Understanding the Application Process

To apply for a reverse mortgage, seniors must first contact a lender and determine their eligibility. To qualify for a loan, seniors must be at least 62 years of age and have a substantial amount of equity in their home. The home must be a single family home, two to four unit property, or an FHA-approved condominium, manufactured home, or co-op. After determining eligibility, the lender will calculate how much the senior could receive based on their age, property value, amount of equity and estimated interest rate. Lenders will also explain the loan process and provide the borrower with information regarding these loans.

Seniors who are serious about getting a reverse mortgage must complete one more step before submitting an application. To ensure that seniors understand these loans, all borrowers must complete one HUD-approved counseling session. Counseling can be conducted over the phone or in person and typically lasts around one hour. Upon completion, seniors will be sent a counseling certificate which they will submit to their lender along with their application.

Is Now the Right Time to Apply for a Reverse Mortgage?

The most difficult part about getting a reverse mortgage is not usually the application process; it is deciding when to get the loan. If you are over 62 and your mortgage payments have become a burden, now might be the right time to eliminate that burden. Reverse mortgages can also benefit seniors who need expensive medical care, want to renovate their home or simply want to add to their retirement savings. Unlike traditional forward loans, reverse mortgages give seniors a way of increasing their cash flow without adding another monthly payment to their expenses.

In April of 2011, Congress approved the Continuing Appropriations Act, which cut funding for counseling agencies by $88 million–leaving them with no government assistance. In September of 2011, HUD, with the support of both NRMLA and CIS, asked Congress to restore funding. On November 1st, the Senate agreed to allocate $60 million towards housing counseling. On the 17th, the House and then Congress also approved a revised Minibus, which cut funding to $45 million. The President signed the bill the very next day.

What the “Minibus” Bill Does for Reverse Mortgage Counseling

Through the Minibus bill, HUD was given $45 million to fund housing counseling through September 30, 2012. $36.5 million of that money will go to fund general housing counseling, and $4 million will go towards reverse mortgage counseling. The remaining funds will later be used to fund training and administrative contracts.

To receive government assistance, HUD-approved counseling agencies had until January 12th to apply for a grant. According to the bill, HUD has 120 days from the date of enactment to award agencies with grants. Therefore, approved counseling agencies should be receiving their grant money very soon, if they have not already.

What Does Extra Funding Mean for Seniors?

When Congress cut funding last April, counseling agencies who previously offered free or discounted counseling had to begin charging seniors. Some agencies were also forced to raise their fees. Many seniors were forced to pay up to $125 for one counseling session. Agencies who still offered discounts on counseling often had long waiting lists. In some cases, this meant that seniors either had to pay full price or wait to complete counseling, which also meant waiting to apply for a reverse mortgage.

Fortunately, increased funding means that more counseling agencies will be able to discount or waive their fees. For seniors, this means greater access to affordable counselors and a few extra dollars in their pocket.

Reverse Mortgages Do Not Eliminate All Costs Associated with Home Ownership

If a borrower has an existing mortgage balance at the time of getting a reverse mortgage, that balance will be repaid using the proceeds of the new loan. With a reverse mortgage, borrowers are not required to make a single loan payment for as long as they occupy their residence. That is, unless they fail to fulfill their obligations as a borrower.

Reverse mortgage lenders require three things of borrowers. Borrowers must have homeowners insurance, stay current on their real estate taxes and make important home repairs. If borrowers allow their home to fall into disrepair, their loan will become due. The same is true if borrowers fail to pay their real estate taxes or homeowners insurance. Of the possible reverse mortgage pitfalls, this one deserves the most consideration.

Reverse Mortgage Can Tie Seniors to Their Home

A reverse mortgage will also become due once borrowers sell their home or decide to move. Seniors who move into nursing homes or long-term care facilities will usually be required to repay their loan after 12 months of leaving their home.

Because borrowers are required to pay interest and other fees on the amount they borrow, it does not make sense to use a reverse mortgage as a short term loan. Once borrowers repay their lender, they might not have the equity needed to fund long-term care or purchase a new residence. Seniors who plan on moving in the near future might benefit more from the HECM for Purchase program, which allows borrowers to purchase a new primary residence with a reverse mortgage. To make the most of a reverse mortgage, seniors should use their loan as a long-term solution not just a quick way to get cash.

Qualifying for the Reverse Mortgage for Home Purchase Program

To purchase a home with a reverse mortgage, seniors must meet a few important requirements. As with all reverse mortgages, seniors must be at least 62 years of age, attend a HUD-approved counseling session and be current on all federal debt. Seniors must also have a substantial amount of money that they can use as a down payment. Seniors’ “purchasing power,” which is the amount they can spend on a new home, will depend on their down payment, age, interest rate and the value of the new property. In most cases, seniors get their down payment through the sale of their current residence. However, seniors can also withdraw the funds from their assets or receive the funds as a gift.

Through the reverse mortgage for home purchase program, seniors may purchase single family homes, two to four unit residences, approved condominiums and manufactured homes built after 1976. The home must meet FHA’s property requirements, and borrowers must move into the new home within 60 days of closing the loan. It is also important that the home is paid off at the time of closing. If the price of the home exceeds the borrower’s purchasing power, the borrower must come up with the additional funds or look for a less expensive residence.

Reverse Mortgage Vs. Forward Mortgage Loan: Which Benefits Seniors?

Purchasing a home with a reverse mortgage completely eliminates the need for a forward mortgage loan. While seniors must stay current on their property taxes and homeowners insurance, they will not have a monthly mortgage payment. In fact, if a senior’s purchasing power exceeds the price of the new home, he or she will receive the difference. The extra cash can be used to customize the new home, cover moving expenses or simply add to the borrower’s retirement income.

Inside a Reverse Mortgage Counseling Session

Once seniors are ready for counseling, they will locate a counselor and schedule an appointment. Counseling can be performed either in person or over the phone depending on the borrower’s location and preference. After the session has been scheduled, potential borrowers will be sent an information packet either by mail or email. This packet will contain several important documents, including the Total Annual Loan Cost (TALC) disclosure, the loan amortization schedule, a comparison of different loan options, and an informational booklet provided by the National Counseling on Aging (NCOA). Seniors should review these documents to prepare themselves prior to their appointment.

During reverse mortgage counseling, your counselor will cover several important topics. Expect your counselor to cover general reverse mortgage information, like loan limits, eligibility requirements, interest rates, fees, and payment options. Your counselor will clarify your obligations as a borrower and explain what happens once the loan becomes due. Reverse mortgage counselors are also obligated to review all of your different loan options. Your counselor will discuss the possibility of selling your home, renting out a room, or refinancing as an alternative to getting a reverse mortgage.

At the end of the session, you will be given time to ask questions and discuss specific concerns. Your counselor will also assess your understanding of the loan process by having you answer several questions. In total, expect to dedicate approximately one hour to counseling.

Why Are Seniors Required to Attend Counseling?

By requiring counseling, the Department of Housing and Urban Development (HUD) is hoping to educate and protect seniors. Housing counselors are not allowed to steer seniors towards particular lenders or persuade them to choose a certain loan product. Counselors are also forbidden from trying to sell future counseling or any other type of financial product. The goal of counseling is to provide seniors with unbiased information and help them determine whether a reverse mortgage is truly in their best interest.

Mistake #1: Rushing Into a Reverse Mortgage

To qualify for a reverse mortgage, all borrowers listed on the title of the home must be 62 or older. Due to the benefits of getting a reverse mortgage, some seniors are anxious to take advantage of these loans as soon as possible. Some seniors are so anxious, in fact, that they are willing to take their younger spouse off the title of their home to qualify. While this might seem clever, it can lead to future problems.

If a reverse mortgage is put in one spouse’s name, the loan will become due upon the individual’s death–regardless of whether his or her spouse is still living in the home. Some seniors get around this by refinancing their reverse mortgage once their spouse turns 62. However, if borrowers do not have enough equity left in their home, they might not be able to refinance. To avoid future problems, seniors should wait until both spouses are at least 62 before pursuing a reverse mortgage.

Mistake #2: Not Considering the Future Costs to Maintain a Reverse Mortgage

Getting a reverse mortgage too early is not the only mistake seniors can make. One important piece of reverse mortgage information that seniors sometimes miss is that there are guidelines to maintaining these loans. To keep a reverse mortgage from becoming due, borrowers must stay current on their homeowners insurance, home repairs and real estate taxes. If these requirements are not met, the reverse mortgage will become due, which can put borrowers in danger of losing their home. While a reverse mortgage will lighten a senior’s load, it will not eliminate all of his or her bills. Before taking out a reverse mortgage, seniors must determine whether they can realistically afford the long-term costs associated with these loans.

Fortunately, one financial product has renewed the hopes of many consumers. If you are one of the many seniors who are questioning their financial stability during retirement, you might have come across a unique loan product known as a reverse mortgage. But what are reverse mortgages exactly? Are these loans the answer to a secure retirement?

What Are Reverse Mortgages?

Reverse mortgages are loans that help senior homeowners, ages 62 and older, convert a portion of their home equity into cash. These loans are also commonly called Home Equity Conversion Mortgages, or HECMs. HECMs are reverse mortgage products backed by the Federal Housing Administration (FHA). While proprietary reverse mortgages are available, the great majority of seniors choose HECMs.

To qualify for an HECM, seniors must own their home and have a substantial amount of equity in their home. Reverse mortgages can only be taken on primary residences, and the home must meet FHA’s minimum property requirements. The amount seniors are eligible to borrow will depend on their property value, equity, age, and interest rate. However, borrowers are limited to a maximum claim amount of $625,500.

How Do Reverse Mortgages Help Seniors?

After asking what are reverse mortgages, most seniors are curious as to how these loans can benefit them. With a reverse mortgage, seniors receive a portion of their home equity as cash. This cash is typically used to repay the borrower’s existing mortgage loan and add to their retirement savings.

Unlike other loan products, reverse mortgages only become due once the borrower dies, sells the home, or stops using the home as their primary residence. Until that time, borrowers will not be asked to make a single payment. The only requirement is that seniors maintain the condition of their home, keep homeowners insurance, and pay their property taxes. As long as these requirements are met, borrowers can stay in their home payment free for as long as they wish. This helps many seniors increase their cash flow and enjoy the retirement they deserve.

Confusing or Incomplete Documents

A reputable lender will never force their borrowers to sign vague, incomplete, or inaccurate documents. As a rule, consumers should pay careful attention to every document they endorse with their signature as signed documents can be legally binding. If a document contains terms or values different than what you have discussed with your lender, do not hesitate to speak up. Mortgage specialists understand the importance being careful and thorough. If you feel forced to sign confusing documentation, it might be time to begin questioning your lender’s intentions.

Claims That Are Too Good to Be True

As you are searching for reverse mortgage lenders, you might come across some attractive claims. To lure in potential borrowers, some lenders claim to offer federally-insured reverse mortgages that carry no closing costs or upfront mortgage insurance premiums. While these claims are certainly interesting, they are also far-fetched.

Currently, to get an HECM, or a reverse mortgage insured by FHA, borrowers are required to pay an upfront mortgage insurance premium. The size of this premium will depend on the loan product you choose. If you choose the HECM Standard, you will be charged an upfront premium equal to 2% of your claim. The HECM Saver carries a substantially lower upfront premium of 0.01%. While this fee can be financed into the loan, it cannot be eliminated. Reverse mortgage lenders who are willing to mislead borrowers on such basic matters should be avoided.

Discouraging Counseling or Other Third Party Advice

To qualify for a reverse mortgage, seniors must meet with a HUD-approved reverse mortgage counselor. Borrowers are also welcome to seek the advice of a family member or financial advisor anytime throughout the loan process. Getting a reverse mortgage is a big decision. Any lender who discourages their borrowers from asking questions or educating themselves should not be trusted.

Why Is FHA Mortgage Insurance Important?

FHA reverse mortgages currently dominate the reverse mortgage market. Because these loans are insured by FHA, they are a safer option for lenders. Fortunately, FHA mortgage insurance also offers two significant benefits to borrowers. The first is that mortgage insurance guarantees that every borrower will receive the reverse mortgage proceeds due to him or her. Even if a lender goes out of business, their borrowers will continue to receive their monthly payments or have access to their line of credit.

The second benefit is that FHA insurance makes reverse mortgages non-recourse loans. This means that borrowers can never owe their lender more than their home is worth. If a borrower’s loan balance exceeds their home value, FHA will compensate the lender for the difference. This protects borrowers from owing large sums of money after selling their home and repaying their lender.

Who Qualifies for an FHA Reverse Mortgage?

To get an FHA reverse mortgage, consumers must meet certain requirements set by FHA. To qualify for a loan, consumers must be at least 62 years old, own an approved property, and have a large amount of equity. Approved properties include one to for unit residences, as well as condominiums and manufactured homes built after 1976. Seniors must also use the home as their primary residence both before and after getting the loan.

If you meet the requirements for an FHA reverse mortgage and want to know more, contact us for more information regarding this unique loan product.

The age requirement remains the same, at least one of the borrowers must be 62 years or older, and no payments are due until the last borrower dies or moves permanently out of the home.

The proceeds from reverse mortgages can be issued as a lump sum, as fixed payments, or as a line of credit which provides flexibility. Since the interest rates on FHA reverse mortgages are now substantially lower than they have been, how you elect to choose your money can make a considerable difference in the balance owed at the time of repayment.

Though there has been an overall decline in property values, the loan limits on reverse mortgages have remained at $625,500 for the past couple years. That being said, mortgage insurance premiums have increased from .5 percent to 1.25 percent on FHA reverse mortgages.

A new type of FHA reverse mortgage, called the HECM Saver, does requires less mortgage insurance but also has loan limits up to 18 percent lower than previous FHA reverse mortgages. The HECM Saver FHA reverse mortgages are aimed at those seniors who want a smaller, more affordable loan.

Relatively new legislation prohibits lending institutions from requiring that any additional financial service, such as long-term care insurance or an annuity, be purchased in conjunction with FHA reverse mortgages.

Reverse mortgages can be used as a good financial tool for those people who wish to convert their home’s equity into usable funds. There are more and more options becoming available to help seniors live comfortably throughout their retirement.