7 Steps To a Reverse Mortgage Decision
I know a lot of older homeowners think about reverse mortgages. They do research looking to find out how they work and if they are as bad or great as you hear. It sounds kind of cool. With a reverse mortgage you may be able to borrow money from your home to make monthly payments of principal and interest.
Sounds almost too good to be true! So then we look at the negative things we might hear and read and wonder, “What’s the deal with reverse mortgages? Is this something that would help me to live a better life? Or am I better off just leaving things as they are?” .
Let’s first quickly go over some important reverse mortgage basics. A reverse mortgage is a home loan for homeowners and homebuyers age 62 and older. Reverse mortgage loan proceeds can be received in any combination of the following options:
- Line of credit (LOC) – draw as needed up to the maximum eligible amount
- Lump sum – a lump sum of cash at closing (only available on fixed-rate loans)
- Tenure – monthly payments for the life of the loan
- Term – monthly payments for a specific number of years
Reverse mortgage loans are insured by the Federal Housing Administration (FHA)1 and allow homeowners to convert their home equity into cash with no monthly principal or interest mortgage payments.
After obtaining a reverse mortgage, borrowers are required to continue to pay property taxes and insurance and maintain the home according to FHA guidelines. Typically the loan does not become due as long as you live in the home as your primary residence and continue to meet all the loan obligations.
How much can you borrow? The amount of money the borrower can receive is determined by an equation that takes into consideration:
- The age of the youngest borrower, and
- The current interest rate, and either
- The home’s appraised value when the borrower is going to stay in a home they currently own, or
- The purchase price when the borrower is using a reverse mortgage to purchase a home, or
- The maximum lending limit. (Note; The Maximum Lending Limit for FHA reverse mortgages is $679,650. The funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements)
Reverse Mortgage Borrower Eligibility
To be eligible for a reverse mortgage loan, the FHA requires the youngest borrower on title to be 62 years or older. Borrowers must also meet financial eligibility criteria as established by HUD. If there is an existing mortgage on the home, it must be paid off with the proceeds from the reverse mortgage loan.
Eligible Homes Types for Reverse Mortgages
Most single-family homes, two-to-four unit owner-occupied dwellings or townhouses and approved condominiums and manufactured homes are eligible for a reverse mortgage loan. The home must meet FHA minimum property standards.
Reverse mortgage loans are commonly used to pay for home renovations, medical and daily living expenses. Homeowners who have an existing mortgage often use the reverse mortgage loan to pay off their existing mortgage and eliminate monthly mortgage payments.
The loan does not generally have to be repaid until after the last surviving homeowner moves out of the property or passes away. At that time, the estate typically sells the home to repay the balance of the reverse mortgage and the heirs receive any remaining equity. Reverse mortgages are non recourse loans. The estate is not personally liable for any additional mortgage debt even if the home sells for less than the payoff amount of the reverse mortgage loan.
When the reverse mortgage loan does become due, the borrower’s heirs/estate can choose to repay the reverse mortgage loan and keep the home or put the home up for sale in order to repay the loan. If the home sells for more than the balance of the reverse mortgage loan, the remaining home equity passes to the heirs.
If the home sells for less than the owed balance, the estate is not required to pay more than the value of the home at the time the loan is repaid.
A reverse mortgage loan is “non-recourse”, meaning that if you sell the home to repay the loan, you or your heirs will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.
Okay - We’ve gone over some of the important basics, now let's talk about the Decision Making Process. I think there are seven important steps to making a solid reverse mortgage decision.
- What are your immediate needs?
- Do you need more cash flow? (would reverse mortgage tenure payments help?)
- Would a cash infusion help to payoff debts that are biting into your monthly obligations? (Lump Sum?)
- Does your home need improvements or upgrades to make it a home you can live in safely, now and for the future? How will you pay for them and how does that impact your cash flow and savings?
- What are your goals over the next 5, 10 or 20 years?
- Imagine a typical day 5, and 10 and 20 years into the future.
- Are you still living in your current home, or somewhere else.
- Do you see yourself travelling? Can you afford to travel?
- Is your home easy for you to get around in when you’re 72, 82 and 92? Can it be modified?
- How is your health. (Use your current health and your family history as an idea of how active you might be -
- did you parents live a long time?
- Were they healthy? People are living longer now than ever before so many experts say to plan for a longer retirement than you expect?
- Do you have long term care insurance? (Growing LOC?)
- What plans have you already put into place to achieve your goals? Investment accounts, staying healthy and fit, pension, timing of taking Social Security benefits?
- Have you spoken with a professional, ethical, financial advisor about your retirement?
- Do you think you’d like to continue to work? How do your career goals impact your future?
- Do you have a plan for an unexpected event?(Death of a spouse, injury, accident?)
- Imagine a typical day 5, and 10 and 20 years into the future.
These are important questions. Life loves to throw curve balls and it’s a good idea to have anticipated and prepared for some of the most common pitches that might be coming over your plate!. You’ve got to know what you’re working against and have a overall game plan, all the while knowing that you’re going to have to meet the interim challenges
Steps ONE and TWO - These are very important conversations to have with yourself, your spouse and your family.
You know, your retirement really is a family affair. What roles do you expect your family to play if you should have an injury or illness or become a widow? Do they know and agree to your expectations? Those questions just came up and aren’t even on my list, but they are important. Family is important. I always encourage my clients to have some or all of their family at my reverse mortgage consultations. Your kids and siblings are going to have questions and solutions that you might not even think of. Don’t limit your options.
Step Three - What Options are there for achieving your goals and meeting your needs?
The option that is under discussion here is the reverse mortgage, and that might be a great answer due to its flexibility and the different options that can be mixed and matched depending upon your situation. A reverse mortgage is not the answer for every retirement plan, but in my completely biased opinion, it is one that should at least be considered. There are other options that may be available that you probably haven't even thought of.
What options are there for achieving your goals and meeting your needs? This is where family really comes in handy. They might have some great ideas. This is also where a knowledgeable financial advisor can be of great help. Make an appointment, the sooner, the better. Consider introducing the advisor to your kids and grandkids. It’s never to early to plan for the future, and today is earlier than tomorrow. Here are some of your options to deal with cash flow, lifestyle choices, and living arrangements over the next few years:
- Downsize to a smaller residence? Downsize using a Reverse For Purchase?
- Sell and rent? (what if rents go up?)
- Keep working?
- Pay off your mortgage? Make extra principal payments on your mortgage now in order to pay it off faster?
- Use a reverse mortgage to make your monthly house payments?
- Use a reverse mortgage to upgrade your home, make investments, travel, or for any other use you deem fit?
- Use a reverse mortgage to buy a two or four unit building, live in one unit and rent out the rest?
Step 4 - What are the Pros and Cons of reverse mortgages as an option?
Pros - There are so many pro’s with a reverse mortgage that it might take a short book to really cover them all, but here are some of my favorites:
- The flexibility of an adjustable rate reverse mortgage. The fact that it is open ended credit makes this loan very useful in dealing with the curve balls life throws at us. You can set up your reverse mortgage loan proceeds in the form of:
- Growing Line of Credit - Available loan funds that are not borrowed yet. The fact that the available line of credit grows over time at a rate equal to the interest rate on the loan plus .5% is unprecedented and one of the most important things to understand about a reverse mortgage. This line of credit gets larger over time! For instance if you have a reverse mortgage line of credit of $300,000 and an interest rate of 4.5%, your borrowing power would increase in year two of the loan by @5% of @$315,000. What a great way to be prepared for emergencies. Remember interest is compounded monthly so your available line of credit grows every month (just as your loan balance does).
- Lump sum - You can borrow the entire available amount to pay off mandatory debts like an existing mortgage and up to 60% of the available principal limit the first year for whatever reason. The other 40% of available loan proceeds become available to you after the first twelve monhts. You can use the available funds to pay for things that are biting into your cash flow, to beef up your checking and savings account
- Many homeowners use the bulk of their reverse mortgage proceeds to payoff their existing mortgage and in fact the existing mortgage must be small enough that the new reverse can pay it off or the borrower can bring in enough verified funds to the transaction to payoff the current mortgage. The new reverse mortgage must be the only loan on the property.
- What would just the elimination of a monthly prinicpal and interest payment do to your cash flow? To your quality of life?
- Tenure payments - Another option is to take your reverse mortgage loan proceeds in the form of TENURE payments. This is equal payments to you each month for as long as you live in the home. You can’t outlive the Tenure Payments as long as you remain in the home. You must, of course, stay current on your property obligations such as property tax, insurance, and HOA dues.
- Term payments - Under this option you take your loan proceeds in a fixed monthly payment for a specific term that you decide, maybe over 10 or 20 years. This one is not used too often in my experience, but it is an option that can be useful in certain circumstances.
- POTPOURRI - This option is a mix up of two or more disbursement methods. For example….some LUMP SUM at closing, some in a monthly TENURE payment and maybe even some in a growing line of credit.
Many of my clients choose this method, taking a lump sum at closing and then parceling out the rest of the loan proceeds in a line of credit and/or monthly payments. It’s a fun step for me when we get to that stage of the process and schedule the closing. I get to call my clients and ask, “How do you want your loan proceeds?” My reverse mortgage software will help us as we have that conversation. “Ok, Debbi, what if I take $5,000 cash at closing? What will my line of credit be or, what would my Tenure payment be?”
That is just the first PRO of a reverse mortgage.
- The second PRO of a reverse mortgage is FLEXIBILITY! Again? Yes it’s flexible like we just talked about but even more so….as time goes on. You can change it up! Yep. for example: Let’s say you set up your reverse mortgage in a growing line of credit, and that you really haven’t touched it very much and it continues to grow. Several years down the line, there is another $40,000 available. You need some help at home with improving the property or taking care of yourselves. You can call the lender and request a change: “I need some money every month. If I switch from a LOC to a tenure payment, what amount would I receive?” The lender can calculate that for you. They will base the amount off of your age at that time and the available LOC funds. There is a recalculation fee of $20 but you can do that as many times as you need to.
Or maybe you are taking monthly payments now, and have an immediate need for a lump sum of some kind. You can call the lender and say, “I need to take out $2,000 in a lump sum, what would that do to my monthly payment?” They can calculate that right there and let you know. I personally love it when my clients set up their reverse mortgage in a growing line of credit that they can then manage over time as they age, taking lump sums as the need arises or even better, mixing it up. Taking the occasional lump sum, having the majority in a growing LOC and even some in an monthly tenure payment often makes the most sense. One of my clients used a reverse mortgage to payoff his regular mortgage AND took a $400 per month Tenure Payment, and was left with a $40,000 growing line of credit and a lump sum of $4000 at closing.
- Here is the THIRD PRO of a reverse mortgage! A reverse mortgage never, ever requires a payment of principal or interest from the borrower. The lender just waits. They wait until the last borrower has permanently left the home due to death or medical reasons. At that time the entire loan plus principal and interest becomes due and payable. So when the last remaining borrower has moved out or died the lender must be paid off. How? That takes us to the forth PRO of a reverse mortgage.
- Reverse Mortgages are NON RECOURSE LOANS. This means if the estate cannot or will not payoff the loan, then the lender’s only recourse is to foreclose on the house and sell it themselves. They must take whatever the home sells for as payment in full. If the home is upside down (meaning the amount owed on the reverse is greater than the home value) the lender has no claim on any other assets of the estate. If the home sells for less than what is owed the lender will file a claim with FHA to receive the shortgage from the Mortgage Insurance that is a cost of every HECM reverse mortgage. A little known fact - If the balance of the reverse mortgage is higher than the home value and the family wants to keep the home HECM lenders are required to offer heirs the option of satisfying the reverse mortgage by paying 95% of the home's present appraised value.
- I helped a grandson to purchase his grandmother's home when she moved into a skilled nursing facility. His mom had called me because her mother was upside down on her reverse mortgage owing about $80K more than what the home was worth. She knew the reverse would become due and payable if the borrower moved out of the home permanently and there was no way she could come up with it. I met with her and told her she would not be responsible for the shortage and during our conversation found out that her son was looking to buy his first home and wished he could afford grandma’s house. I explained the non-recourse nature of the reverse to her, we conference-called the lender so that she could hear them tell her it was true. Her grandson was able to purchase grandma’s home on a short sale transaction for 95% of the appraised value. HAPPY ENDING!
- If the heirs choose to sell the home, they recieve all sale proceeds from the sale of the home minus the balance due on the reverse mortgage. Period. The lender only receives what they are owed or the value of the home whichever is less. In California we are lucky in that our home values have risen steadily since 2009. We seem to recover from downturns in the RE market fairly quickly here in SoCal.
- 5TH Pro of a reverse mortgage is that there is NO PREPAYMENT PENALTY! You can make payments on your reverse mortgage if you want to!! (Why would I?” You ask) Well, there are some compelling reasons to consider making payments on your reverse mortgage, especially if you have chosen the Open Ended adjustable rate reverse mortgage (my particular favorite).
- Talk with your tax professional. If you are still filing taxes, your CPA might suggest that you could make some house payments in order to benefit from the allowable interest tax deduction.
- The funds that you paid work two ways for you. Because the adjustable rate reverse mortgage is open ended credit, not only does your prepayment reduce the amount you owe, it becomes available to you as an increase in your line of credit, which is then going to grow over time at a rate equal to the interest rate on the loan plus .5% . This is a concept that can be hard to understand so if you have a question about it please do give me a call at (951)283-2983.
- 6th PRO - YOU OWN YOUR HOME - A lot of people think that a reverse mortgage is just signing over your house to a bank for money and they let you live there. Not at all. It’s a mortgage, plain and “not so simple,” but a mortgage. If you decide to sell the home, no problem. You have all rights to sell the home, payoff the reverse with the sale proceeds, and keep all the change after closing costs. I have had quite a few clients who have sold their homes with reverse mortgages and actually used a new reverse mortgage to help them purchase a new home!
- 7th PRO. You can buy a home with a reverse mortgage.
There are other Pros as well, the HECM Counseling Session that you participate in to get a reverse mortgage is a huge help in understanding your options and responsibilities as a reverse mortgage borrower.
Let’s go into the CONS of a Reverse Mortgage:
- The flexibility of an adjustable rate reverse mortgage. It’s such a flexible loan that it takes more time to grasp the ins and outs of how it works. I promise you, though, it’s no tougher than 7th grade math and you can do it! But it will take some time and effort. Lucky for us there is also a closed end, fixed rate, reverse mortgage and it has its own benefits. The fixed rate reverse must be taken as a LUMP SUM, there is no option for a growing LOC. But, the benefit of the fixed is that you will know to the penny what your balance will be into the future on any given day. In other words, the math is really simple.
- You must live in the home. A Reverse mortgage can only be made on the primary residence of the borrower. It cannot be used on rental property. Cool tip here, you can get a reverse mortgage on a duplex, triplex or fourplex as long as you live in one of the units!! One of the borrowers must always live in the home as the primary residence to comply with the loan conditions. Once the last borrower has permanently left the home due to death or illness the reverse mortgage becomes due and payable. Remember, the reverse mortgage loan balance grows over time, so I think it’s wise to only get a reverse mortgage on the home you plan to stay in. If you know you’ll be moving soon I’d say don’t do it.
- The balance grows over time and so you will have less equity in your home than you would have if you’d never gotten a reverse mortgage. This means your kids will get less when you die. (Now, as the child of a reverse mortgage borrower, let me tell you...most of us don’t care. We don’t want our parents house, we just want our parents to live a good quality of life. Your kids most likely feel the same.. Remember though, the lender’s only recourse is to the home. All of your other assets should go to your heirs. I’ll take this moment to encourage you to talk with an estate attorney to be sure you’ve set up your estate in such a way that things go smoothly and your kids can avoid a lengthy probate, but as far as the house is concerned, the worst that can happen is that the kids get no $$ from the house itself. They would never have to come out of their own pocket to pay back anything on the reverse mortgage.
- The reverse mortgage may not provide enough loan proceeds for you. Many of my clients, though they are in their 60’s, 70’s and 80’s still have large mortgages on their homes. A reverse mortgage will not loan you 80 or 90 percent of your homes value like a forward mortgage. You need to have your home paid down. At today's rates a 62 year old will only be able to borrow a smidge over 40% of their home value. And remember the loan amount on a reverse mortgage is based upon the age of the youngest borrower or eligible non borrowing spouses age and current expected interest rates! As interest rates rise, the amount you can borrow goes down. Right now, rates are still historically low so loan amount are larger than they would be if rates were even a little bit higher. This can make waiting for the right time to get a reverse mortgage problematic. Remember though, you can treat a reverse mortgage just like a regular mortgage and make payments on it. It may be better to get the reverse sooner than later.
- CLOSING COSTS. Like any mortgage you would get, the transaction has costs. FHA charges 2% of your homes value up to $679,650. As an FHA mortgage it compares more to a traditional FHA Mortgage as far as costs go. There are the usual closing costs of title, escrow recording fees, appraisal fees as well. You’ll want to be sure to understand what the costs are for.
STEP 5 - Do you qualify for a reverse mortgage?
Ahhhh...qualifying for a reverse mortgage. How hard can it be? I mean, there aren’t any required payments of principal or interest, so what do you have to qualify for?
We’ve got to look a little deeper and understand the risks of a reverse mortgage to the homeowner and the lender. Remember, owning a home is really more costly than renting a home. As the owner of the home you are responsible for the home’s condition and any lender, including a reverse mortgage lender, is going to want you to maintain the home in good condition. So you will have the ongoing costs of maintenance and upkeep.
If you were renting you’d almost always have the landlord to go to for repairing things like leaky roof, broken AC and other things. A reverse mortgage requires the homeowner to keep the property in good repair. If you let the house go to hell in a handbasket the lender could foreclose. How do they even know? Well, if you let the house go, eventually those things show on the outside and the city or county will get involved. They might give you a citation for clearing brush and weeds from the yard. Those citations are public record and the lender will then find out.
As a homeowner you are responsible for keeping your home insured, and it is a condition of your mortgage that you have homeowner insurance naming them as an additional insured on the home. This is true for both forward and reverse mortgages. So you will have to budget to pay those insurance premiums. The lender will want to know that you have an adequate income to pay those premiums.
You also have Property Taxes and possibly special assessments on your home. You will be required to pay your property taxes on time and the lender will confirm that you have the income or assets to afford that.
Another property obligation you may have is Homeowners Association dues. If you live in a community with a HOA you must always pay your dues on time.
As a part of qualifying for a reverse mortgage the lender will look to your income to be sure that you can afford to continue to pay those property obligations for the foreseeable future. The lender will also look to your credit history to be sure that you have a habit of paying your obligations on time. Though a homeowner with a reverse mortgage is not required to make mortgage payments on their loan, they are responsible for the staying current on the property obligations...taxes, insurance and HOA (if any), missing or becoming delinquent on those obligations will cause your reverse mortgage to go into default and the lender will begin the default and foreclosure process.
In the past reverse mortgage borrowers were not required to qualify with credit and income and may have not understood or been told clearly that it was their obligation to do so and seniors would lose their home to a foreclosure. The new financial assessments require the lenders to look at the homeowners ability to afford the property obligations as well as the “habit” and “willingness” to pay obligations. Its VERY important that all reverse mortgage borrowers understand their obligations when they have a reverse mortgage.
If you want to know if you qualify for a reverse mortgage, please give me a call and we can go over the numbers, your income and credit and find out. If you’ve been making your house payments on time and keeping current on your other bills it’s very likely that you will. I am happy to review and give you a good idea. If your credit report is not so good, I’ve got some ideas and partners that can help you to improve your credit.
In order to qualify for a reverse mortgage, the proceeds will need to be sufficient to pay off any existing mortgages. Sometimes this isn’t so. I’m currently working with two borrowers that are bringing in money from their savings and retirement accounts in order to help the reverse mortgage to payoff their existing mortgage. Sometimes that is a better long term solution than just continuing to pay on an existing mortgage. Sometimes it’s better to keep paying. This is a very good conversation to have with your financial advisor and I am happy to participate in that conversation.
Once you are comfortable that you can qualify for a reverse mortgage the next step is
Step 6 - How can you use a reverse mortgage to meet for your goals and needs?
Coming up with the plan for how you will use this flexible reverse mortgage to meet your goals and needs?
- Will you just be able to payoff your current mortgage and this alone will improve your cash flow to make life better?
- Will you use a reverse mortgage to access cash for some other sensible reason?
- Will you structure the reverse mortgage to provide you with monthly tax free funds?
- Will you be looking for funds for travel, investments, or hobbies?
- How about mixing it up and doing a little of all of them?
This is a part of the process that will be under discussion all the way until the end and can even continue after the loan is closed in many circumstances. The adjustable reverse as we said before is “open ended credit” and allows you the flexibility to change your options. A fixed rate reverse mortgage is closed ended financing and must be taken as a lump sum and there are some restrictions on the amount if it is mostly going to be used to payoff an existing mortgage.
My personal favorite is the adjustable, and I think the fixed rate’s best benefit is that it provides absolute knowledge of what the future balance will be at any given time. You still won’t have absolute figures on what your house is worth over time, but you will know what the balance will be. So the fixed reverse definitely has its place, in my opinion. I especially like the fixed rate when someone is buying a home with a reverse mortgage because I know they will be using all of the loan funds to purchase plus their down payment, and they can see exactly what will happen to the loan balance over time.
Step 7 - The Last STEP in the Decision making process
What is the process to get a reverse mortgage?
You’ll want to know what hoops you have to jump through, what paperwork has to be filled out, what documents you will need to provide, how long does it take...you’ll want to be familiar with the process and what it entails.
I actually have a Process Flow Chart that I can give you that outlines it all and we’ll go over that today.
I will give you a checklist when we first meet, or can email it to you with the 12 Step Process to getting a reverse mortgage. The whole process normally takes between 45 and 60 days and can sometimes be faster depending upon volume and and turn times. Here quickly is the process. If you’d like a copy of the process please contact me by phone or email or FB and ask. I’m happy to send it to you! (951)283-2983, (951)283-2983
- Talk with your Reverse Mortgage Advisor
- Obtain HECM Reverse Mortgage Counseling Session and certificate
- Complete Pre-financial assessment with your Reverse Mortgage Advisor (income, property taxes and insurance for home and any additional properties owned)
- Complete Application and submit required documentation for financial assessment and processing department to review
- INTAKE AND PRELIMINARY FINANCIAL ASSESSMENT REVIEW: We may request missing additional items.
- APPRAISAL ORDERED: Check to make sure that your water heater is double-strapped and you have smoke/CO2 detectors on each level of your home and inside each sleeping area (bedroom). The appraisal company will call you directly to schedule the appraisal. Appraisal is completed and a copy will be emailed to you for your records
- UNDERWRITING: The complete file and appraisal will then be submitted to our Underwriting Department for an initial review and preliminary loan approval. Title will be working on their tasks and legal will review your trust documents for approval.
- CONDITIONAL LOAN APPROVAL - Underwriting will give us a list of conditions we must satisfy in order to obtain the “Clear To Close” Your Advisor and Transaction Coordinator will work with you, the title company, and our processing team to satisfy all Underwriting conditions.
- FINAL LOAN APPROVAL AND CLEAR TO CLOSE! Just what it sounds like! Let’s schedule your closing appointment with the notary at your home.
- FINAL LOAN DOCUMENT SIGNING with the notary.
- 3 DAY WAITING PERIOD – This is the required 3 day rescission period before the loan can fund.
- FUNDED! Your loan is funded, payoffs made, documents recorded and loan proceeds (if any) deposited to your account.
Now is the time to take action! If you have reviewed this document and believe that you would be a candidate for a reverse mortgage, let’s get started on making it happen. Call me at (951)283-2983 or email me at . Or you can go to the Request a Quote page of my website and fill in the form at: http://reversemortgagedebbie.com/Request%20a%20Quote