New Rules Guide Seniors Using Reverse Mortgages
More than 20 years ago, Federal Housing Administration (FHA) started making reverse mortgages available to individuals 62 and over who wanted to use the equity in their homes to supplement their retirement income, to meet unexpected living expenses, or who wanted to use the funds for their leisure. The proceeds of the sale of one’s home can be used to buy a new primary residence, if the individual has enough cash to cover the closing costs for the new property which is being purchased.
A reverse mortgage is sometimes called a Home Equity Conversion Mortgage or HECM. A reverse mortgage, which is guaranteed by FHA, is a home loan that lets individuals convert a portion of the equity in their home into cash. Under a reverse mortgage, there are no monthly fees; the homeowner is only responsible for taxes, insurance, utilities and other maintenance costs.
Today, many homeowners qualify for the HECM Saver Reverse Mortgage that was part of the Stimulus package passed by Congress. The reverse mortgage requires a premium of .01 percent of the value of the home, rather than the 2% previously required. This option reduces the amount of money the homeowner can borrow as well, but increases the savings to the homeowner.
Homeowners age 62 and older who live in their home are eligible. Reverse mortgages can be made regardless of income, credit history, bankruptcy, or health of the individual.
Under the new rules, homeowners seeking a reverse mortgage are mandated to attend a counseling service approved by Department of Housing and Urban Development (HUD). The Colorado Housing Finance Authority maintains a list of Colorado approved counseling agencies.
As part of the counseling, homeowners complete a budget review to consider both their immediate, as well as their long term, cash requirements. This can help to determine the need for a home equity conversion mortgage that is a) fixed rate, b) adjustable rate, c) mortgage for purchase, or d) refinancing. Recently the interest rates have varied between 3% and 5% depending on the type of loan. Each type has advantages and disadvantages depending on the needs of the homeowner.
The maximum amount of the loan is dependent on the amount of equity in the home, the age of the borrower and the type of loan that is needed. By law, the maximum amount that can be borrowed is $625,000, if there is that much equity in the home.
Other characteristics of the loan include mortgage insurance which is 2% of the property value or 2% of the loan value. The purpose of the mortgage insurance is to guarantee that the a) homeowner does not outlive the reverse mortgage; b) homeowner and heirs are not liable for the balance of the loan if it exceeds the value of the home; and c) FHA will take over the loan if the lender defaults.
As part of the loan, the origination fees will be 2% of the first $200,000 of the property value and 1% of the second $200,000. The cost will range from $2500 to a maximum of $6000. Other fees that are charged include FHA approved appraisal, title insurance, credit reports, recording fees, and documentation preparation.
A preliminary amount of the available proceeds of the loan can be calculated using the calculator through HUD. The proceeds of a reverse mortgage can be used to pay off an existing mortgage(s), if the balance is less than the available amount of the reverse mortgage. If the existing mortgage(s) is greater than the equity available in the home, the reverse mortgage will be declined. Proceeds of the loan usually do not affect eligibility for most government programs such as food stamps, old age pension, social security, Medicare and Medicaid.
The title to the loan remains in the name of the homeowner. The loan is a “non-recourse” loan meaning if the value of the property declines below the loan amount; other assets are not required to secure the loan; rather that is the purpose of the mortgage insurance. The loan must be repaid if a) the homeowner no longer lives in the home; or b) if the homeowner dies. The loan is due usually within one year of the death of the last homeowner, but there are no time limits. The lender is not allowed to “call” the loan due; nor is the lender able to force the individual to move out of their home.
Many financial institutions offer reverse mortgages. Homeowners are encouraged to work with lenders that are regulated by FHA to guarantee consumer protections. Individuals who have questions can call 303-333-3482 for more information.
Eileen Doherty, MS is the Executive Director of the Colorado Gerontological Society, 3006 East Colfax, Denver CO 80206. She has more than 30 years of experience in education and training, clinical practice, research, and public policy in gerontology. You may reach her at 303-333-3482 or by email.