HOME EQUITY CONVERSION (HECM) FHA
THESE LOANS ARE VERY DIFFERENT FROM ANY OTHER TYPE OF MORTGAGE LOAN AND REQUIRE YOUR CLOSE ATTENTION BEFORE DECIDING IF ONE IS RIGHT FOR YOU. THERE ARE THREE (3) REVERSE MORTGAGE PROGRAMS AVAILABLE. THEY ARE THE FHA “HOME EQUITY CONVERSION” KNOWN AS THE “HECM”
WHAT IS A REVERSE MORTGAGE?
Simply put a reverse mortgage is a loan that allows age 62 or older person to receive cash from the built- up equity in their home, without paying a monthly payment.
In a traditional mortgage you borrow a sum of money at an interest rate for a certain period of time. Every month you make a payment to the lender to pay back the money you borrowed plus interest. With a reverse mortgage the borrower receives a certain sum of money or stream of payments and all of the borrowed funds, interest and cost are settled at the conclusion of the mortgage.
A Home Equity Conversion Mortgage is a mortgage in reverse.
QUALIFACATIONS:
To qualify for the HECM program there are two areas that are considered.
Borrower; The borrower must meet two critical criteria. All borrowers on title to a property must be at least age 62 and must reside in the property as their principal residence. The borrower’s income and credit score do not factor in as they do in a regular mortgage. A credit report is obtained to insure that the borrower does not owe the federal government any funds, but a troubled credit history or lack of sufficient monthly income are not impediments to enjoy the benefits of a reverse mortgage.
Property: The property may only be a single-family residence, condominium, townhouse, PUD or two to four families home. Some manufactured homes are acceptable but you will have to check with us to see what specific criteria apply. All homes must have a pest inspection completed by a licensed inspector.
TITLE:
The title or ownership of the property remains in the borrowers name as it would in a regular mortgage with a trust deed or mortgage lien ( depending on the laws in each state) on the property. The borrower always maintains title and has complete control over the property.
The lender does not want own your home. The fact, because the lender is paying the borrowers rather than the borrowers paying the lender, the borrower cannot lose the property.
NON-RECOURSE MORTGAGE:
The government requires that the lender may not seek any repayment from your income, other assets or heirs. They are limited to the equity in the property. This makes the HECM loan one of the safest mortgage loans available in America today.
Limits:
The benefits available to borrowers under the HECM mortgage are based on a highly complex actuarial calculation that can only be calculated by a reverse mortgage lender. There is no loan agent with a hand calculator that can give you a correct number.
The calculation considers the age of the youngest borrower and the lesser of the appraised value or FHA limit of $625,500.00. There is a $625,500.00 limit established by the FHA for each county in every state in the union. It is not a good idea to rely on rumor or “common wisdom” regarding the benefits that are available to the unique situation of each borrower. You are going to need to call a reverse mortgage professional lender to get a number for your specific situation. Addendum to this is that for the current year 2009 the maximum limit has been increased to $625,500 this is not the loan amount it is the maximum value that the funds are determined which expires 12/31/2009
MORTGAGE INSURANCE:
Mutual Mortgage Insurance is charged to every FHA HECM loan in two parts. There is a 2% fee based on the benefit entitlement, which is charged as a closing cost at the start of the loan. There is also a monthly charge of .05% of the loan amount applied each month against the outstanding balance due. This is not a cash charge to the borrower, but an accounting entry added to the outstanding balance.
This FHA mutual insurance was put into place to protect both parties involved in a reverse mortgage.
Borrower: If a lenders fails, or somehow mishandles the administration of a HECM loan the FHA will step in to insure that the borrower receives their benefits. Consider what would happen if the monthly checks stopped and there was no insurance to back it up.
Borrower: In the event the accumulated principle, interest and cost exceed the maximum loan amount (as it is explained in the loan documents), would allow no more monthly benefits to be issued, the FHA will step in an continue those payments and charge the excess to the insurance fund. The borrower may actually receive more benefits that they have to pay back.
Lender: The government felt that since there is a great unknown as to the final outcome of a reverse mortgage as a lender product that no lender would invest in the program if it was not insured or guaranteed by FHA.
HOW CAN A BORROWER RECEIVE THEIR BENEFITS?
The loan benefits can be taken as a lump sum at closing, left in a credit line or taken as a supplemental monthly income. Borrowers may also choose a combination of these three types of payouts to fit their unique situations.
(TENURE):
Monthly payments may continue for as long as the borrower lives in the property. These benefits could be called a “Lifetime Check”, or the borrower could select a specific amount, which will continue only for a specific term.
The credit line established at closing can be used as you need the money. Interest is charged only on the money received by the borrower. Any existing mortgages or liens on the property have to be paid off at the closing, which would be satisfied by receiving a lump sum.
CREDIT LINE AND LOAN AMOUNT GROWTH FEATURE:
CREDIT LINE Growth Account:
The maximum loan amount will grow yearly, using a formula on a 10 year Treasury bond index or a LIBOR (London Interbank Offering Rate) and an additional one half of one percent until it reaches the absolute maximum specified in the mortgage note. This provides new funds that may be obtained, if the borrower has a credit line then there is a potential for borrower increases each year. This is now money available to meet emergency situations!
This new money, just as the old balance in the credit line, does not accumulate interest. There is no charge it is potential borrowing power and an incredible benefit as the cost of living situations increase.
INTEREST RATES:
At the time this booklet was written the interest rate on HECM reverse mortgage was better than almost all Savings and Loan institutions in the United States. It is a very favorable loan with a profit margin for the lender far below normal.
There are no “Teaser Rates” or “Start Rates” or “Payment Rates” with a reverse mortgage loan. There is only one honest interest rate, which is disclosed each month in a comprehensive loan statement sent to each borrower, each month.
OTHER LOAN COSTS:
Set Aside Fees- There is a small monthly fee set aside to service the loan usually $30 or $35. The service would include monthly statements handling of necessary internal paperwork and once a year the lender will contact you to see if the home is still occupied. The fees are drawn form a no interest fund that is set-aside at the loan closing. Each small monthly fee is added to the monthly balance at it is used. No interest is charged on unused set-aside fees.
CLOSING COST:
There are several important differences between the closing costs of a reverse mortgage and a regular mortgage. Because there are no payments being made and a fixed profit margin to the lender there are no “back room” fees paid to the mortgage company. All fees charged are disclosed on the HUD closing Statement. The borrower is charged the costs and they are funded out of the loan amount, the lender has no opportunity to pay some of those fees with “backroom money”
Generally these Fees include:
FHA 2% Insurance Premium
Loan Origination Fee 2% of the first $200,000 1% percent to the limit to a maximum of $6,000.00
Third Party Closing Fees
• Appraisal
• Credit Report
• Title Search and Insurance
• Recording Fees
• Mortgage Taxes
• Surveys
• Pest Inspection
Are closing costs to high? It seems costly but the question to answer is compared top what? If you were to purchase a different home using FHA financing you would find that the fees were the same as reverse mortgage fees. If you compare the fees to “no fee” loans advertised in the media you will find the closing cost higher, but at the end of five years you will find that you paid more with “NO COSTS”
Closing costs need to be part of the consideration process on whether a Reverse Mortgage is right for you if you plan on staying in your home for at least four years. If not, another loan option maybe best for you.
MANDATORY COUNSELING:
Every senior that applies for a Reverse Mortgage must participate in a mandatory counseling program. There are no exceptions or waivers. The counseling must be an approved program. For the FHA HECM program, the counselor must be FHA approved. There is never a cost to you for the counseling. The counseling can be completed in person or by telephone and usually takes about an hour. These counselors are neutral, they don’t care if you get a HECM loan or not. They only care that you understand the very different terms under which these loans are made. It is a check and balance system designed to make sure that you understand the program.
PAYING BACK THE LOAN:
When the last borrower no longer lives in the property as his or her principal residence, the loan is due. It must be repaid in one lump sum. That sum can come from any lawful source and is repaid after a reasonable period of time to accommodate sale or refinancing.
A HECM reverse mortgage may be repaid in full or partially at any time with no prepayment penalty. If a better program appears and the borrower can receive better benefits, the HECM is just paid by the new program. If the borrower moves, or ceases to live on the property, then the borrower or those in their behalf will have a reasonable amount of time to settle the debt.
Choice of Programs
In choosing the program that best fits your specific needs and goals we can design a program for you from the following
• Monthly Adjustable HECM with interest tied to CMT ( Constant maturity treasury
• Annual Adjustable CMT
• Monthly and Annual tied to the LIBOR
• Fixed Rate programs
THE SENIOR LENDING “CASH ACCOUNT” PROGRAM
For higher value properties money can be taken as a lump sum, line of credit or monthly term payment. These loans tend to be more “sophisticated” programs that fit certain needs. They represent a small percentage of the reverse mortgage market. This program has uncapped loan amounts for high valued properties.
The HECM Real Estate Purchase Program:
The Federal Government on January 1, 2009 rolled out a new portion of the Reverse Mortgage which gives seniors the option to use the Reverse Mortgage as a purchase financing option. It allows them to purchase a home with a minimum down payment and finance the balance including closing cost with a Reverse and make no mortgage payments for the rest of the lives.
CONCLUSION:
As time progresses and different generations become eligible to utilize reverse mortgages it will be seen more as another asset rather than a mortgage. If you have spent your life saving for retirement in mutual fund, IRA or other investment product you may be hesitant to utilize the funds to make retirement easier. The same will be true of your home. For years you have put money into it now; you can enjoy what it has to offer. You are set to begin the process of staying in your home and gaining your financial independence.
After all, you worked hard all of your life. Let the assets you acquired help in making life a bit more enjoyable. The next thing for you to do is to call me and set up a personal interview appointment to go over all of the details and to discover how much money maybe available to you.
I have made this segment of my professional mortgage career my life’s work to help older Americans realize the potential they have to eliminate the possibility of having to move out of their homes, and help to afford a decent way of life and enjoy the fruits of their labor over the remainder of their lives.
In closing; I truly hope that my Free Report has helped you in the basics of the reverse mortgage process. It has been my goal to educate you in all aspects and give you a complete understanding of the programs. I look forward to changing the lives of many seniors over the years. It has given me a great personal reward and fulfillment in knowing that I can make such a difference in so many lives to the people who have made this country what it is through their hard work over the years. I say now it is their time to reap the rewards.
May GOD bless you on your journey in Retirement!
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