Reverse Mortgage Loan Blog

Individual money managers looking for added income in these troubled times might be unaware of two often-untapped sources: the equity in their home and their life insurance policy. Let me look at home equity today and life insurance tomorrow.

When I talk about the use of home equity, I don’t mean mortgage refinancing or a home equity line of credit, but rather an FHA-insured reverse mortgage, formally called a home equity conversion mortgage, which allows a homeowner age 62 or older to withdraw some of the equity in his or her home, with no income requirements or qualifying credit.

The borrower makes no monthly payments as long as he or she continues to use the property as a personal residence. The debt is not paid back to the lender until the borrower permanently moves out, sells the property, or dies. Since no payments are being made, the debt increases every month. However, title does not change and heirs still inherit the property. But first, any existing mortgages must be completely paid off from the loan proceeds or cash on hand.

“More people are facing hard economic times and they can take advantage of the hidden-away value in their home through a reverse mortgage, but they should not do it on a whim, but for the right reasons,” says Celia Mason, a San Ramon-based certified senior advisor, who guides clients through the whole process, which usually takes six weeks. She can be reached at 1-925-998-4678.

Mason reports that two recent changes in reverse mortgage rules by the Federal Housing Administration make the process more attractive to homeowners.

The first is a temporary increase (for 2009 only) in the FHA lending limit to $625,500 from $417,000. The loan amount is based on current interest rates, the borrower’s age and the appraised value of the home or lending limit, which ever is less.

The second change is found in the Housing and Economic Recovery Act of 2008 (HERA) which allows borrowers the use of an FHA-insured reverse mortgage to purchase a new principal residence. This residence may be a one- to four-family dwelling unit and the borrower must occupy the property within 60 days from the date of the closing.

The down payment for the purchase of a new principal residence must come from cash on hand or cash from the sale of a currently-owned property. Gifts are not permitted nor can the borrower apply credit-card cash advances toward the down payment. Seller financing and seller concessions are not allowed.

Properties not eligible for an FHA reverse mortgage include cooperative units, newly-constructed principal residence where a certificate of occupancy has not been issued by local authorities, boarding-house or bed-and-breakfast establishments, and manufactured homes built before June 15, 1976, or manufactured homes built after June 15, 1976, that fail to conform to safety standards and/or lack a permanent foundation.

The requirements for a reverse mortgage are that you must be at least 62 years old, must pay off any existing mortgage up-front (and you can do that with the money received) and must receive professional financial counseling before the deal is closed.

You are not giving up your home, but can continue to live in it, making sure you pay taxes and homeowners insurance and continue household upkeep, just like you have always done. When you sell or otherwise vacate the property, the loan comes due.

When you die, your heirs have several options for paying off the loan, including selling the house or refinancing the debt. After the debt is settled, the remaining equity goes to the heirs.

If there’s not enough from the sale of the home to cover the debt, the FHA steps in and makes the lender whole, Mason says.

She makes sure that the family of the borrower is in on the planning to quell any fears that they may lose whatever value the house has when the parents die.

One major downside to a reverse mortgage is the high closing costs, which can reach $17,000 or more. But the loan is net of that money. The costs include the all-too-familiar ones like loan origination fee, appraisal, credit report, pest inspection, title insurance and other standard charges.

An advisor like Mason collects no commission directly, but takes part of the $7,000-plus origination fee that is part of the closing costs. Mason lines the borrower up with a lender that specializes in reverse mortgages, such as Financial Freedom and Seattle Mortgage.

One personal counseling service that Mason uses is HUD-funded Eden Council for Hope and Opportunity (ECHO), which has offices in Oakland and Hayward.

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