SENIORS: HECM (Reverse Mortgage)
Seniors want to age in place, at home! The best way to do this is to fund their own decisions. For many, a great deal of their wealth is in their home. To access those funds homeowners can use a HECM (Home Equity Conversion Mortgage), nicknamed a “Reverse Mortgage”. It works the same as a forward mortgage but does not require a monthly payment.
WHAT IS A HECM?
HECM = Home Equity Conversion Mortgage, nicknamed a “Reverse Mortgage” because it works the same as a traditional mortgage, but in reverse.
Allows homeowners 62+, to access their home's equity.
If you qualify, if you have a mortgage, it will be paid off. If additional equity is available you can withdraw funds, setup a growing line of credit, or a combination.
WHAT IS REQUIRED
Be 62+ years old.
Have equity in your home or funds to put down on a Purchase.
Live in the home.
Pay property taxes, homeowners insurance, and HOA (if applicable).
Make home repairs as needed.
HOW TO QUALIFY
Credit requirements are less strict than for standard home equity loans and lines of credit. Interest rates are not based on credit history or credit scores.
If you have had trouble paying your taxes and insurance, or that you don’t have enough income to cover your regular monthly expenses, you may be required what is called a “life expectancy set-aside.” This means that we/lender will hold back part of the money from your loan, so that it can be used solely for paying your taxes and insurance, (similar to an escrow account).
QUESTIONS & ANSWERS
WHAT IF BOTH SPOUSES ARE NOT 62-YRS OLD
Age of the Youngest Borrower (or spouse, if the spouse is younger).
At least one homeowner must be aged 62 or older.
Younger borrowers receive less money because their life expectancy is longer, and this means they may keep the loan longer, accumulating more interest.
If there is a spouse who is not yet 62, they cannot be a borrower on the loan. However, their age will still affect the amount of money available.
CAN YOU LOOSE YOUR HOME
No, you can never be forced to leave, as long as you do the things you agreed.
You are to live in the home; pay the property taxes, homeowners insurance, and homeowners association dues (if applicable); and make home repairs as needed.
CURRENT MORTGAGE
If you have a mortgage, it will be paid off at closing.
If you have any additional liens against your property, they must be subordinated.
WHO HAS TITLE
You retain the same ownership and title that you have today.
We (lender) puts a lien on the property, just as they would with a regular forward mortgage.
TITLE CAN BE IN A TRUST
Yes, but the lender and title company will need to review the Trust to approve it. Most Trusts are prepared with lenders and their requirements in mind so they are not a problem but it is best to know as early on as possible, send me a copy.
LOAN LIMIT IS DEPENDENT ON…
Borrower’s age (must be 62+ years).
Appraised value of home.
Current reverse mortgage interest rates.
Mortgage balance.
CLOSING COSTS
Most of the are the same as what you would pay for a traditional mortgage.
Fees include: origination fee, appraisal, title, insurance, surveys, inspections, recording fees, etc. You will also pay a mortgage insurance premium that covers FHA insurance. This helps protect you in case of a lender failure, and assures you will not have to pay back more than the house is worth.
Almost all of the costs can be paid using loan money (“financed”), which means that you don’t have to pay them out of pocket.
INTEREST RATES
Interest is charged on all money that you receive and on all loan costs that have been financed, i.e., added to the loan balance.
You may select an interest rate that is fixed or one that adjusts monthly or annually. We will provide the index, margin and the periodic and lifetime caps for adjustable interest rates.
HOW DO YOU GET MONEY
Proceeds may be provided through: 1) A full or partial lump sum; 2) A growing line of credit; 3) Monthly payments (tenure or modified tenure plans available); or 4) Combination of 1,2,3.
Loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. However, you must be careful that any loan proceeds you retain do not exceed the monthly liquid resource limits for Supplemental Security Income (SSI) and Medicaid. You can change your payment plan at any time for a small fee.
YOU REPAY THE LOAN WHEN ANY OF THE FOLLOWING OCCURS:
The last surviving borrower dies.
Home is no longer borrower(s) primary residence.
Borrower(s) are unable to occupy the home for the past year.
Home is sold or ownership is transferred.
You do not pay the property taxes, homeowners insurance, or homeowners association dues (if applicable).
When home repairs are ignored.
WHAT IF THE HOME IS WORTH LESS THAN WHAT YOU OWE, WHEN TIME TO REPAY
This could occur if the home's value depreciates; if interest rates go up; or if the total payments made during the life of the loan exceed the value of the home.
If your home is sold to pay off the loan, you or your estate will not have to pay back more than the amount received from the sale of the home.
If your heirs or your estate choose to keep the home, they must pay the entire loan balance, even if it is greater than the current value of the home.
WILL HEIRS STILL RECEIVE AN INHERITANCE
Yes, after the loan is paid off, all remaining equity will go to your heirs.
One of the forms we provided before you close your loan, is an amortization schedule so you will always know the principal balance of your loan, year by year.
How much equity will remain will depend on how much money you draw; how long you stay in your home; homes appreciation; your home experiences; and interest rates (if you have a variable interest rate loan).
WHY IS THERE BAD PRESS
Most comments are a result of the lack of understanding the loan, it’s features, and how it works today. Like all loan options, guidelines and features change. In the past some features have been changed or removed, making it a more appealing option today.
In the past clients did not have to qualify, today you do…to assure you have funds to pay your taxes, insurance, HOA, and willing to maintain the home.
Some mention high fees.
Some have a conviction against using a homes equity for anything.
STEP BY STEP…TIMELINE
Taking a reverse mortgage requires multiple steps, including counseling, appraisals, closing documents, and funding. The reverse mortgage can take from 30 - 60 days from start to close. Borrowers can speed the reverse mortgage process on their end by acting quickly to provide required information and documentation and answer any questions we may have.
Here’s a general timeline of what you can expect during the reverse mortgage process.
STEP 1 - INITIAL Q&A (QUESTIONS & ANSWERS)
Introduction to Ray, His Team, Element Home Loans, and Finance of America.
Discuss your needs, goals, objectives, and identify your support system.
I will provide an overview of the Reverse Mortgage product.
Answer your questions.
STEP 2 - PULL CREDIT & QUALIFY
Pull credit, (640+ required). If you have a spouse, both will be on the mortgage.
Credit:
Eligibility for HECM loans are not primarily based on credit history or credit scores. Instead, HUD is wanting to make sure that you are able, and willing to keep up your end of the bargain: paying your utilities, taxes, insurance, and HOA (if applicable), as well as maintaining the home.
The most important factor will be whether you have paid your taxes on time, and kept the home insured. We will also confirm if you have consistently paid other bills on time. In addition, we will look at your income and expenses to see if you have enough money to live on and still pay your property taxes and insurance.
Requirements:
At least one owner must be 62+ yrs old.
Current mortgage is paid off with proceeds from the HECM.
You must live in the home as your primary residence.
You cannot take out another loan on the same home.
You are required to speak with a HUD counselor.
You are responsible for paying your utilities, taxes, insurance, and HOA (if applicable), as well as maintaining the home.
Documents needed:
Drivers license or Government Picture ID.
Benefit statements such as Social Security, Pension, etc.
Two-Years Tax Returns.
If working: Last pay statement for the past 2-years, W2’s.
If self-employed, 1099’s, W2’s, & YTD profit loss statement.
Subject Home:
Most recent mortgage statement(s).
Home Owner’s Insurance statement showing yearly cost, & contact info.
HOA if applicable, yearly statement, & contact info.
Tax, we will pull from the county tax assessor office.
STEP 3 - I WILL PRESENT YOU OPTIONS
Provide a summary of loan configurations to accomplish your stated goals.
Review all costs.
Discuss scenarios of how HECM loan will work over the years.
STEP 4 - HECM COUNSELING (REQUIRED)
You are required per HUD, to speak with a HUD counselor. Below is a list of counseling agencies that are HUD approved. Please schedule a session at your soonest convenience. Average cost is $125. Once complete, you will receive a certificate which I need. We need to close your loan within 180-days of completing your counseling and signing your certificate.
Quick Cert…..(888) 383-8885
Clearpoint Financial Solutions…..(800) 251-2227
Credit.org…..(800) 947-3752
Greenpath Financial Wellness…..(888) 860-4167
Guidewell Financial Solutions, Inc…..(800) 882-6171
Housing Options…..(844) 432-6467
Money Management International…..(877) 908-2227
National Foundation for Credit Counseling…..(866) 698-6322
Navicore Solutions…..(866) 855-7736
Neighborworks America…..(202) 760-4000
STEP 5 - SIGN LOAN DOCUMENTS
Sign loan documents in person or via e-sign.
STEP 6 - TO PROCESSOR & APPRAISAL
We will send your file to my processor.
They will order an appraisal to determine the homes current value.
Good News…No charge to you! We pay for the appraisal.
The appraiser will call for access to the home.
STEP 7 - HOME INSPECTION
Your home is the collateral for the loan, and must be maintained to meet HUD standards.
A home inspector, sometimes done by the appraiser, will deliver a report indicating if repairs are required.
If so, a portion of your loan will be set aside to pay for those repairs.
It is your responsibility to hire a contractor to do the repairs.
Once the repairs are completed, the contractor will sign a lien release form.
Then the completed repairs will be inspected.
Once verified, the Servicer will disburse the funds from the set-aside to pay the contractor and return any remaining funds to your loan proceeds.
You have up to one-year from the closing date of the loan to complete the repairs. If repairs are not completed, loan payments will be suspended until they are completed or the Servicer may request that HUD deems the loan due and payable.
STEP 8 - PROCESSING & UNDERWRITING
We will send your file to my processor who will scrub the file and submit to underwriting.
Once out of underwriting, we expect it to be “Approved” with closing conditions.
The processor is tasked with clearing any conditions.
Back to underwriting for a Clear to Close.
Closing will be scheduled at your convenience with the attorney/title company.
STEP 9 - CLOSING
Day of closing, you sign loan documents, and receive a copy for your records.
3-day right of recession. This is a time period that we hold the file to allow you time to make sure you are not having buyers remorse. You can simply call and we cancel the transaction. After the 3rd day, your file is processed:
Any existing Mortgage/Lien on home is paid off.
Loan is now in-place as defined.
You can access funds in the form of the payment option selected. You have the right to change your payment plan at any time. You simply request a new Payment Plan Agreement form from your Servicer. A change may include a small admin fee. Once the agreement is executed, the new payment plan will go into effect the first business day of the next month.
STEP 10 - LIFE OF YOUR LOAN
After closing, a loan “Servicer“ manages the account and is responsible for disbursing monthly payments to you (if this payment option is chosen), advancing funds from the line of credit upon request, collecting any voluntary repayments and sending periodic statements.
Servicers also implement safety nets that are intended to prevent borrower fraud, identity theft or outside parties taking undue advantage of you.
You are responsible for:
Maintaining the home.
Staying current on property taxes, homeowner’s insurance, & homeowners association dues (if applicable). You can pay them yourself or establish a set-aside account and have the Servicer pay them for you.
If you do not stay current Taxes, HOI, HOA:
The Servicer will alert you fall behind.
If you fail to pay, the Servicer will use funds in your account to pay them.
If there are no funds, the Servicer must pay them on your behalf. When this happens, your loan will be placed into a “technical default” status and your account frozen.
The Servicer will present a repayment plan so that you can bring your accounts current.
If you do not have enough income to make this possible, the Servicer will have no other choice but to request HUD to deem the loan due and payable.
Additional counseling is available to those who find themselves in default. Your Servicer will help you find a counselor. A counselor will work with you to try to set up an acceptable repayment plan.
STEP 11 - PAYING OFF YOUR LOAN
When the last surviving borrower sells or conveys title of the property, passes away, or does not maintain the property as a principal residence for a period exceeding 12 months, the loan has reached what is called a “maturity event.”
The Loan Servicer will mail a “Due and Payable” notice within 30-days to the borrower’s heirs informing them the loan must be repaid and will provide options for doing so.
The heirs can sell the property. Any equity remaining after the sale of the home, belongs to the heirs.
They can purchase the property for the amount due.
Future payments stop at death, but interest, mortgage insurance premium and homeowner’s insurance continue to accrue until the loan is paid.
Your heirs will work with the Servicer to ensure the loan is paid in full within 6-months.
If selling the home:
If it is still on the market after six months, the heirs can contact the Servicer and request a 90-day extension, subject to approval by HUD.
One additional 90-day extension can be requested, again with HUD’s approval.
If the initial Due and Payable notice is not responded to, or the home hasn’t sold after the 90-day extensions have expired, or if the borrower has no heirs to help pay off the loan, the Servicer may initiate foreclosure.
If heir want to keep the home:
They can either pay off the home or refinance it into their name(s).
If heirs are actively working to refinance or sell the home, they should work closely with the Servicer from the time the loan is called due and payable, else it will be foreclosed.
HISTORY of HECM (REVERSE MORTGAGE)
HECM or Reverse Mortgage is one of the most well-developed loan products in the mortgage industry. From its birth in 1961, it has been through many developmental milestones to make it the safe financial tool it is today. According to The Reverse Review, the product has seen rapid growth, expansion of additional innovative loan products, improvement of practices, increased consumer awareness, and a redefining of the options available to seniors. Below is an overview of the major turning points and milestones in its history.
1961, the reverse mortgage is born. The very first reverse mortgage is written to Nellie Young in Portland, Maine by Nelson Haynes of Deering Savings & Loan. Haynes designs this unique type of loan to help the widowed wife of his high school football coach to stay in her home after losing her husband.
1969, at a congressional hearing, the concept of a reverse mortgage intrigues the Senate Committee on Aging. When a UCLA professor named Yung Ping Chen states his support for an “actuarial mortgage plan in the form of a housing annuity” that would allow homeowners to stay in their homes while enjoying their saved home equity, the chairman expresses great interest.
1983, during the first congressional hearing concerning reverse mortgages, the Senate approves a proposal by Senator John Heinz to have reverse mortgages insured by the Federal Housing Administration (FHA). Heinz also suggests that the idea of home equity conversion should be further explored.
1984, American Homestead sets the foundation for government-insured reverse mortgages when it unveils the Century Plan, which is the first mortgage that keeps the loan in place until a borrower permanently leaves the residence.
1987, Congress passes an FHA insurance bill called the Home Equity Conversion Mortgage Demonstration, which is a reverse mortgage pilot program that insures reverse mortgages.
1988, HUD gains the authority to insure reverse mortgages through the FHA when President Ronald Reagan signs the reverse mortgage bill into law. The reverse mortgage government insured loan is established.
1989, the first FHA-insured Home Equity Conversion Mortgage (HECM) is issued to Marjorie Mason of Fairway, Kansas by the James B. Nutter Company of Kansas City, Missouri.
1990, the HECM program has its 1-year anniversary, with HUD reporting to Congress that the program is steadily growing.
1994, Congress begins requiring lenders to disclose to borrowers the total annual loan costs at the start of the application process.
1996, the reverse mortgage program is adjusted to allow for loans on residences that have up to four units if the borrower occupies one unit as their primary residence.
1998 marks the year that the HECM is officially permanent! The HUD Appropriations Act makes the program official while Congress allots funds for counseling, outreach, and consumer education. Safeguards (like full disclosure of fees) are implemented to protect borrowers from unnecessary charges.
2000, HUD announces an increase in origination fees to either 2% of the Maximum Claim Amount, or $2000.
2001, HUD and the American Association of Retired Persons (AARP) team up to begin testing and training approved counselors. They also begin the establishment of consistent HECM counseling policies and procedures.
2004, the FHA implements rules of HECM refinancing. HECM refinancing allows existing HECM borrowers the chance to refinance and pay only the upfront Mortgage Insurance Premium and the difference between the original appraised value and the new appraised value/FHA loan limit.
2005, the First HECM refinances are made.
2006, the national loan limit of $417,000 is established. Also, that year, AARP conducts its first national survey of reverse mortgage borrowers which reveal that the primary motivation for getting a reverse mortgage for borrowers is to plan for emergencies and to improve the quality of life.
2008, the first baby boomers turn 62, which results in a surge of loans which exceed past records. The SAFE Act is also established that year, which requires states to implement consistent procedures when licensing and registering HECM loan originators. Also, the Housing Economic Recovery Act puts up a few safeguards for consumers such as a limit on origination fees, rules against cross-selling, and guidelines for counseling independence.
2009, The HECM for Purchase is introduced. For the first time in reverse mortgage history, borrowers are allowed to purchase a new home without paying monthly mortgage payments. That year, Congress also increases the HECM loan limit to $625,500; meanwhile borrower proceeds are reduced when the FHA lowers principal limits for HECM’s by 10%.
2010, HUD introduces a new reverse mortgage option called the HECM Saver. Characterized by lower upfront Mortgage Insurance Premiums and closing costs, the HECM Saver makes the reverse mortgage more affordable by allowing homeowners to borrow a smaller amount than the standard reverse mortgage. In addition, the Federal Housing Administration makes two changes:
– They increase Mortgage Insurance Premium from 0.25% to 1.25% per year
– They lower the interest rate floor from 5.5% to 5%.2013, HUD releases new HECM policies that make the product safer, stronger, and less risky for the borrower. These changes include a policy that allows borrowers to tap into only a portion of their equity the first year. They can then tap into the rest of their equity after the first year.
2014, HUD began to finalize guidelines for Financial Assessment, which will begin to be implemented in 2015. Financial Assessment will require lenders to analyze potential borrowers’ income sources and credit history to determine whether borrowers must have a mandatory set-aside of funds from proceeds to cover necessary expenses such as property taxes and homeowners’ insurance. These steps are expected to protect consumers and reduce the number of borrowers who might fall into default from failing to comply with loan terms like continuing to pay for taxes and insurance yet again.
2017, the loan limit for HECM reverse mortgage loans increased from $625,500 to $636,150. Announced by FHA on December 1, 2016, it went into effect on January 1, 2017, and will continue through December 31, 2017. The increase is 150% of the national conforming limit of $424,100 and is due to rising home prices.
In its 53 years from its birth in 1961 to present day, the reverse mortgage has developed significantly, and there’s no end in sight. The reverse mortgage has a bright future of continually improving and getting only better with time.
Sources: Guerin, Jessica. “The History of the HECM: A Detailed Timeline.” The Reverse Review. October 2012: pp. 40-45. http://www.reversereview.com/magazine/spotlight-a-historical-timeline-of-the-hecm-program.html. Wikipedia. “AAG Reverse, Mortgage”. http://en.wikipedia.org/wiki/American_Advisors_Group