Business

Reverse Mortgage?! What?!

“They’re a scam!” “There is no way I’m going to let a bank take my house!” “I would never leave that kind of mess for my kids!” “What will my spouse do if I die?” “I’m not in dire straits.” “I don’t own my home free and clear so I can’t get one anyway.” These were some of the major objections that I heard when I used to mention I was a reverse mortgage specialist.  Why would anyone get a reverse mortgage?  Two words…Baby Boomers.  With 10,000 Baby Boomers turning 62 every day, it is becoming more and more common.  When they were born, we needed to build more hospitals.  When they were of school age, we had to build more schools.  When they were of driving age, we had to build more cars.  Well now they are retiring, living longer, and their retirement plans are getting smaller.  There is a legitimate need for reverse mortgages today.  For the right candidate(s), a reverse mortgage can be a part of a well balanced retirement plan.  A reverse mortgage is a way for seniors 62 or older to tap into the equity in their home tax free.  There is no repayment required as long as you maintain (including paying taxes and insurance), and live in your home.  The first reverse products were not exactly a safe way to go, but since HUD got involved 20 years ago, they have become a very viable mortgage option.  Since 1989, 544,300 reverse mortgages have been originated.   As of this September, there are still 431,025 outstanding, or almost 80%.  Reverse mortgages actually have a 90% plus approval rating from those who are in them. Now more people are approaching me about reverses than ever before, and less people are protesting the concept.  Here are the frequently asked questions with answers. What do I need to look out for when pursuing a reverse mortgage?   My Big Three -The first thing I always tell a client is, if they know they are not going to live in the house more than 5 years a reverse isn’t necessarily worth doing.  That’s not enough time to make the cost of a reverse worth it. It’s also not enough time for the house to appreciate to insure a profit upon sale.  There are probably better options.  Second, do not get a reverse mortgage without consulting a reputable estate planner, accountant, and financial planner.  The popular horror story is the borrower who takes out a lump sum with their reverse mortgage, and an unscrupulous financial planner puts their money in an annuity that cannot be touched for thirty years.  You also don’t want that lump sum in a low interest bearing savings account or certificate of deposit.  It has to be something that is conservative, liquid or semi-liquid, with a legitimate rate of return, and something that you can access without penalty.  Consult a Certified Financial Planner for specific investment vehicles because that is beyond the scope of my profession.  The last thing is more of a personal issue.  If my mom were going to look into a reverse mortgage, I would make her insist on an in-home consultation from the lender.  What I do is tell the potential borrower that I will come to their home and answer any questions they may have and to invite friends, family, or anyone they trust to help them make the decision.  My opinion is if a reverse mortgage lender will not “face the gauntlet” they are hiding something.  RUN! Unfortunately, if you ask a seasoned reverse mortgage specialist, who commits the biggest “scams” on reverse mortgage borrowers, they will probably tell you their problem children. Do I have to own my home outright to qualify for a reverse mortgage?   You do not.  There is a formula based on age, home value, remaining balance, and location.  One can go to www.reversemortgage.org and get a good estimate of how much they qualify for.  That is the site of The National Reverse Mortgage Lenders Association, the watchdog group for reverse mortgages. Are there income and credit requirements to qualify for a reverse mortgage?   Since borrowers do not need to make monthly payments there are no income requirements.  A borrower’s credit is pulled to make sure there are no outstanding liens or judgments, but there is not a minimum credit score. Are there different types of reverse mortgages?   Yes.  There are reverse mortgages for jumbo homes($625,500+), The Fannie Mae Homekeeper (normally between $417,000 and $625,500), and the most popular reverse mortgage The Home Equity Conversion Mortgage (HECM).  The principal limit for a HECM was increased as part of the stimulus package to $625,500, so The Fannie Mae Homekeeper has been on the sideline in 2009.  The HECM loan is the most popular, and the one this blog addresses.  Why is it the most popular?  It’s a Federal Housing Administration (FHA) insured loan, meaning if your bank goes out of business, it will not affect your reverse mortgage.  You still get paid.  It is also the most flexible reverse mortgage in terms of payment methods.  You can receive a lump sum, a line of credit, a monthly payment based on a specified number of years (term), a monthly payment based on you living in your home forever (tenure), or a combination of the lump sum, line of credit, and monthly payment.  If you want to change payment methods at anytime, no problem and the fee is nominal. Can the bank take my house if I have a reverse mortgage? No.  Only you and your spouse own the home.  Like a forward mortgage, you are on title, not the bank.  The bank is listed as a lien holder just as in a forward mortgage.  Once you move out of the home or it passes to your estate, the loan must be repaid.  After you or your estate pays the loan in full, the remaining proceeds are yours or your heirs to keep. What if the house ends up being worth less than the loan amount?   A reverse mortgage is a “non-recourse” loan, which means, even if you live to be 150, are forced into assisted living, pass away, move out, or sell, you will NEVER owe more than the house is worth.  In the early days of reverse mortgages this wasn’t the case which is where the major objection started. If I pass away, does my spouse have to move out?   As long as the spouse is on the title to the property, they will not be forced to move out.  If the spouse is not on title, they will need to do a reverse themselves, pay the loan balance in cash, or refinance the balance with a forward mortgage.  If an applicant qualifies for a reverse, but their spouse is not 62, I will have them get together with an estate planner to protect the younger spouse.  Some spouses want to stay in the home because of the memories and some spouses want to move out because of the memories.  It is important to address these issues before entering into a reverse mortgage. Do you find that the only people who get reverse mortgages are in dire straits?   While it is one of the more popular reasons for entering into a reverse, it is not the prevailing reason.  The benefits of a reverse mortgage can be far reaching.  As your home is typically your biggest asset, a reverse mortgage is becoming a popular financial planning vehicle to greatly improve the retirement years of a senior.  Many seniors are using the proceeds for travel, health care costs, long term care, home remodeling, to give their children a head start on their inheritance, to establish a college fund for their grandchildren, to buy a second home, and most recently to  buy a smaller primary residence. What type of property qualifies for reverse mortgages and what type does not?   Single family homes, 1-4 unit properties if the borrower lives in one, FHA approved condos, new homes with a certificate of occupancy, and manufactured homes that are on permanent foundations qualify for a reverse.  Co-ops, boarding houses, bed and breakfasts, and new constructions without certificates of occupancy do not qualify. What causes a loan to come due?   Your reverse mortgage loan becomes due and must be paid in full when one or more of the following conditions occurs: (a)  the last surviving borrower passes away or sells the home; (b) all the borrowers permanently move out of the home; (c) the last surviving borrower fails to live in the home for 12 consecutive months due to physical or mental illness; (d) you fail to pay property taxes or insurance; (e) you let the property deteriorate, beyond what is considered reasonable wear and tear, and do not correct the problems. What happens if/when my spouse and I die?   Your heirs have the option of buying the home, refinancing the home, or selling the home.  Worst case scenario – If your heirs cannot afford to buy or refinance the home, they have thirty days to have it listed to be sold.  They have six months to sell in good faith, meaning hiring a realtor and pricing it right.  If the home hasn’t sold in six months, they can file for a 90 day extension.  If after 90 days (9 months at this point) it hasn’t sold, they can file for another 90 day extension.  So at the end of a year and the home hasn’t sold, what is the worst case scenario?  The house is worth less than the loan amount, the bank takes over the home, and your heirs get nothing.  But, your heirs walk away without any ding to their credit or affect on the other assets of your estate.  Remember, banks are in the business to make money, not sell homes, so they will work with you to get the home sold in that year.  If you compare worst case scenarios, the forward mortgage gives heirs 60- 90 days to make mortgage payments before starting foreclosure proceedings. Here’s another thing to consider regarding your heirs.  If you were to take out a reverse mortgage and elect to have a lump sum payment.  You could give your heirs their money today and let them put it into a safe investment vehicle to start working for them now.  They will have more at the conclusion of the reverse mortgage whether the house is worth more than the loan amount or not.  If your heirs do not have great saving habits, you can set up a trust that can’t be touched until you pass away.  Either way, the present value of money principal says investing that money today is better than investing that money tomorrow.  I do not want either of my parents’ homes and don’t expect an inheritance, so I’ve told them to “burn it” on themselves while they can…Enjoy it.  They changed enough of my Pampers, bought me enough baseball gloves, and leather basket ball shoes to earn that and then some. Do reverse mortgages affect my social security benefits or Medicare?   Generally, they do not affect either, but I suggest contacting both agencies.  For example, a reverse can affect your Medicaid. Can I refinance into another refinance?   Yes, if your home appreciates enough you can refinance into another reverse mortgage. If you were old enough for a reverse mortgage, what would be your first steps?   The first thing I would do is consider my quality of life.  Am I missing anything?  Are there financial issues that keep me up at night, like scrambling to meet my mortgage, threat of foreclosure, rising health care bills, or a falling retirement nest egg? Second, I would get online and gain some free knowledge.  Start with the previously mentioned website for The National Reverse Mortgage Lenders Association (NRMLA) www.reversemortgage.org .  Also check out the HUD website www.hud.gov , and AARP website www.aarp.org/revmort and www.aarp.org/money/lowincomehelp (for alternatives to reverse mortgages).  I went on Google when are started training for reverses years ago, and signed up to have Google Alerts send me anything published regarding reverse mortgages.  I get 5-10 alerts every day. Last, I would contact a reverse mortgage specialist and have them come to my home and answer any question I have.  The beauty of the reverse mortgages is a specialist cannot have you sign an application until you speak to a third party consultant.  This is usually a 45 minute to 1 hour conversation with a consumer credit counselor. I know this was a long blog, but this topic is so important moving forward.  It is the next boom business and with any boom business there will be shady people getting involved to take advantage.  Education is the only antidote to prevent your loved ones from falling prey to them.   Brian Allen is a reverse mortgage specialist based in State College, PA, but able to lend in every state.  If you would like to have Brian speak to your family, church group, rotary, assisted living facility, or business office about reverse mortgages at no cost, he can be reached at 814.272.0125 or emailed at ballen@cmfloans.com .  Brian can also be heard every Saturday morning at 11am as the last segment of Coaches Corner, 970 AM WBLF.

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