Revisiting Reverse Mortgages Home Loans for Older Adults

Revisiting Reverse Mortgages

 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.  

 Basic Facts

 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 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.  

 Some Complications

 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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  • As a loan signing notary and condo owner, I have learned that reverse equity mortgages are not available to condo owners for a few reasons. We must be FHA approved: having a certain amount of reserves for capital repairs is something that a lot of south Florida condos do not maintain; restricted number of rental units and; We are very mistrustful of funds being in the hands of possible unscrupulous board members. The other reason is that the common areas are not individually owned so that lenders of reverse equity mortgages cannot guarantee insuring the loan. While there are many Co-ops here in south Florida, most of them do not qualify for any kind of mortgage (sometimes because of land leases). So, I believe it is not such an open market for reverse equity mortgages.
  • You are basically signing over your home and any appreciated value to the lender. You get usually less then 50 cents on the dollar for your home by the time fees are taken out. Market goes up which 95% time it does you lose all that money. Your heirs may get a small part of it depending on interest owed on loan. EX 150K house free and clear you'll may get about 75k upfront. That 75k is charged interest by the lender and added to your loan. Interest can be as high 300/ month or more. That's 3600/ year you live 15 years before moving from house you know owe 129K plus fees and insurance so basically if you house didn't increase in value (rare) but possible you or your heirs sell the house you get less then 20 K after selling fees you break even and get nothing for your home. Now if it increased in value you'll get the increase or at least some of it. Home decreases then loan is forgiven and the insurance pays off the house. I feel this should be a last resort loan for if you did an equity loan for the same house say 4% for 15 years. Your payment would be 555/ month. You can afford that and the same 15 years with no home increase in valueof your home. You decide to sell home you get the entire 150K. Since loan is already paid off. You or your heirs get it all. You may want longer term equity loan in that case the reminder of loan would have to be paid. Least your not paying interest on top of interest.