Reverse Mortgage Loan Blog

THE federal government issued new guidelines at the start of 2009 that would allow older borrowers to use reverse mortgages to buy a principal residence. But few lenders were ready to offer this option – until fairly recently.

The problem, said Peter Bell, the executive director of the Reverse Mortgage Lenders Association, had been that lenders needed more information from the government about acceptable underwriting procedures.

These details have since been worked out, he said, and in recent weeks, a number of lenders have placed their first loans in the pipeline. New York, however, is not well represented in that mix, according to Mr. Bell, in large part because the loans cannot be used to buy co-op apartments.

Reverse mortgages, which are offered through the home equity conversion mortgage (HECM) program run by the Federal Housing Administration, an arm of HUD, had previously been available only for refinance transactions. In order to qualify, borrowers must be 62 or older.

Bronwyn Belling, who recently retired as the national program coordinator of the AARP’s reverse mortgage education project, said the recent guideline changes would help borrowers improve their living circumstances without forcing them to relinquish all their savings for a new home. She noted, though, that the loans can be complicated.

Here’s how a typical transaction might work: Let’s say a 75-year-old woman lives in a home valued at $700,000, with an outstanding mortgage of about $100,000. She sells the home for $700,000 and finds another – closer to the grandchildren, with no staircases and minimal upkeep – for $625,000.

Instead of securing a traditional “forward mortgage” for the new property, she could obtain a reverse mortgage.

The woman would qualify to receive $439,000 from the bank for that new home, based on lending guidelines, according to Cheryl Chapin MacNally, the national reverse mortgage sales manager for Wells Fargo Home Mortgage.

Of the $600,000 she received from selling her previous home, she would need to put down only $186,000 to buy the new one (as well as closing costs of about $22,000), according to Ms. MacNally. After paying those costs, she gets to pocket the remaining $392,000 for living expenses or emergency funds. There are no monthly payments to make to the lender; instead, the lender recovers its principal, plus interest, when the home is eventually sold.

A major drawback of reverse mortgages is high closing costs. While lender can charge a maximum of $6,000, the borrower must also pay an upfront insurance premium equal to 2 percent of the home’s appraised value or lending limit. This protects borrowers should anything happen to the lender and guarantees that the total debt owed will never exceed the home’s value. (In the case of the 75-year-old woman, the insurance would cost $12,500.)

Financial counselors say borrowers and their potential heirs may wish to consider discussing reverse mortgages beforehand, so that there are no surprises when it comes time to settle the borrower’s estate. Anyone expecting to move out of a home within a few years should understand that if it was left vacant for 12 consecutive months, the loan would be due immediately.

Aside from the high closing costs and the diminished size of the borrower’s estate, there are other potential downsides to consider.

Ms. McNally of Wells Fargo said older borrowers who might be moving out of their homes after two or three years should avoid reverse mortgages for the same reason that it makes little sense to refinance any loan before selling the house: the closing costs of the mortgage would probably outstrip any appreciation in home value, especially in the current real estate market.

Ms. Belling recommends that prospective borrowers pay close attention during pretransaction financial counseling, which is compulsory for anyone seeking a reverse mortgage.

Mortgage industry sources have said privately that the quality of the counselors can vary widely, so prospective borrowers will do well to seek reverse-mortgage counselors who have passed an exam designed by the AARP and administered by HUD.

A state-by-state list of such counselors is available at www.hecmresources.org/network.cfm.

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