Reverse Mortgage

There has been a substantial increase in the number of borrowers applying for a reverse mortgage.  A reverse mortgage enables homeowners, who are at least 62 years old or older, to utilize the equity in their home as secondary income, to do with as they see fit.  The single largest asset owned by the elderly today will be the home they live in.  So, for all intents and purposes, their home should be working for them, not against them.  Many senior citizens have been working hard for a number of years, to reduce debt and increase savings.  Their primary objective for implementing such a strategy is so that one day they will have the means necessary to comfortably retire.  This is not a new notion.  We have been encouraged by others our entire lives to save during our working years and to utilize those savings to support ourselves during the “golden years.” 

Most elderly people have come to realize that the savings they have worked so hard for their entire lives will hardly be enough for them to meet their basic needs to survive during their retirement years, much less retire in comfort.  These senior citizens now find themselves in a world where increased health care and longer life expectancies have greatly jeopardized their ability to enjoy life.  A reverse mortgage will give senior citizens the opportunities they need to regain some of the control that they have lost, due to our changing economic environment.

Reverse Mortgage products have existed for a number of years, but officially branched out in 1988, when the Federal Housing Administration (FHA) enacted the Home Equity Conversion Mortgage Insurance fund.  The premiums that were paid into the insurance fund would prove to be exactly what lenders needed to reduce loan risk enough, in order for them to introduce reverse mortgages to the national market.  Due to the increased number of lending institutions offering reverse mortgages, lenders began to expand their products to include a number of loan payment options to help satisfy the growing demand.  Today, you can receive payment on your reverse mortgage in one lump sum, an established credit line, or in monthly payments.  Lenders had finally developed a product worthy enough to be bought and sold on the open market.  Having these loans insured through FHA helped open the door for the mortgage securities purchasing giant, Fannie Mae, to begin a commitment process with other lenders.  Fannie Mae agreed to provide a venue for lenders to sell their reverse mortgage loans.  In return, these lenders were motivated to increase the number of reverse mortgages loans offered by them to the public.

Although reverse mortgages receive about a 90% approval rating from qualified seniors, currently just 1% of all individuals aged 62 or older actively pursue the reverse mortgage option.  However, we are seeing that as time progresses and information about the product becomes more streamlined, confidence among the elderly has begun to shift.  The number of applicants has increased significantly and today, more than ever, senior citizens are electing to make this product a part of their lives. 

Even though the product has advanced in popularity, there are still a large number of seniors who have found themselves questioning whether doing a reverse mortgage makes sense or not.  There are a number of reasons why seniors might decide against pursuing a reverse mortgage, and understanding what those reasons are will help lenders provide the education needed to overcome these objections.  Here are the top sited reasons for not taking out a reverse mortgage:

1.    Seniors do not want their families to lose out on any potential inheritance planned in the estate after their death.

2.    Seniors are extremely opposed to increasing their debt, even if the debt requires no repayment while they live in the house.

3.    Costs tied to a reverse mortgage, although rolled into the loan, appear to be excessive and unreasonable for the senior to want to pursue the loan.

4.    The savings accumulated during the senior’s lifetime is sufficient to meet their needs, and accepting a reverse mortgage will not enhance anything in relation to the quality of their life.

5.    Reverse mortgages can be detailed and complex. For some elderly people reverse mortgages are just not worth the time and effort to comprehend.  Seniors may be concerned with being preyed upon or taken advantage of, especially when they do not understand what is being offered.  To avoid such conditions they simply walk away.

The number of reverse mortgage applications has substantially increased in the last few years. In fact, in October 2008 the loan limits on these FHA products were increased, allowing even more seniors to qualify than ever before.  Seniors, who participated in surveys shortly after enrolling into a reverse mortgage, have overwhelmingly expressed that the product has significantly improved their quality of life. 

Today we are witnessing some of the toughest economic issues to hit our economy in quite some time.  These issues have raised serious concerns for Americans, but seniors seem to be particularly impacted.  Seniors are now choosing to use a reverse mortgage to help better their situation and improve their overall quality of life.  In times of uncertainty it becomes even more important for seniors to find a way to protect their selves during retirement.  A reverse mortgage can provide that protection, by offering seniors a secondary source of income, to help them through those tough economic cycles.  Here are the top reasons why seniors choose to go forward with a reverse mortgage:

1.    A reverse mortgage can help pay off current debt.  This will significantly improve a senior’s discretionary income for more meaningful things in their life.

2.    A reverse mortgage can help pay for in-home, long-term care or other medical necessities, including prescription drug care or out-of-pocket medical expenses.

3.    A reverse mortgage may allow seniors to give a portion of their family’s inheritance to their family, before they pass away.  Seniors often find a great deal of pleasure watching their family enjoy what they have given them before they actually pass away.

4.    Seniors may elect to withdraw the equity, using a reverse mortgage, as a way to partake in a different investment instrument; as a result, it could yield greater returns if the right investment came along.

5.    A reverse mortgage can be the exact amount needed for a senior to supplement their fixed income enough to enter into retirement.

6.    Seniors might find themselves faced with unexpected obligations, such as emergencies or sudden expenses.  A reverse mortgage can provide them with the income needed to meet these obligations or expenses.

A Reverse Mortgage can be a good solution when it benefits your life and your ability to enjoy life more.  Seniors who choose to enter into a reverse mortgage will need to go through a specific process.  The process is simple and the information available on the topic can be easily accessible through a number of credible online sites. 

Your first step is to talk to your family and tell them of your intentions to pursue a reverse mortgage.  You should also consider and contemplate any of their initial concerns.  The majority of senior citizens decided against a reverse mortgage arrived at that decision because they were persuaded by someone in their immediate family. 

Once you have made the decision to apply, you will need to find a reputable FHA lender who is licensed to originate reverse mortgage products.  The lender will accept an application and submit the loan to underwriting for loan approval.  After the loan is approved there will be extensive documentation and disclosure requirements; it is best to be patient and ask questions whenever there is something you do not fully understand.  Regardless of the amount of paperwork needed, remember those that qualify for a reverse mortgage have had an overwhelming approval rating for the product.  Each disclosure and every document needed for a reverse mortgage will be explained in full, and your lender will not proceed any further until you are completely comfortable with the process.  

Finally, seniors will be required to attend a mandatory counseling session with an approved reverse mortgage counselor.  The counselor’s job is to ensure your understanding of all of the parameters included in a reverse mortgage.  Counselors are required to be HUD approved, and independent from the lender providing you the reverse mortgage product.  Most seniors elect to have the counseling done face to face, however they may also decide to complete the requirements over the phone.  Once the counseling is complete seniors can expect to get a “certificate of counseling”, which will be needed in the loan documentation for final loan approval.  It is important to note here that there can be no fee charged to the senior for participating in the counseling.  The expense for counseling is paid by the lender, anyone trying to charge such a fee should be reported.

In order to qualify for a reverse mortgage you will need to be at least 62 years of age.  The home must be a 1-4 unit structure or an FHA qualified manufactured home.  The home will also need to possess enough equity to support the costs and continuous payment requirements obligated by the terms in the loan.  As a rule of thumb, the home should have at least 50% equity available before an approval can be made. Lastly, your home will need to be your primary residence.  Reverse mortgages are not contingent on Credit, employment history, income, medical condition, late payments, mortgage history, or anything else related, so long as it does not impact the title on the home.  Your reverse mortgage will remain in place as long as you don’t move from the property, you continue to maintain the home, you pay your property taxes and homeowner’s insurance, and you don’t pass away.  As you can see the approval process is simple, the qualifying process is clearly defined, and maintaining your eligibility during a reverse mortgage could not be any less obtrusive. So why are there not more seniors requesting a reverse mortgage option? 

The answer, simply put, is fear.  Senior citizens are far more cautious in their business dealings than any other age group.  They require a greater degree of care, and often react apprehensively towards change.  For this reason lenders have made information related to reverse mortgages readily available.  The information provided will make it easier for seniors to do their own research, but just in case, here are a few answers to the most commonly asked questions related to reverse mortgages:

1.  Will my Social Security or Medicaid benefits be impacted by a reverse mortgage?

a.  No, neither Social Security nor Medicaid benefits will be impacted by a reverse mortgage, so long as you do not accumulate cash advances, which are typically not done in a reverse mortgage.

2.  How much will a reverse mortgage cost me?

b.  Expect the costs of a reverse mortgage to run high.  I will often tell people to expect around 6% of your total loan amount in reverse mortgage costs.

3.  Does my home qualify for a reverse mortgage if it is in a living trust? 

c.  Yes, homes currently in a living trust are eligible for a reverse mortgage.

4.  Will I be taxed on any income received from a reverse mortgage? 

d.  Presently, the IRS considers the proceeds received in a reverse mortgage as loan proceeds, which today are tax free.  Therefore, all payments made through reverse mortgage proceeds would be exempt from tax obligations.  The money you receive will be tax-free.

5.  Will I remain on title for the home if I decide to take out a reverse mortgage?

e.  You will not lose ownership rights to your house.  A reverse mortgage, as with all other loans, works in the same lien holder capacity.  The lender will put a lien on the home and will request payment when the loan becomes due under the terms established in the reverse mortgage. 

6.  What happens if I still have a mortgage on my home when I decide to take out a reverse mortgage? 

f.  You can have an existing mortgage on your home, as long as the equity in the home is substantial enough to qualify for the reverse mortgage continuous payment obligation.  An existing loan will be paid by the proceeds received in the new reverse mortgage acquired on the home.

7.  What if I decide to end the terms of my reverse mortgage and then I find out that I actually owe more than what the house is worth?  What happens then? 

g. You will never be required to repay more than the actual worth of the home.  If, in fact, you remain in the home long enough for the loan balance to exceed the home value, the lender will simply forfeit the difference.  The loan is considered a non-recourse loan and can only be securitized by the home itself.

8.  What kinds of interest rates can I expect on a reverse mortgage?

h.  Interest rates offered on a reverse mortgage will be based on an adjustable rate mortgage, which is secured to an index used by the lender.  These indexes are regulated and will be consistent from one lender to the other.  The adjustment can take place monthly, quarterly, or yearly, depending on the program selected.

It may seem a bit overwhelming, but for the right person it will make all the sense in the world.  Seniors pursuing reverse mortgages today understand their benefits and look forward to using those benefits in their favor.