing separate returns. The PMI deduction is reduced by 10% for each $1,000 a filer’s income is over the AGI limit. The deduction disappears completely for most homeowners whose AGI is $109,000 or $54,500 for married filing separately taxpayers.
As with all tax-related items, you need to consult with a qualified tax advisor. None of the tax information in this book should be relied upon without being supported with advice from an expert.
The Real Estate Procedures Settlement Act (RESPA) mandates that all HECM originators give potential borrowers estimates and disclosures of all costs associated with the loan, including the lenders fees and other closing costs. The document that lists these fees and costs is known as the Good Faith Estimate or GFE. It is an estimate of settlement and closing costs, and the estimate is made in good faith. It is not always entirely accurate as not all information is known at the time of the GFE. The GFE should include all of the settlement service costs but not costs related to a sale. The GFE is primarily concerned about the costs of settlement rather than the costs of credit.
The HUD-1 Settlement Statement is a standard form which itemizes services and fees charged to the borrower by the lender or broker when applying for a loan for the purpose of purchasing or refinancing real estate. HUD refers to the Department of Housing and Urban Development.
The borrower has the right to inspect the HUD-1 before the day of settlement. The form is filled out by the settlement agent who will conduct the settlement.
The HUD-1 settlement statement also contains a Good Faith Estimate (or GFE). This additional set of figures specifies estimated settlement figures provided by the lender upon application of the loan, and borrowers should compare their initial GFE disclosures to the HUD-1 Settlement Statement and ask their lender or broker about any changes.
A Truth-in-Lending Disclosure Statement (TIL) provides information about the costs of your credit.
Effective October 3, 2015, for most kinds of mortgage loans (but NOT HECMs) a new form called the Loan Estimate replaces the initial Truth-in-Lending disclosure, and a Closing Disclosure replaces the final Truth-in-Lending disclosure. However, if you are applying for a HECM loan or a HELOC or a manufactured housing loan that is not secured by real estate, or a loan through certain types of homebuyer assistance programs, you should continue to receive a TIL disclosure.
You receive a TIL disclosure at least twice: an initial disclosure when you apply for a mortgage loan, and a final disclosure before closing. Your TIL form includes information about the cost of your mortgage loan. It would usually include your annual percentage rate (APR) if this is a traditional type mortgage or HELOC. But NOT for HECMs. HECMs disclosures are about the Total Annual Cost due to the products negative amortization features.
The core of the Truth in Lending disclosures about HECMs is the . The TALC is the HECM equivalent of the Annual Percentage Rate (APR) disclosure required on standard mortgages.
The TALC rate is an annual percentage cost of a HECM. Unlike the annual percentage rate (APR), which takes into account only the finance charges in a credit transaction, the TALC rate considers all costs, which is why it is named the Total Annual Loan Cost. In addition to finance charges, the TALC rate may reflect costs, such as appraisal fees and other closing costs, but also takes into account a percentage of any appreciation in the consumer’s house.
Regulations require lenders to disclose TALC rates based on three loan terms as determined by the life expectancy of the youngest borrower and to assume annual appreciation rates of 0%, 4%, and 8% for the dwelling.
If TALCs were computed for each major HECM option, the TALC would be the lowest on transactions in which borrowers draw the maximum amount of cash at the outset, leaving nothing for the future. Transactions on which borrowers take out a credit line which they don’t draw on for many years, which is the most prudent use of a HECM, would have the highest TALC. Consequently, the usefulness of the TALC is not clear and few people seem to use it to comparison shop.
The cost of any HECM loan depends on how long you keep the loan and how much your house appreciates in value. The longer you hold a HECM, the lower the total annual loan cost rate will be.
On December 31, 2013, the Consumer Financial Protection Board (CFPB) published a final rule implementing elements of the Dodd-Frank Act, which directed the CFPB to publish a single, integrated disclosure for mortgage loan transactions, which includes mortgage loan disclosure requirements under TILA and RESPA. The amendments in the final rule referred to as the “TILA-RESPA Integrated Disclosure Rule” or “TRID,” apply to covered closed-end mortgage loans for which a creditor or mortgage broker receives an application on or after August 1, 2015. The new integrated disclosures are not used to disclose information about HECMs, home equity lines of credit (HELOCs), chattel-dwelling loans such as loans secured by a mobile home or by a dwelling that is not attached to real property (i.e., land), or other transactions not covered by the TILA-RESPA Integrated Disclosure Rule. Lenders originating these types of mortgages must continue to use, as applicable, the GFE, HUD-1, and TIL disclosures.
No. They cannot. Even on a variable interest rate product, even if rates went to the maximum allowed under your mortgage, the Principal Limit cannot be decreased. The outstanding balance of the HECM would grow faster as more interest was charged (or slower if the market rates declined), reducing your equity in the home, but your Principal Limit would not go down. Remarkably, it could increase!! (see below)
Because the line of credit disbursement option permits that the unused line of credit will grow by an annual amount equal to the rate of interest on the loan plus the annual mortgage insurance of 1.25%, the Principal Limit will increase. It will always grow if unused. It is just the matter of what is the interest rate.
It’s yours! HUD takes the downside risk. You or your heirs get the upside or any equity remaining.
No, you continue to own your home, and the title stays in your name. When your home is sold, you or your estate will have to repay the lender the balance outstanding on the HECM. Any remaining equity in the home belongs to you or your heirs.
Aside from any legal obligation you might have concerning law or local ordinances, or occupancy requirements of the HECM program, you must pay your property taxes and hazard and flood insurance on time, and make proper repairs to assure the safety and soundness of the home (e.g. let’s say a tree falls on the house, you need to fix it).
Yes. THIS IS IMPORTANT.
Many times, with regular mortgages, when you make your monthly payment you also pay a portion of your taxes and insurance into escrow. The Lender then pays those expenses on your behalf. HOWEVER, with HECMs, unless you arrange separately with the lender, you must make sure you directly pay taxes and insurance. This is now your responsibility.
If your homeowner’s insurance has lapsed, you will need to reinstate your policy. You also need to be current on any homeowner’s association fees.
If the borrower does not pay his/her taxes and insurance, they may be considered in loan Default and lose their home to foreclosure proceedings.
The lender determines the length of time you will have to complete repairs after loan closing. The exact date by which you need to have all repairs completed will be on the Repair Rider attached to the Loan Agreement. You will be given a copy of these documents at loan closing. You may expect a 90-180 day window, but the program does provide for up to one year to make necessary repairs.
If the required repairs are not completed by the date specified on the Repair Rider to the Loan Agreement, the lender must discontinue disbursements to you on the loan. The loan will be frozen and be available only to fund repairs and mandatory items such as property charges and MIP. Upon satisfactory completion of the repairs, the loan may be converted back to the borrower’s selected method of payment. If repairs are not completed, the Servicer may request that HUD deems the loan Due and Payable.
The lender is responsible for ensuring that the repairs are inspected by an FHA-approved inspector one or more times before the funds to pay for the repairs are disbursed. The lender may charge an administrative fee and compliance inspection fees.
The lender will transfer any remaining balance to a line of credit and inform you of the amount available. At that time, if you choose, you can send the lender a written request for an amount not to exceed the amount available (the Net Principal Limit), and the lender will send a disbursement five days after receiving your written request for the funds. Otherwise, the remaining balance will remain in the line of credit. And increase in size if unused.
If a borrower fails to:
….the HECM can be put into a Default status. If the borrowers sell the property or obtain insurance proceeds, those proceeds are due to the lender to paydown or payoff the loan.
If after reasonable efforts are made to help the borrower eliminate the Default status or the mitigation plans are unsuccessful, then the HECM loan will eventually be designated a Due and Payable. We also call this a Maturity Event.
If a spouse who is on the HECM note or a Non-Borrowing Spouse who qualifies for a deferral of a Due and Payable event, are still living in the house, there is no change in loan status and the HECM is not in Default or Due and Payable. The remaining borrower or Non-Borrowing Spouse can stay in the home until a Maturity Event.
Unless there is a Non-Borrowing Spouse, who qualifies for a deferral of the Due and Payable event, the loan servicer will put the loan into a Due and Payable statuses and work with the estate to repay the HECM.
As long as there is one of the co-borrowers still occupying the home, there is no change in the status of the HECM.
The lender can use any available Net Principal Limit on a HECM (I.e. a line of credit availability on the HECM loan) to payoff (partially or in full) any delinquent taxes or insurance. In the event no funds are available from the HECM, the lender must advance its own funds to pay delinquent taxes or to pay for “Forced Insurance” (a very expensive minimum coverage hazard insurance).
Also according to the FHA guidelines, loss mitigation options available to lenders who have a delinquent mortgage due to unpaid property charges must include, but are not limited to: (1) Establishing a realistic repayment plan for the delinquent property charge(s); (2) Contacting a HUD-approved Housing Counseling Agency to receive free assistance in finding some viable resolution to their delinquency, or identifying local resources available to provide funds or homestead exemptions; and (3) Refinancing the delinquent HECM to a new HECM if there is sufficient equity to satisfy the existing mortgage and outstanding property charges.
Lenders may also use a repayment plan in conjunction with other loss mitigation options, especially when the sum of the lender advances on delinquent taxes or insurance is more than $5,000. If the borrower provides evidence to the lender that they are unable to repay the delinquency within the allotted timeframe, the lender may, at their discretion, extend the repayment term up to twenty-four (24) months regardless of the amount of the lender advance.
In no case, may any repayment plan extend past twenty-four (24) months.
Lenders are not permitted to charge a fee or interest for repayment plans.
THIS IS VERY IMPORTANT. If you are unable to meet the tax/insurance obligations or fail to repay the lenders advances used to pay delinquent property charges, the lender must follow the FHA HECM program rules and initiate a Due and Payable notification to the borrowers, which if not addressed, will lead to foreclosure of the home.
If the borrower or the borrower’s estate requests to pay off the mortgage, the local HUD office must request a payoff statement from the servicer, which will need the following information to calculate the payoff amount:
If the borrower requests to pay off the mortgage , he or she may request an appraisal, and pay off the of 95% of the appraised value or the outstanding balance on the mortgage.
[What happens after a Maturity Event?
**] Once the Loan Servicer has verified that a maturity event has occurred, it will send a “Due and Payable” demand within 30 days to the borrower’s heirs informing them the loan must be repaid. The heirs can sell the property, or purchase the property for 95% of its current appraised value. If any equity is remaining after the sale of the home, it belongs to the heirs. Future payments stop at death, but interest, mortgage insurance premium and homeowner’s insurance continue to accrue until the loan is settled.
Your heirs will work closely with the lender to ensure the loan is paid in full in a timely manner. While payment is due immediately, the heirs have six months to satisfy the debt. If they are selling the property and it is still on the market after six months, the heirs can contact the lender and request a 90-day extension, subject to approval by FHA. One additional 90-day extension can be claimed, again with FHA’s approval.
If the initial Due and Payable notice is not responded to, or the home hasn’t sold after the 90-day extensions have expired, or if the borrower has no heirs to help pay off the loan, the lender may initiate foreclosure. If, however, the heirs are working to either refinance or sell the property to satisfy your HECM, then foreclosure may be delayed.
The heirs or estate may purchase the home for lower of (a) 95% of the then current appraised value (this value is provided by the lender/servicer upon becoming aware of the last borrower leaving the property or dying) or (b) by paying off the HECM unpaid principal balance outstanding and the estate transfers ownership to the heirs. The loan balance will continue to accrue interest and MIP after the death of the last borrower and the calling Due and Payable on the loan, up to the date of the payoff of the loan.
When contacted by the lender upon the Due and Payable event, the estate can give the keys to the lender/servicer and walk away. The lender will handle all the events from this point forward. Essentially the estate permits the servicer to foreclose quickly and take the home in exchange for payment of the HECM outstanding.
Unless there is a Non-Borrowing Spouse, who can obtain a deferral of the Due and Payable event, the FHA requires that either the HECM is repaid, or the property is foreclosed upon. Nothing prohibits any of these people, family included, from purchasing the home at 95% of its market value. Depending on if the state is a judicial or non-judicial state will determine the process to be followed by the servicer and generally how long that process will take.
If you’ve got kids in or heading for college and you are also helping one or two sets of your parents, a HECM may help. You’ll be happy to know you are referred to as the “Sandwich Generation.” The circumstances are apparent. Wherever you look, all you can see is additional expenses.
In the challenging economy of the past few years – with some home values and retirement savings down, government benefit programs under siege and longer life expectancy – many children of seniors are concerned about their parents being able to finance the remainder of their lives, even if they have been diligent about retirement planning. There used to be substantial resistance from children about their parents taking a reverse mortgage and using up their inheritance. Recent research conducted for NRMLA by Marttila Strategies in 2016 shows, however, that there is an emerging intergenerational consensus that your parents should spend whatever they have to live as well as they can for as long as they can.
The vast majority of America’s seniors have their wealth in their home equity. And if your parents are struggling to meet their month-to-month expenses or to pay for additional health costs, tapping into that equity may be the best solution for all of you. A HECMs is a financial product that allows them to do just that. But it also has a cost.
Whether or not a HECM is the right financial option for your parents is a very personal decision and based on many factors. In most cases, your parents will discuss this option with you before making their decision. You want to be prepared to give them the best advice. Here are some questions you most likely will want to be answered:
If there is remaining equity, that equity can be left to the heirs of the estate. If there is “negative equity” (i.e. the loan is greater than the current value of the home), the estate can just hand the property to the lender and walk away.
When your last parent on the home’s title leaves the home or passes away, the lender will send you (or the estate or the surviving parent no longer in the home) an appraisal of the home and the balance owed on the HECM. You probably should go and ask a real estate agent for a sales price estimate. Many times realtors have a different idea of what the property is worth, and since they sell it, their viewpoint may matter more. If there is equity and you want to keep it, you can go about this in basically two ways:
If after you get the appraisal, it’s clear there is no equity in the home, at this point you should immediately (delaying only adds interest to the HECM balance) contact the lender and offer to buy the property for 95% of its appraised value. Yes, you can buy it for 95% of its current value. The same deal applies to everyone, including heirs and families. The deal is that you can own the home for the lesser of the HECM loan balance or 95% of the current appraised value.
One thing, though, you should do regardless. Always ask the realtor for a valuation. If it turns out the appraisal from the lender is high, you can argue it should be lower, and you may get the home at 95% of a reduced price. And if you have doubts, have another appraisal done by a qualified FHA appraiser. It may (not always, as there can be genuine professional valuation differences) convince the lender to get a revised estimate.
No matter how large the loan balance, your parents or you never have to pay more than what the property is worth. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the Federal government absorbs that loss. The government pays for it with proceeds from its insurance fund, which the borrower pays into on a monthly basis.
The financial assistance a HECM can offer, aside from relieving you from the double duty of college and caregiving for elder parents, could include the following:
No!! This was changed in 2014. Special provision was made for Non-Borrowing Spouses. Under certain somewhat strict conditions, they may apply for a deferral of the Maturity Event triggered by the death of the borrower.
Anyone, including a spouse not on title who does avail or elect to be protected under the special Non-Borrowing Spouse deferral rule, may bid and own the home for 95% of the market value at the time of sale. Of course, you must either have the cash or a mortgage to be able to fund the purchase.
The short answer is no! If you decide to do this, talk to an attorney, your spouse, your family and make sure it’s consistent with your goals and that in the event the Non-Borrowing Spouse, not on the title, is dispossessed as a result of foreclosure, there is some form of backup plan.
Yes. They can be. Some states do not allow Non-Borrowing Spouses. But many do. And also some states recognize common-law spouses and same-sex spouses. There are very specific rules. First of all, check your state laws on this.
In the past, some borrowers removed their spouse from the property title if the spouse was considerably younger (the Principal Limit is larger the older the “youngest” borrower on the title) or had not reached age 62 (everyone must be at least 62 years old to qualify for the program). This was a poor decision if the older borrower on title died before the Non-Borrowing Spouse. FHA rules would unless the Non-Borrowing Spouse could repay the HECM loan or refinance it, require the property to be put into foreclosure.
The most critical aspect from an origination of a new HECM is that the Principal Limit will be based on the age of the Non-Borrowing Spouse. If the spouse is (say) 50 years old, while they don’t qualify to be a HECM borrower, they do get certain protections, but the HECM Principal Limit is based on their younger age. But they are not on title to the home.
As a result of the hardship a foreclosure would have on the remaining Non-Borrowing Spouse, FHA changed the rules so the Due and Payable event upon the death of the borrowing spouse, can be deferred until the passing of the Non-Borrowing Spouse or another Due and Payable event. The deferral can be for as long as a Non-Borrowing Spouse continues to meet all the qualifying attributes stated below.
However, there are the substantial financial restrictions:
For the deferral period to apply to a Non-Borrowing Spouse, the Non-Borrowing Spouse must:
In the event, the last surviving borrower predeceases a Non-Borrowing Spouse, the Due and Payable status will be deferred for as long as a Non-Borrowing Spouse continues to meet all the qualifying attributes stated above. Also, such Non-Borrowing Spouse must satisfy and continue to meet the following:
The deferral does not apply in circumstances where a borrower makes a permanent move out of the home, whether for health or any other reasons. The borrower must die for the deferral to be available.
Most homes placed in a living trust can still be financed with a HECM. Consult with your trust account manager to ensure that your contract does not prevent this type of financing before beginning your application.
No. The growth feature means that your credit limit increases at an annual rate equal to the interest on your HECM, plus the MIP of 1.25%. You get this monthly/annual credit because when the Principal Limit was initially calculated as a line of credit, it assumed you could (if you wanted to) draw down the full amount, and start accruing interest and MIP from the date of close on the total amount. But because you possibly didn’t do this, but left some of the line of credit unused, FHA gives you a credit back for the annual interest and MIP associated with that remaining portion. In a strange way, it looks like a kind of interest credit. But it’s still borrowing. Just a larger capacity to borrow.
The lender can disburse funds to you after the 3-day right of rescission ends. The disbursement date will appear on the HUD 1. After the first disbursement, payments from the lender will be made within five days of receiving a written request for payment from you. Term and Tenure payments will be made on the first business day of each month beginning with the first month after closing
It is possible to add owners to the title of the home after obtaining a HECM. However, anyone added to the title must also be included in the HECM, which means that they must be eligible for HECM financing. Provided the individual being added to the title is eligible, they can be added to the HECM by doing a HECM-to-HECM refinance, which requires minimal processing. Be aware that borrowers collectively need to pass the new Financial Assessment requirement and may need to be re-counseled.
It doesn’t matter if you are disabled or not. The FHA use age, property and your ability to pay taxes and insurance, as well as maintain the home, as the criteria to determine HECM eligibility and make no exceptions for disability or Social Security status.
Filing for Bankruptcy is NOT a Default in the terms of the HECM Program. Under the HECM program, you cannot access any unused Principal Limit unless that request for funds is approved by the court or the trustee monitoring the bankruptcy proceedings.
You may only participate in a property tax deferral program if the lien created by your deferral program is subordinate to your HECM.
Yes, tax exemption programs are permitted under the HECM program. It is strongly recommended that you coordinate your participation in any tax exemption program with your lender.
If your property is in an area that has been identified by FEMA as having special flood hazards, then you must maintain Flood Insurance in compliance with the Flood Disaster Act of 1973. If you are required to maintain Flood Insurance, then you must provide your lender with evidence of this coverage and ensure that this policy is renewed upon expiration.
Also, be aware that should FEMA update their flood maps, your home may subsequently fall into a flood zone when previously it had not, or it may indeed fall out of a flood zone. You will be required to purchase flood insurance or allowed to cancel depending on the circumstances.
Yes. You can go to these websites for additional information.
A HECM can be in Default if the borrower fails
The Department of Housing and Urban Development, more often identified as HUD, is the agency that oversees, enforces, guarantees and monitors government residential lending programs. FHA is the Federal Housing Authority and is a component of HUD.
A HECM becomes Due and Payable after a Maturity Event
The FHA uses the 10-year Swap Rate (index plus margin) to estimate what Principal Limit Factor can be applied to the Maximum Claim Amount to determine the Principal Limit. The minimum rate is currently (as of July 2016) 5.06%
The Federal Housing Administration (FHA), a wholly owned government corporation, was established under the National Housing Act of 1934 to improve housing standards and conditions; to provide an adequate home financing system through insurance of mortgages, and to stabilize the mortgage market. FHA was consolidated into the newly established Department of Housing and Urban Development (HUD) in 1965.
As it impacts HECMs, the primary role of the FHA is to insure HECMs. The FHA determines how much private HECM lenders can lend, based on the homeowners age and home value, and guarantees that lenders will meet their obligations.
This includes payoffs, closing costs, Repair Set-Asides, taxes, HOI and unpaid federal debt required by the lender.
A Maturity Events occurs when:
This is a term used primarily in conjunction with the HUD home equity conversion mortgage (HECM) program, the most popular HECM program. The term is best understood as the lesser of the appraised value, the sales price of the home or the FHA limit of $636,150. Technically it can vary slightly from this amount. It represents the maximum claim the lender has on the FHA insurance against loss on disposition of the home.
HUD/FHA mandated insurance guaranteeing the borrower will receive the promised loan advances and will not have to repay the loan as long as there is no Maturity Event. It also insures that the lender will be reimbursed portions of any deficits arising from the sale of the home to repay the loan. Mostly it makes the loan non-recourse to the borrower. HECM MIP, unlike some Private Mortgage Insurance (PMI) programs, cannot be canceled regardless the number of years passing or the current loan to value ratio as in some PMI arrangements.
This is (a) the net amount of Principal Limit available to the borrower after payment of Mandatory Obligations, or (b) subsequent to the initial amount the Net Principal Limit can (i) decline as more draws are made or (ii) it increases as repayments are made to the HECM or (iii) the unused Net Principal Limit grows at the rate of interest plus MIP.
The FHA uses a formula to determine what the lender can charge.
HECM origination fees can be financed, (i.e. rolled into the loan) so that the borrower does not need to pay the costs out of pocket. Although there are upper limits on origination fees, they still can vary from lender to lender.
The principal limit of a HECM is the Maximum Claim Amount (think of this as the maximum loan amount) amount that FHA is willing to lend initially to the borrower. This result is reached by applying a principal limit factor to adjust down the maximum loan amount according to the age of the youngest borrower and the Expected Interest Rate. These factors are actuarially determined – i.e. the older the borrower, the higher percentage of principal limit can be obtained through a HECM.
Refers to the percentage of Maximum Claim Amount that creates your Principal Limit . E.g. a PLF factor of 50% on a Maximum Claim Amount of $200,000 means you have a Principal Limit of $100,000
VA Residual Income is the discretionary income which remains after a homeowner has fulfilled all of his/her monthly credit obligations. To get HECM mortgage-approved, FHA requires mortgage applicants to show a minimum (VA) Residual Income based on their geography and household size.
This is a protection given to borrowers under the Truth in Lending Act (TILA). This power gives the borrower of a HECM the opportunity to cancel their loan within three business days of signing the loan documents and qualify to receive a full refund of any monies paid. You may have second thoughts or want more time to shop for other financing options. This act gives you extra time to consider your new loan carefully. Sometimes called a “cooling off” period, it allows you those three extra days to be certain the loan is exactly what you expected. However, this right does not apply to a Purchase transaction, only to a Refinance.
To exercise the right to rescind, the consumer must notify the creditor of the rescission by mail, telegram or other means of communication. Within 20 calendar days after receipt of a notice of rescission, the lender is required to return any money or property that was given to anyone in connection with the transaction and must take any action necessary to reflect the termination of the security interest. If the lender has delivered any money or property, the consumer may retain possession until the lender has complied with the above.
Similar to the annual percentage rate (APR) being disclosed on traditional loans, the “total annual loan cost” (TALC) is a standardized rate calculation intended to give borrowers (in a single number) the projected annual average cost of a HECM including all itemized closing or other expenses.
TALC is a useful benchmark for comparing different HECM programs or using different assumptions. However, the TALC rate has shortcomings and should not be relied upon solely in selecting a HECM.
A Truth-in-Lending Disclosure Statement provides information about the costs of your credit.
The amount outstanding on the loan, including all Mandatory Obligations, additional draws, interest and MIP to date.
Life Expectancy Tables come from the FHA Guide and are identified as Appendix L to Part 1026 – Assumed Loan Periods for Computations of Total Annual Loan Cost Rates. This book only reproduces below the Loan Period in Life Expectancy in years of the youngest borrower to become obligated on the reverse mortgage, as show in the U.S. Decennial Life tables for 1979-1981 for females, rounded to the nearest whole year.
Reverse mortgages are a remarkable financial product that permits certain homeowners who have reached the age of 62 to turn their home equity into their most important retirement asset. Reverse mortgages provide the borrower the option of not making a monthly prepayment for as long as the mortgage is outstanding, help supplement retirement income and allow homeowners the comfort of aging-in-place. This book is written for the consumer. Potential borrowers need to be informed, so they can make the best decision for their circumstances. The book has the answers to over 100+ questions on products, special features, qualification, strategies on how to use a reverse mortgage, borrower protections, how reverse mortgages are priced and what are the various pricing options, consumer risk considerations, and practical advice for the children of parents considering a reverse mortgage. A companion book “The Reverse Mortgage Solution” provides a comprehensive description of the product for financial intermediaries, advisors, elder care lawyers, charities and children of potential borrowers.