There are various kinds and styles of financing options available to mature clients including ways to use the equity.
A Reverse Mortgage is a special type of mortgage that enables a senior 62 years of age or older to convert a portion of their existing home equity into cash. It is a loan against your home that requires no repayment for as long as you live there.
Common uses of funds:
· In home care
· Back taxes
· Payoff existing mortgage
· Pay off credit cards
· Purchase a car
· Take a trip
· Supplement monthly income
· Purchase a 2nd home
• With a Reverse Mortgage, you don't have any monthly repayments to make so you can't lose your home by failing to make the payments.
• You can never owe more than the value of the home at the time the loan is paid off.
• Your heirs are entitled to the balance of the equity position.
• If you elect a monthly payment option, payments will continue even if you outlive the expectancy tables.
Borrower Eligibility -
• To qualify for a reverse mortgage, you and any co-borrowers (spouse or others) must be at least 62 years old.
• The house must be owner-occupied and be your primary residence.
• Your home must be free and clear or with an existing mortgage that can be repaid from the proceeds of the new Reverse Mortgage.
Property Eligibility -
• For the federally insured "Home Equity Conversion Mortgage" (HECM), your home must be a single-family property, a 2-4 unit building, or a federally approved condominium or planned unit development (PUD).
• For Fannie Mae's "HomeKeeper" mortgage, it must be a single family home or condominium.
Reverse mortgage programs generally do not lend on cooperative apartments or mobile homes. although some "manufactured" homes may qualify if they are built on a permanent foundation, classed and taxed as real estate, and meet other requirements.
Methods for obtaining funds -
There are several ways you can elect to receive the funds:
1. Lump sum at closing.
2. A tenure or term option where you receive monthly payments for a specific time period.
3. A line of credit.
4. A combination of methods.
The IRS does not consider the money that is borrowed through a reverse mortgage taxable income. These loan proceeds also do not affect Social Security benefits. Supplemental Security Income (551), Medicaid/Medi-Cal benefits/eligibility is not affected since your home is exempt. but you must spend any withdrawn Reverse Mortgage funds within the month you receive them. It is always a good idea to have your senior client contact their local Social Security office for additional information.
The loan is eventually repaid when the last surviving borrower dies, sells the home, or permanently moves away. "Permanently" generally means you have not lived in your home for 12 months in a row.
How much can be borrowed?
The amount of cash you can get from a Reverse Mortgage is based on a HUD formula which factors in the appraised value of your home (subject to the maximum allowable FHA limit in your county), the age of the youngest borrower and the current interest rate upon closing. The older you are, the larger your payments are likely to be because life expectancy is shorter.
If your home is worth more than the FHA maximum limit and you desire more cash than is available under the FHA program, the Reverse Mortgage representative can explain other options. There is a limit on the amount of money available through a Reverse Mortgage. Since the loan amount, accumulative interest, etc., are charged against the home's equity, there must be sufficient equity in the home to cover the deferred payment to the lender. The total amount of cash you actually end up getting will also depend on how it's paid to you.
The application process -
A reputable lender will require a mandatory HUD counseling session prior to finalizing the loan.
To find a reputable lender in your area www.reversemortgage.org
National Reverse Mortgage Lenders Association
1625 Massachusetts Ave., NW
Washington, DC 20036
© 2003 National Reverse Mortgage Lenders Association.
The application process -
• The borrower is never underwritten.
• Appraisal and inspections are ordered.
• Defects, if any are discovered, are required to be repaired.
• Approximate time from application to closing is approximately four to six weeks.
What costs are involved?
• The interest rates charged reflect the type of program selected.
• The options are monthly ARM or annual ARM.
• Closing costs reflect HUD insurance, origination fees, appraisal, home inspection, credit report, flood determination, legal, document preparation and recording fees.
Borrower's obligations -
• You must continue to pay real estate taxes, hazard and flood insurance and maintain the condition of the property.
The closing process -
• The closing often takes place in the Senior's home and lasts approximately one hour.
1. HUD insured
2. No personal liability
3. No restrictions on use of the funds
4. No prepayment penalty
5. No income or credit qualification
6. Funds from reverse mortgage are not considered income
7. Durable Power of Attorney is eligible
8. Properly documented Conservator is eligible
9. Life use provision is eligible
10. No risk of foreclosure
Why not utilize an equity line instead?
• A Senior's income and credit are considered.
• Monthly payments are required.
• Foreclosure is a lender option for default.
• Often there are no closing costs attached to an equity line.
Disclaimer: SAREC® members are not qualified to give legal or tax advice and SAREC® does not guarantee the accuracy of its members' information. All clients are strongly urged to contact a Real Estate Attorney, CPA, banker or other financial specialist to obtain legal or tax advice prior to completing any contracts. Make financial review a contingency of all transactions.