The concept of a “reverse mortgage” was originally considered back in 1980 and ultimately insured by the Federal Housing Administration in 1989. Today, the reverse mortgage is officially called the Home Equity Conversion Mortgage, or HECM and is insured by the FHA. The HECM is a loan program designed to provide seniors access to their home equity without the need to apply for a cash out refinance or a home equity line of credit. Instead, the lender issues funds directly to the homeowners in the form of a lump sum payment, a line of credit or a combination of either. Who qualifies for a reverse mortgage and what are some of the details?
The program is designed for seniors and according to the FHA a senior is defined as someone 62 years or older. If there is a spouse and the spouse is under 62, the spouse can be a non-borrowing spouse while still remaining on title. If both borrowers qualify as seniors, the program considers the age of the youngest borrower to determine the loan amount. The older the qualifying borrower, the greater the loan may be as long as the final loan amount is at or below FHA limits. The FHA HECM is guaranteed to the lender and is considered as such to be government-backed. However, that does not mean the government is involved in any way other than managing the mortgage insurance premiums paid. However, the term “government-backed” or “government benefit” might imply the program is a benefit similar to Medicare or social security.
Borrowers are also required to occupy the property as a primary residence as with any other FHA loan program. The amount of funds available depends upon the age of the borrowers, the current value of the property and the existence of any current liens on the property. If there is a mortgage on the property for example, funds from the reverse mortgage are first used to pay off the existing mortgage. There cannot be any subordinated debt with a reverse.
Borrowers must also submit to a counseling session with a licensed reverse mortgage counselor to make sure the borrowers completely understand how reverse mortgage loans work. Sometimes the borrowers can initially think the program is something that it’s not or that the loan is part of their retirement benefits form the government. The counselor explains how reverse mortgage loans work, how interest accrues and how and when the loan becomes due.
Reverse loans don’t have any monthly payments on the mortgage, this is only repaid after the last borrower leaves the house and the property is no longer owner-occupied. This could mean moving to an assisted living center or the passing of the borrower. During the occupancy period, interest accrues on the reverse mortgage and when the loan becomes due, the reverse mortgage is paid off with the sale of the property. However, borrowers are responsible for paying property taxes, insurance, and maintenance on the home. Failure to pay taxes or insurance could trigger a foreclosure and the reverse mortgage lender would then call in the note.
Up until 2013, there really was very little in the way of documentation regarding a reverse mortgage application. There was no need for a credit report and no income documentation. Lenders concluded that should the loan would be paid off when the last borrower leaves the property and the property sold. Since there were no mortgage payments associated with a reverse mortgage loan why would there be any need to verify monthly income? As it relates to credit the same thinking applied. Why verify credit if no payments were required each month? However, that thinking led to a significant amount of foreclosures as seniors who received funds from a reverse mortgage found themselves without the ability to pay property taxes and the local taxing authority foreclosed on the property.
During this period many lenders exited the reverse mortgage business due to recorded losses. Fannie Mae exited the program entirely in 2000 and today the FHA is the only reverse mortgage program available other than a few portfolio products including jumbo reverse mortgage loans. Because the FHA reverse mortgage loan carried two mortgage insurance premiums, lenders were compensated for the loss. Still, the FHA suffered and changes had to be made if the program were to continue. Those changes did occur with the introduction of the Reverse Mortgage Stabilization Act of 2013 which shored up the program and provided safeguards for both the borrower as well as the FHA.
There is a non-recourse feature with reverse mortgages as well. What is a non-recourse feature? Say that a senior takes out a reverse mortgage. The lender determines the loan amounts to be distributed after review of the application and appraisal report. Now let’s say the retiree remains in the home until the age of 82. Over this time, it’s possible the property value fell below the amount due when the borrower leaves the property. That means the loan balance is higher than what the property will sell for or otherwise, “’upside down.” The borrower or their heirs are not responsible for the difference between what is owed and the final sales price of the home. The lender has no recourse to recover the loss.
The Financial Assessment
The Financial Assessment rule was introduced in 2014 as a way to stem the flow of foreclosures. The financial assessment requires reverse applicants to demonstrate both an ability and willingness to pay taxes, insurance, and credit obligations. This is performed by reviewing a credit report as well as a history of title to see that property taxes have been paid when due. While lenders don’t require a minimum credit score for a reverse mortgage loan they will require evidence the property has been maintained and property taxes have been paid and the property has been fully insured.
The financial assessment also includes a residual income calculation. This calculation makes sure borrowers have enough monthly income to take care of the property, pay taxes when due and keep the property insured. Additional calculations include considering monthly living expenses such as utilities.
With the implementation and actions by HUD, the program today is an excellent way for seniors to assist with living expenses in their later years. Most retirees today find their retirement or social security income isn’t enough to both take care of monthly expenses as well as enjoy the retirement lifestyle they once envisioned. With a reverse, seniors can supplement their income and enjoy their retirement without having to pay back the reverse mortgage until the last borrower leaves the property.
Who Makes Reverse Mortgage Loans?
Who issues reverse mortgages? Any FHA approved lender like Coast 2 Coast has the ability to issue a reverse mortgage. Lenders must also be approved to issue FHA reverse mortgages on top of being approved to issue FHA loans for a typical purchase or a refinance. Obtaining a reverse mortgage needs to be an educated decision as this is an important part of a senior’s overall financial profile. Please call us at the number above to learn more.