Florida has the highest percentage of seniors in the United States; approaching 20 percent of the state's population is over 55, according to the latest U.S. Census. And because of the large numbers of senior citizens residing here, The Sunshine State has been a strong market for reverse mortgages, a type of loan structure that is only available to senior homeowners 62 years and older.
A reverse mortgage is a particular type of home loan that lets the borrower convert a portion of the equity in your their into cash, according to the federal Department of Housing and Urban Development (HUD), which administers the great majority of them.
Although the interest keeps building up, the reverse mortgage doesn’t come due or payable until the borrower passes away or moves out of the home permanently - meaning that he or she hasn’t lived in the home for a year or more, according to Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association. The repayment amount can’t exceed the sales value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or the borrower’s heirs or estate.
“There are liabilities taken on by lenders as part of their responsibilities as FHA lenders,” says Bell, but “the FHA insurance is designed to help mitigate those liabilities.”
The first reverse mortgage was given in 1961, but that was an isolated case given by a local savings and loan in Portland, Maine, to the widow of the lender’s high school football coach. The concept became more popular in the 1980s, and in 1987, under the influence of the AARP, Congress created the Home Equity Conversion Mortgage, or reverse mortgage program. In 1989, HUD selected 50 lenders to make the first FHA-insured reverse mortgages. After years of popularity, however, the current financial situation has seemingly made some lenders think twice about offering reverse mortgages.
In Florida, according to Howard S. Krooks, an elder law attorney with Elder Law Associates, P.A., in Boca Raton, reverse mortgages have been an available product in Florida since about 1969. Some of the largest lenders, such as Bank of America and Wells Fargo, no longer offer the product, however, Financial Freedom still does. There are still some Florida mortgage lenders such as AmeriFirst, Advanced Mortgage Solutions of Southern Florida, and Mortgage Bankers of Florida, among others, that continue to offer reverse mortgages.
A Changed Landscape
Today, according to Lemar Wooley, a spokesman for HUD, Home Equity Conversion Mortgage (HECM) loans make up about 95 percent of the reverse mortgage market. These are the only reverse mortgages insured by HUD’s Federal Housing Administration (FHA). Applicants must be 62 or older; own the property outright or have a small mortgage balance; occupy the property as their primary residence; not be delinquent on any federal debt; and participate in a consumer information session given by an approved HECM counselor. And HUD-approved condos definitely are one of the types of housing that meet the requirements.
Since October 2010, lenders, under the direction of FHA, have also been offering a new product called the HECM Saver. Under this program, eligible borrowers are charged lower upfront fees. However, these lower fees result in less money being made available to the borrower than under the traditional HECM loan.
Krooks notes that denial of a loan usually comes down to age (if married both spouses must be 62 or older), insufficient equity in the home, existing liens and encumbrances, and the fact that the home is not owner-occupied to qualify. Another factor, especially in Florida, is short sales or foreclosures. If the property itself had been foreclosed upon in the past three years or if there are an inordinate amount of foreclosed homes in the neighborhood could lead to a disqualification, according to Krooks. The property must also be compliant with all zoning laws and be in “livable” condition.
Applying for a reverse mortgage is a simple process. As in any business transaction, you call up the company, make a date with a representative, pay an application fee, then an appraisal fee.
A counseling session, as we’ve mentioned, is also mandatory under HUD rules. HUD, and the lenders themselves, have lists of approved counseling organizations. Some will even do the counseling over the phone.
Advice on how to prepare to talk to lenders and counselors, according to Bell, can be found on the National Reverse Mortgage Lenders Association (NRMLA) website at www.reversemortgage.org. Prospective borrowers can also find a NRMLA member lender on the site.
Reverse Mortgage Calculators
“All reverse mortgage lenders who are originating the FHA-insured HECM use the same calculator to determine your benefits,” says Michael Branson, CEO of All Reverse Mortgage Co., a California-based lender that operates in Florida and 12 other states.
“As long as each lender is using the same property value and the same birth dates, then the only things that can affect the amount of money you would receive would be the interest rates (and then only if one or both lenders are far enough over the floor of 5%) or the fees,” he adds.
In case you’re wondering what a reverse mortgage calculator is, it asks your zip code, your birth date, your spouse’s (or other co-owner’s) birth date and how much your home is worth, as well as, in some cases, optional questions such as mortgages and liens on your home, and the cost of any necessary home repairs. All this together will help calculate the amount of the loan you will receive.
Reverse mortgage calculators can be found on the NRMLA site, individual lenders’ sites, on the AARP’s website and on a link from the HUD website.
Of course, not everything always goes smoothly. What happens when a borrower moves or passes away? What does it mean that “the repayment can’t exceed the value of the home?” And what if the market bottoms out and the estate can’t get enough money for the property?
These topics, according to HUD spokesman Brian Sullivan, are covered during the aforementioned HECM counseling sessions. Lenders recover their principal, plus interest, when the home is sold, usually by the borrower or heirs, and the remaining value of the home goes to the borrower or heirs.
“If the sales proceeds are insufficient to pay the amount owned,” he says, “FHA will pay the lender the amount of the shortfall. FHA collects an insurance premium from all borrowers to provide this coverage.”
Even though the FHA makes up the shortfall, however, losses are still a matter of concern.
What about accidents or disasters—for example, what happens if the housing unit or building the mortgage was taken out for has a fire, or becomes uninhabitable because of mold or other conditions? The answer, as with all mortgages, is that borrowers are required to have adequate homeowners’ insurance on the property.
Using Reverse Mortgage to
Pay off Existing Mortgage?
Prospective borrowers, according to Sullivan of HUD, don’t have to own their own homes outright before they can be considered for a reverse mortgages. However, eligible homeowners with existing mortgages must pay them off at the origination of the HECM loan. “This means,” he says, “that the HECM principal limit loan amount must be sufficient to pay off an existing mortgages.”
What They’re Used For
Once seniors are approved for the loans, they use them for many purposes, according to Krooks. Most commonly, seniors will pay off existing mortgage balances, supplement their retirement income, remodel or repair their home, pay their property taxes or common fees, cover long term health care costs or home care, or help get their home out of foreclosure.
Once a reverse mortgage has been approved, the borrower has a choice of how to receive payments. According to Bell, the disbursements can come in the following methods: lump sum, line of credit, life tenure payments, or any combination of the three.
“Every borrower has individual needs,” he says. “Those looking to eliminate their monthly mortgage payment by refinancing with a reverse mortgage will likely choose a lump-sum loan, which is offered at a fixed rate. Homeowners who want to draw money down over time may find the line-of-credit feature advantageous.
“A special aspect of the line of credit is that the available balance is adjusted upwards annually. For homeowners looking to have a constant stream of cash coming to them as long as they live in the home, the life tenure option delivers constant monthly payments.”
What About Co-ops?
Although the most common form of seniors’ residential development in Florida is a condo development, there are some New York-style cooperative apartments in southeast Florida, particularly in the town of Palm Beach, where more than 1,200 exist. However, at the present time, there are no officially-approved co-op mortgage products, according to Bell.
Are Reverse Mortgages For You?
Like everything else, reverse mortgages are not for everyone, and Krooks notes that a reverse mortgage had always been considered as a needs-based product of last resort. Some seniors also have trouble understanding the terms and conditions of reverse mortgages. And a 2006 survey by AARP showed that more than two-thirds of the borrowers polled by the organization felt the fees were high.
The same survey, however, revealed that 93 percent of the borrowers said the reverse mortgages had a mostly positive effect on their lives, 93 percent of them were satisfied with their experience with lenders, and 95 percent were satisfied with their experience with their counselors.
Thankfully, there are many places where senior condo owners can turn for advice on reverse mortgages: AARP, HUD, the lenders themselves, the National Reverse Mortgage Lenders Association, and, in many cases, their condo’s manager or board president.
Raanan Geberer is a freelance writer and a frequent contributor to The South Florida Cooperator. Staff Writer Christy Smith-Sloman contributed to this article.
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