Secure Living Loans
Improving Lives and Fulfilling Dreams
How They Work
Reverse Mortgages
A Reverse Mortgage is a home loan which allows homeowners that are 62 years or older a means to access some of the equity they have in their homes without making any repayment until they no longer live in the home as their primary residence.
About HECM Reverse Mortgages
Like traditional forward loan products a reverse mortgage loan has loan fees that can have adjustable or fixed rates and is secured by a note and a deed of trust. A note is your promise to repay. A deed of trust is the security instrument that ties your home to your promise to repay. The deed of trust is recorded in the County that you live in and becomes a lien against the property. Contrary to popular belief, the reverse mortgage lender does not take title to the house. Payment of property taxes and homeowner insurance along with proper upkeep of the property are also requirements of both forward and reverse mortgages.
While traditional forward mortgages and reverse mortgages may have other similar sounding features like a line of credit, mortgage insurance, etc., the benefits from those features vary from a traditional forward mortgage and often times causes a little confusion when trying to understand exactly how a reverse mortgage works. A properly trained reverse mortgage professional will be sensitive to these differences though and help you understand them.
First Mortgages
Reverse mortgages are a first mortgage and must be in first lien position. If you currently have any existing mortgages they must be paid off. This can be done in one of two ways:
- Pay off the old debt before you get a reverse mortgage
- Pay off the old debt with the money you get from a reverse mortgage
One of the most common misconceptions is that a home has to be debt free to take out a reverse mortgage. A large number of seniors use a reverse mortgage to pay off their existing forward mortgage so that they can retire. Retirement quite often results in decreased income and without the aid of reduced monthly expenses that a reverse mortgage can provide many seniors feel that their only option is to keep working.
Loan Proceeds
The amount of money one receives is determined by a 3 step formula which consists of the following:
- Your home’s value up to the FHA lending limit
- The age of the youngest borrower on title
- Current interest rates which are recalculated weekly
Generally speaking the older you are and the more your home is worth, the more cash you can get.
Qualifying
Qualifying is easy as long as you are 62 years or older, own and occupy the property as your primary residence (live there at least 6 months out to the year). 1-4 family residences, approved manufactured homes (those that meet FHA qualifications) and FHA approved condos are typically allowed. Sorry, but manufactured homes built prior to June 15th, 1976 and those on rented land do not meet FHA qualifications. Your income and credit score are NOT used to determine eligibility.
Payment Options
Lump Sum – The lump sum option is where you immediately take all the proceeds that are available to you at closing. This option is used quite often when a reverse mortgage client has an existing first mortgage that must be paid off and the amount is very close or equal to the amount their reverse mortgage will provide.
Tenure Option – The tenure option allows you to receive equal monthly payments for as long as you own and occupy the home as your principal residence.
Term Option – The term option allows you to receive equal monthly payments for a fixed period of months that you select.
Line of Credit Option – The line of credit option tends to be the most popular option. Its popularity is two fold. Like a traditional line of credit interest is not charged against the unused portion. This factor allows the reverse mortgage client to have more control over the amount they or their heirs will eventually have to repay. Secondly the line of credit grows at an interest rate that is a half percent above the interest rate that is accruing on the money they have already used. For example if the money you have already used was accruing interest at 5.5% your line of credit balance would be growing at 6%. Credit line growth is defined as access to more money not actual interest earned as in a certificate of deposit. This has a tendency to get a little confusing but information provided by your lender can help you understand exactly how this feature benefits you.
Modified Tenure of Term Option – This option lets you combine either the tenure or term option with the line of credit option. You decide how much you would like to receive as a reduced tenure of term payment and the remainder is placed in a line of credit that you can access anytime you want.
Origination Costs
The origination costs of a HECM loan are made up of the lenders origination fee, an FHA mortgage insurance premium, and third party closing costs. Third party closing costs are made up of items like, appraisal, credit report, title insurance, closing agent fees, etc. Like many conventional forward refinances these fees can be included in the loan and you are not required to pay them up front.
Repayment
Your reverse mortgage must be repaid when the last surviving borrower dies or sells the home. It may also become due if you move to a new principal residence, allow the property to deteriorate, fail to pay property taxes and/or hazard insurance, or are absent from the property due to physical or mental illness for 12 months in a row. Other conditions that could result in required repayment include declaration of bankruptcy, donation or abandonment of your home, fraud or misrepresentation, and eminent domain or condemnation proceedings involving your home. The amount repaid is the sum of the principal, accrued interest, service fees, and mortgage insurance at the time of closing after the above mentioned qualifying event.
If repayment is from the result of your passing away your heirs may choose to sell the home or repay the reverse mortgage in some other fashion - such as, refinancing or using the proceeds from life insurance.
Your reverse mortgage is a non-recourse loan which means that the lender has no legal recourse to anything other than your homes value at the time of repayment. That’s right, regardless of what your home sells for at fair market value the lender must accept that amount minus the ordinary cost of sell as complete repayment on your part. The lender may not seek repayment from your income, other assets, or from your heirs. The required mortgage insurance on a HECM reverse mortgage covers any loss the lender might otherwise incur.
Special Features
Required Counseling - All HECM reverse mortgage clients must receive reverse mortgage counseling from a HUD approved counselor. The lender must be in receipt of your signed counseling certificate before processing the loan file.
Repair Administration – Repairs like worn out roofs, leaking gutters, and peeling paint are generally required items prior to a conventional loan funding. These items and others are allowed to be completed up to nine months after a HECM reverse mortgage closes. Certain restrictions and conditions apply but generally the lender holds back 1.5 times the amount from a licensed contractor’s bid for the completion of the repairs after the loan closes.
HUD Guaranteed – HUD guarantees the homeowner will continue to receive loan payments in the event that the lender becomes incapable of making the payments. At time of closing there are two deeds of trust signed. The first secures the lender’s position and the second deed of trust puts HUD in that position if the original lender can not live up to its obligation to the reverse mortgage client.
Loan Origination Process – The loan origination process can either start by the client receiving counseling by a HUD approved counselor, or by filling out the application packet. Once the signed counseling certificate is received by the lender the lender can then begin processing the loan which includes ordering the appraisal, title work, lien payoffs, etc. Once processing is completed the completed file is submitted to underwriting for final approval. If the loan package is approved signing of the loan is scheduled. Disbursement of funds then occurs three business days after the date of signing, provided it passes the lender’s review. The complete process generally takes from 4 to 6 weeks once the counseling certificate is received by the lender.
Return To Top
