A. For the complete step-by-step procedure for a reverse mortgage, Click Here. A
visit with Patrick O'Neil, can help you determine what the best course of action
Q. There Are Lots Of Terms Used In Connection With Reverse Mortgages, What Do They
A. A comprehensive glossary of terms follows the Q and A's below.
Q. How Is The Money From A Reverse Mortgage Paid?
A. Part of the available proceeds can be taken in a lump sum at closing, with any
paid first, the remining balance can be taken in 5 different flexible payment plans,
with a little
over half of the proceeds available at closing, and the balance of funds are available
year, with such options as monthly payments, a line of credit that grows, as a single
or a combination of these. Borrowers always have the option to change the way they
their future payments at any time. A portion of available funds may be required to
be set aside to insure payment of taxes and insurance
for borrowers who have limited income, limited liquid assets, or a history of recent
late installment payments.
Q. What Is The Difference Between a Reverse Mortgage and An Equity Mortgage?
A. A typical equity mortgage is a mortgage obtained to get cash or a line of credit
using the equity in the home. The typical equity mortgage requires the same qualifications
as any other mortgage such as verification of income, assets, and credit history.
Equity mortgages also require the borrower to make monthly payments, and there are
differences in the way that equity mortgages are calculated. A Reverse Mortgage is
also an equity mortgage, but requires different income, asset, and credit history
qualification, and there are no monthly mortgage payments required. The borrower
must pay the annual property taxes and insurance on their home.
Q. How Can Seniors Use The Proceeds From A Reverse Mortgage?
A. Reverse Mortgage proceeds can be used for anything without limitation. The only
thing that requires any type of approval from the lender is if the borrower were
to want to use the proceeds to purchase an annuity. This is because the Reverse Mortgage
itself can be structured as an annuity at no cost to the homeowner.
Q. Can I Use A Reverse Mortgage To Purchase A Home?
A. A reverse mortgage may be utilized to provide purchase money for a home. As an
example, if a senior recently sold a home that was larger than they needed for $250,000
and wanted to repurchase a smaller home for $130,000, they could use a reverse mortgage
to purchase the new home. If the reverse mortgage resulted in $70,000 in available
proceeds, when added to the money from the first home sale, it would put a borrower
in the new home with no payments and have cash left over from the first sale to reinvest
or use any way they want. Utilizing a reverse to purchase a home must be researched
closely to determine if purchasing with cash first then doing a reverse on the new
home might result in lower closing costs.
Q. How Much Money Is Available from A Reverse Mortgage?
A. The amount of money available on a Reverse Mortgage is based on the value of the
home, the age of the borrower, and the interest rate selected. The more valuable
the home or the older the borrower, the more money that will be available. Older
borrowers are entitled to more money because they will occupy the home for a shorter
period of time than younger borrowers. We can determine approximately how much you
could get by simply providing us with the most recent tax value of your home, and
the youngest borrower's age.
Q. What If the Senior Already Has A Mortgage?
A. As long as there is adequate equity in the home, the Reverse Mortgage can be used
to pay off the existing mortgage, and any additional available funds can be made
available to you in 5 different ways. By paying off an existing mortgage, the homeowners
actually create additional monthly cash flow since they no longer have their monthly
Q. What Types Of Properties Qualify For A Reverse Mortgage?
A. 1 to 4 family homes, certain manufactured homes, condos, and townhouses all qualify
for reverse mortgages. Manufactured homes must have been built after 1976 and must
be on an approved foundation and located in the original location as when they were
first purchased from a dealer, whether by the borrower or a previous owner. Mobile
Homes must also be taxed as real estate. Mobile Homes in a lot rental community do
not qualify for a reverse mortgage.
Q. How Long Does It Take To Do A Reverse Mortgage?
A. The amount of time needed to do a Reverse Mortgage is dependent upon several factors.
A homeowner with a home that is free and clear, with no title issues, and who has
good credit and easily verifiable income can expect to see the process go fairly
quick. If there are any title issues, or any existing liens, or a survey is required,
or income is from sources that cannot be easly verified, it can take longer, but
usually from 3 to no more than 6 weeks, with most taking less than 5 weeks on average
following application and counseling. Currently counseling can take 1 to 2 weeks
to be scheduled and most of the process cannot be undertaken until counseling is
complete. Title reports are taking about 10 business days and an appraisal can take
a week or longer after the appraisal is ordered.
Q. Where Does The Money For Reverse Mortgages Come From?
A. Reverse Mortgages are funded by mortgage lenders who then sell the loan to Gennie
Mae, sell it to a loan servicing company or they sell mortgage backed securities.
FHA does not fund reverse mortgages, they only insure them.
Q. What Must The Homeowner Do To Qualify?
A. Homeowners must be at least 62 years of age and must live in their home. Borrowers
must provide proof of income and possibly available assets, and must have a history
of making monthly installment payments on-time as well as a history of paying property
taxes and hazard insurance on-time. The home must meet FHA appraisal standards as
Q. If The Homeowner Does Not Meet The Credit And Income Requirements Are They Disqualified?
A. Not Necessarily. If a homeowner has credit issues or lacks sufficient income after
monthly debt to pay taxes and insurance, they can still do a reverse mortgage but
will not be able to access all of the available equity in their home. The lender
will establish a "Life Expectancy Set Aside" that withholds a portion of the equity
to pay annual taxes and insurance as long as the borrower remains in the home. For
many borrowers, the idea of not having to worry about taxes and insurance for as
long as they live in their home is an attractive option.
Q. Who Should Take Advantage Of A Reverse Mortgage?
A. Seniors who want to enhance their retirement, or seniors who either have an immediate
need to get money out of their home, or who would like to put the equity in their
home to work should consider a reverse mortgage. Seniors who are in need of home
repairs, need to pay medical expenses, want to eliminate monthly mortgage payments,
pay off debt, or just want to enjoy retirement should consider a reverse mortgage.
Q. Are There Instances When A Reverse Mortgage Is Not A Good Idea?
A. Seniors who have a comfortable retirement income and have adequate savings to
pay for any unforseen contingencies might not need to do a reverse mortgage. If the
senior intends to sell the home or move within 2 or 3 years, the loan closing costs
may make doing a reverse less attractive unless there is an immediate need for money.
Q. How Are Lenders Able To Do A Mortgage With No Monthly Mortgage Payments Required?
A. Reverse mortgages accrue interest just like any mortgage. They are only available
to seniors because the older a homeowner is, the shorter the actual term of the mortgage.
The interest rates for reverses are adjusted either monthly or annually based on
the LIBOR rate, or they can be fixed rate loans. Basically, investors are making
more than reasonable interest on Reverse Mortgages and mortgage backed securities
from reverse mortgages are selling well, they just don't collect monthly payments.
Q. Are The Proceeds From A Reverse Mortgage Taxable?
A. None of the proceeds from a reverse mortgage are considered taxable income.
Q. Will The Reverse Mortgage Affect Social Security, Medicare, or Medicaid?
A. Because the proceeds of a reverse mortgage are actually a loan, there is no effect
on Social Security or Medicare. If the proceeds from a reverse Mortgage are taken
in the form of cash and are placed in savings, they could affect Medicaid, but not
always. Proceeds that are used to pay off a mortgage, repair the home, pay off loans,
or spent any other way, will not affect Medicaid. Check with your financial advisor.
Q. Who Owns The Home After Doing A Reverse Mortgage?
A. The home always remains the property of the homeowner. Seniors cannot lose their
home under normal circumstances, but please understand foreclosure may occur if annual
property taxes or insurance are not paid, or if borrowers do not comply with the
Q. What Happens To The Home When the Homeowner Dies Or Decides To Move?
A. When the last remaining owner passes away, the disposition of the home is determined
by the rightful heirs according to the homeowner's will. The heirs will need to either
sell the home or pay off the Reverse Mortgage within a reasonable time period. If
the heirs sell the home, any equity remaining in the home after paying the reverse
mortgage goes to the heirs. As an added protection to the homeowners and the heirs,
a reverse Mortgage is totally non-recourse. In other words, even if the home were
to be worth less than the accrued balance on the Reverse Mortgage at the time of
sale, the remaining loan balance would be forgiven. If the owners must move for any
reason, the reverse mortgage must be repaid either by refinancing or selling the
home. The owners are given a reasonable time to do either.
Q. What Happens if The Borrower Dies And Doesn't Have A Will?
A. Every good Reverse Mortgage Specialist should ask if borrowers have a will as
part of the application interview process, and if they don't have a will the specialist
should recommend that they get one! If the borrower dies without a will, the disposition
of the home and assets become the responsibility of a court appointed trustee and
the heirs end up with little say in the disposition of the property. Most probate
trustees are interested in settling the estate the fastest way possible and as a
result the property may be sold for far less than it is really worth and the heirs
may end up with nothing, or may end up having to actually pay to settle other debts
the borrower may have left behind. A will is something that is just too important
and inexpensive not to have.
Q. Can Borrowers Make Payments On A Reverse Mortgage?
A. A reverse mortgage is a flexible loan. Borrowers can make payments on a reverse
mortgage if they like, or they can pay interest only, or not make any payments at
all. It is up to the homeowner to decide. The mortgage company that is servicing
the loan can give the borrower information about making payments and how they are
applied to the loan. Making payments on a reverse mortgage can actually reduce the
borrowed principle much faster than a standard 30 year mortgage! Any reduction of
the loan balance results in a corresponding increase in available funds in the available
line of credit.
Q. Since There Are No Payments Required, Is There Any Possibility Of Foreclosure
While In The Home?
A. The only way that a home can be foreclosed on while the borrower is still alive
and living in the home is through what is known as a technical default. Grounds for
a technical default exist if the homeowner fails to adequately maintain the property,
fails to pay property taxes and assessments, fails to maintain hazard insurance on
the property, or if it is discovered that the borrower committed fraud in obtaining
the loan. If the borrower were to allow a superior lien to be placed against the
property, the loan can be in default as well. Such liens are usually liens for federal
or ad velorem taxes, although they can be created by a Mechanic's and Materialman's
lien (M & M Lien) following repairs or improvements to the home. While technically
an M & M lien is not normally considered a first lien, in Texas it is a lien that
must be cleared before a property can be sold with a clear title, and thus has the
same effect as a first lien.
Q. Do I Have To Live In The Home I Do The Reverse Mortgage On?
A. The home should be considered the primary residence, but homeowners are not required
to stay there all the time. Borrowers must meet annual occupancy requirements, which
have been interpreted to mean "the majority of the time". There are many seniors
who actually use the proceeds from a Reverse Mortgage to purchase or pay off a vacation
home, and who actually may spend considerable accumulated time at the vacation home.
A senior is not allowed to lease out their home for any reason during a part-time
absence, except in the case of a multi-family property, such as a duplex or four
Q. What Happens If Borrowers Have Filed Bankruptcy Or Need To File bankruptcy?
A. Seniors can still do a Reverse Mortgage if they have filed Chapter 13 bankruptcy
if they meet credit and income qualifications, as long as there is adequate equity
in the home, however, some of the proceeds of the Reverse Mortgage may have to be
applied to some debts in the bankruptcy, depending upon the judges decision. In the
case of a chapter 7 bankruptcy, it must be dismissed or discharged before doing a
reverse mortgage. In a chapter 13, the judge will normally agree to the reverse mortgage,
but any cash funds obtained might have to be applied to the discharge of certain
debts in the bankruptcy. If borrowers have a prior bankruptcy that has been dismissed
or discharged there are no problems associated with doing a reverse mortgage if they
qualify, as long as there is nothing that would affect title to the property. If
borrowers should have to file bankruptcy after taking out a reverse mortgage, the
funds from the reverse mortgage which have not yet been received will no longer be
available, such as a line of credit or future payments. In such instances, it would
be advisable to check with an attorney and decide whether the borrowers should pull
any remaining unpaid funds from the reverse mortgage before filing bankruptcy.
Q. There Are Many Terms Used In Connection With Reverse Mortgages, What Do They Mean?
A. A comprehensive glossary of terms would be as follows:
REVERSE MORTGAGE GLOSSARY OF TERMS
Application - Several documents are part of the actual Reverse Mortgage application,
with the application itself being 7 pages. There are also required disclosures, estimates,
and sample instruments for the borrower. The term application also describes the
process of applying for the reverse mortgage.
Appraisal - A third party appraiser who is certified by FHA will inspect the home
and determine the fair market value of the property and will also determine that
the home meets FHA guidelines, basically a combination inspection and appraisal.
The value determined by the appraisal is either "as-is" or "subject to". A value
that based on the current condition of the property is marked "AS-IS" and a value
that is based on the property after certain required repairs are made is marked "Subject
To" those repairs. An appraisal that is marked "Subject To" will result in a condition
from underwriting that the repairs must be completed, and the appraiser must re-inspect
the home and determine the repairs are complete. This re-inspection results in an
addendum to the initial appraisal called a "Compliance Inspection Report".
Appraisal Management Company (AMC) - Since 2008, appraisals for mortgages must be
ordered through an appraisal management company to insure appraiser independence.
This was basically a solution to a problem that did not exist and simply added additional
costs on the borrower as a result. Direct Lenders have the option to have their own
"AMC' within their company as long as appraisals are ordered by someone who is not
involved in the loan production process, but most lenders choose to use outside third
Available Principle Limit - That portion of the total proceeds of a reverse mortgage
that can be paid out to, or on behalf of the borrower.
Cap on Interest Rate - The maximum rate that a variable rate mortgage could potentially
go up to.
Closed-end Loan - Any mortgage that has a fixed interest rate is a closed-end mortgage.
Closing - The actual signing of the final documents needed to create the reverse
mortgage. Usually done at a title company or with a qualified notary.
Closing Costs - The actual cost of originating and closing the reverse mortgage.
This will generally include a settlement fee, notary fee, counseling fee, title insurance
fees, legal fees (if any), document prep fees, appraisal fee, etc.
Compliance Inspection Report (CIR) - the CIR is the report that amends an appraisal
where the appraiser called for FHA required repairs be done in order to remove a
"Subject To" mark from the original appraisal.
Counseling - All reverse mortgage applicants must receive counseling from a HUD approved
third party financial counselor.
Deed of Trust - This is the document that shows you are the owner of the property
and the property has a reverse mortgage on it.
Default - A default occurs if a borrower fails to adhere to the terms of a lending
agreement as set out in the Note.
Disclosure - A document that is provided by the lender which communicates important
information to the borrower.
Equity - That portion of a home's value that is over and above what is owed on the
home. If the home is free and clear, the entire value is equity.
Expected Interest Rate - The interest rate that HUD predicts to be the average rate
on the loan over it's lifetime.
Financial Assessment (FA) - The process of determining if borrowers have adeqaute
income or assets and a satisfactory credit history.
Fixed Rate Reverse Mortgage - One of the interest rate options available to a borrower
on a reverse mortgage. Fixed rate mortgages can be used to pay mandatory obligations,
however, if there is still remaining avaialble principle limit, under the new HUD
guidelines, that money is not available to the borrower at a later date, because
a fixzed rate loan is not an "Open-end Mortgage". (See "variable rate mortgage")
Flood Certification - A flood certification simply determines if your property is
located in a flood zone and whether flood insurance is required.
Funding - Actual disbursement of the proceeds from the reverse mortgage. Might include
payoffs to existing lender, payoff of liens, taxes, etc.
Good Faith Estimate (GFE) - A form that is prepared by the mortgage company telling
you what the estimated costs of doing the mortgage will be.
IMIP - Initial Mortgage Insurance Premium. This is the amount of the "up front" mortgage
insurance paid from loan proceeds at closingas opposed to monthly mortgage insurance
premiums collected at a later date.
Initial Interest Rate - The interest rate in effect when the reverse mortgage closes.
If the loan has a fixed rate, the initial rate is also the expected rate, whereas
in the case of a variable rate (LIBOR) reverse, the initial rate may change at a
later date. It could rise or could fall.
Initial Line of Credit Growth - The money that is still available, but not paid to
borrowers at closing actually earns interest. The initial line of credit growth is
usually calculated as the initial interest rate plus the FHA insurance rate. If the
initial rate is 2.75% and the FHA insurance rate is 1.25%, then the line of credit
grows at 4% annually.
Initial Loan Balance - The total of funds disbursed at closing is the initial loan
Lender Established Set Aside (LESA) - a portion of the available funds from a reverse
mortgage that are set aside to cover taxes and insurance for borrowers who have limited
income and assets or who have a recent history of late payments on monthly installment
LIBOR - The "London Interbank Offered Rate" or LIBOR is the rate that determines
the rate adjustments to a variable rate reverse. The LIBOR is used because it covers
a wide range of markets, time periods, and currencies. It has also historically been
a very stable rate.
Lien - A claim against the title to a piece of property.
Line Of Credit (LOC) - Money from a reverse mortgage which is not disbursed at closing,
but is available after one year, and at any time when needed by the homeowner. The
line of credit grows as it earns interest for the borrower. A line of credit can
be accessed as easily as writing a check with some lenders.
Mandatory Obligations - Any liens or claims against the property for any reason are
considered mandatory obligations and must be paid at closing. These could be a mortgage,
reapir lien, taxes due, IRS tax lien, required repair expense, etc.
Maximum Claim Amount - Same as the actual appraised value as determined by an FHA
Mortgage Insurance Rate - The amount of FHA mortgage insurance added to the loan
balance over time expressed as a percentage.
Note - The document that sets out the terms and conditions of the Reverse Mortgage
Open End Loan - Any mortgage that has a variable interest rate feature is an considered
an open-end mortgage.
Primary Residence - That property that the homeowner declares as his official residence,
in some states it would be their homestead.
Principle Limit - The principle limit is the total amount of proceeds available in
a reverse mortgage, including closing costs. The entire principle limit may not be
immediately available when the reverse mortgage closes. The entire principle limit
would be available to pay mandatory obligations if they were equal to or greater
than the principle limit.
Processing - The lender must assemble all the information required by the lender's
underwriter concerning the property and the borrower, including verification of age,
social security number, value of the home, condition of the home, title commitment,
Remaining Principle Limit - The amount of proceeds from a reverse mortgage that remain
after paying closing costs.
Repair Set Aside - If there are minor repairs required on the property, the borrower
can choose to accomplish those repairs after closing the mortgage. The lender withholds
funds from the disbursement that are released to the borrower upon completion of
the repairs. In the event of repairs that are required by an appraiser in order to
close the loan, there is no repair set aside option, and repairs must be completed
prior to closing the loan. Repairs completed using a repair set aside must be inspected
and satisfy the lender before set aside funds are released to the borrower.
Reverse Mortgage Analysis (RMA) - A three page estimate of the funds available from
a reverse mortgage along with estimated total loan costs and a projected amortization
schedule. The preliminary RMA is only an estimate based on an estimated home value,
and the final RMA is determined once the value of the property is determined by an
Right of Recission - A 3 business day period following closing is allowed for the
borrower to rescind the loan. Rescinding the loan would result in the borrower still
having to pay any up front costs incurred in the loan process.
Survey - The title company may require a survey of certain properties if the homeowner
does not have one or if the survey the borrower has is considered too old. Over time,
cities and counties can add easements or rights of ways, or there could be encroachments
that did not show up before which could result in shortages of property.
Technical Foreclosure - A default occurs if the borrower fails to adequately maintain
their property, fails to pay their taxes, or fails to maintain hazard insurance on
Title Policy - A title company researches the title to your property and determines
if there are liens or anything else that can affect title. The title policy is a
guarantee to you and the lender that your title to the property is good for as long
as you own the home.
Unavailable Principle Limit - Any funds that would normally be available at a later
date on a variable rate loan, but are not available on a fixed rate loan. See "Fixed
Rate Reverse Mortgage", "Variable Rate Reverse Mortgage", "Open-end Loan" and "Closed-end
Underwriting - The process of determining the suitability of the borrower and the
property for a reverse mortgage. The lender must make sure that the property and
borrower meet the requirements established by FHA who insures the loan.
Underwriting Condition - Something that the lender requires prior to closing and
funding of a mortgage according to the underwriting guidelines of FHA.
Variable Rate Reverse Mortgage - The most often chosen reverse mortgage rate plan.
As the name implies, the rate can vary depending on the LIBOR rate, going up or going
down with the market. There is a maximumcap on a variable rate mortgage to protect
the borrowers. Variable rate loans are "Open-end mortgages" and they are the only
loan that will allow the future payment of any available proceeds that were not paid
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