Realtors: 2 Deals In 1 – The Purchase Reverse Mortgage

Back to Back Closings

Back to Back Closings

Realtors: 2 Deals In 1 – The Purchase Reverse Mortgage

The Home Equity Conversion Mortgage for Purchase (HECM) is known in the industry as the H4P. The H4P is an FHA Insured reverse mortgage which is guaranteed by the Department of Housing and Urban Development.

In writing this post I recall a specific H4P transaction where I was privileged to originate a purchase reverse mortgage for a delightful fellow Colorado native. This transaction closed in July 2013. The purchaser, age 63, sold her townhome in Parker for $115,000.00 and in conjunction with the H4P used the combined proceeds to purchase a townhome in Castle Rock for $227,600.00.

The financial details of that transaction are as follows: The buyer’s cash to close requirement was $96,400.00 plus her earnest money of $2,000.00. This sum of $98,600.00 included pro-rata property taxes, insurance and HOA fees.  The H4P proceeds to close were $129,200.00. In addition, the FHA UFMIP, origination fee and allowed closing costs totaling $11,400.00 were financed. All figures have been rounded to the nearest $50.00.

Purchase Price $227,600.00
Buyer Cash to Close + Earnest Money     98,400.00
H4P Cash at Closing $129,200.00
Financed Closing Costs     11,400.00

She found it most desirable to purchase her new home and not have to make mortgage payments ever again. Of course, she may make periodic payments or payoff the loan at any time but only if she wishes. It bears observing that she made this decision with the blessing of her children, one of whom is a CPA. Going forward, she simply pays the taxes, insurance and HOA dues. She does not need to pay monthly mortgage payments again for so long as she lives in her home.

On qualifying, for all intents and purposes, this was a Stated Income loan. As a matter of responsible underwriting, it was merely confirmed she had sufficient income to pay real estate taxes, insurance and HOA dues.

Due to adjustments* which FHA made to the HECM program in September 2013, an identical transaction as described in this post would presently require cash to close from the buyer of approximately $114,950.00.

On qualifying, for all intents and purposes, this was a Stated Income loan. As a matter of responsible underwriting, it was merely confirmed she had sufficient income to pay real estate taxes, insurance and HOA dues.

Due to adjustments* which FHA made to the HECM program in September 2013, an identical transaction as described in this post would presently require cash to close from the buyer of approximately $114,950.00.

For additional facts on the FHA Reverse Mortgage program (HECM), you may wish to click on this link: Reverse Mortgage Facts. Further discussion and illustration on the H4P is available on this link: What Is A Purchase Reverse Mortgage?

TIPS: There are no concessions allowed by sellers, builders or agents; this includes any personal property (such as appliances). In addition, the buyer must pay for the title insurance. There can be no repair set-asides; all repairs, where major property deficiencies threaten the health and safety of the homeowner and/or jeopardize the soundness and security of the property, must be completed by the seller prior to closing. Another unique feature of this program is to set your closings for about 10:00 AM and not later than 11:00 AM to help make sure the H4P funds the same day as the closing. On the closer, few are experienced with the H4P, most are experienced with the traditional reverse mortgage and think the H4P is the same. It is not. Given the buyer is paying for the title insurance, I suggest we use a closer well-trained in the HP. I have such a closer.

Finally, although a rare circumstance, should a buyer have two FHA Case Numbers open, the non-purchase case number must be cancelled prior to final loan approval. As of this post, FHA will not allow an application to be taken until the Certificate of Occupancy has been issued.

If a non-borrowing spouse is involved in the transaction, the non-borrowing spouse (NBS) may not be a party to the real estate purchase contract. For more information on the NBS you may wish to read: Reverse Mortgages and the Under-Age 62 Spouse.

[*HUD Mortgagee Letter 2013-27]

Update: There are market and borrower favorable changes pending application to the H4P on September 19, 2017. When they go into effect, this posting will be updated to reflect the changes.

Notice: The information provided is not intended to be an indication of loan approval or a commitment to lend. Additional program guidelines may apply. Information is subject to change without notice.

Disclaimer: This article does not represent that any of the information provided is approved by HUD or FHA or any US Government Agency.

Image attribution

 Financially Speaking  James Spray, RMLOCNE, FICO Pro |CO LMO 100008715 / NMLS 257365 |Published: April 3, 2014 ~ Updated: February 6, 2017

 Notice: The information on this blog is opinion and information. While I have made every effort to compose and link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Reverse Mortgage Primer: A Realtor’s Notes

For Homeowners Over 62, a Reverse Mortgage Could Address Some Financial Needs

Jim Smith Golden RE Logo

Recently our agents and I received training on Home Equity Conversion Mortgages (HECM), better known a “reverse mortgages.” These loans can be taken out on your current home or used to purchase a new home. What makes them particularly attractive is how they can turn your home from an expense (if you have a mortgage currently) into a source of money for the rest of your life after age 62.

In a normal mortgage, you have monthly payments of PITI—principal plus interest plus taxes and insurance. With a reverse mortgage, the principal increases instead of decreases because the principal and interest is being drawn from the equity you have in your house.

If you have longevity in your genes and don’t need to leave the value of your house to your heirs, this can be a good solution because no matter how long you live, as long as you continue to live in your house, you will never be “upside down.” The mortgage continues to be paid even after your equity is used up.  When you die and the house is sold by the lender, any shortage in payoff is covered by the mortgage insurance which is built into the loan.

This scenario is not for everyone, but it has enough advantages that it is worth speaking with a reverse mortgage specialist who can study your financial situation and help you decide if a reverse mortgage is right for you.

We had such a specialist — James Spray of MilestoneMtg.net, dba The Mortgage Company — speak to us and answer such questions as:

What happens if both husband and wife are on the mortgage and one of them dies? The surviving spouse can stay in the house until he or she dies.

What if you go into assisted living? Once all borrowers on the loan no longer live in the house, the loan must be paid. If there’s still equity in the house, it can be listed and sold just like any other house, and the loan is paid off.  If the equity has been exhausted and you’re “under water,” then you deed the home over to the lender and walk away not owing anything.

What if a son or daughter wants to buy the house? They can buy the house, with the loan paid off at closing, but if the house has negative equity, they can buy the house from the lender for 95% of its appraised value, regardless of how large the principal had grown.

Are property taxes and insurance escrowed? No, you must pay those directly, along with any HOA dues.

Can you take cash out when you refinance with a reverse mortgage? Yes, depending on your age, you can take out half or more of your home’s appraised value when you refinance into a reverse mortgage. The older you are, the more you can take out, based on actuarial tables. That’s why I say that if you have longevity in your genes, you could take out your full equity in your home before you die and continue to live in the house until all borrowers die without making any mortgage payments again—just taxes, insurance and HOA dues.

Can I sell my house and downsize? You should do that before you take out a reverse mortgage. Sell your house now, buy your perfect “forever” home, and finance it with the reverse mortgage, putting down only the minimum down payment based on the actuarial tables.  Keep the other proceeds from the sale of your current home as cash to spend, save or invest as you wish.

What about Social Security?  As you know, you get a much higher Social Security payment if you wait until age 70 to start drawing it.  Refinancing or purchasing with a reverse mortgage at age 62 could make it possible by lowering your living costs for you to wait until age 70 to start drawing Social Security.

What if my credit isn’t very good? Unlike with a regular mortgage, credit is not a factor in approving a reverse mortgage, barring recent bankruptcy or other derogatory factors. You need only prove that you’ll be able to keep paying the taxes, insurance and HOA fees (if any) on your home. Not doing so risks foreclosure.

You probably have many other questions.  If I can’t answer them for you, I’d be happy to connect you with Jim Spray or another specialist.

Jim Smiths Sig for blog

Read my weekly Real Estate Today column as published in the Denver Post at www.JimSmithColumns.com

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The above article is to be/was published in the Denver Post on September 8, 2016 by Realtor Jim Smith of Golden Real Estate, Inc. His office is located in Jefferson County, Colorado. It is reprinted here with permission/blessings of the author.

Financially Speaking™ James Spray RMLO, CNE, FICO Pro | CO LMO 100008715 | NMLS 257365 |September 2, 2016

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct for your situation. This information is not legal advice and is for guidance only. You may reproduce this information in whole and not in part, providing you give full attribution to James Spray.

Reverse Mortgages and the Under-Age 62 Spouse

The-Good-News

New Rule on Reverse Mortgages

A new rule has been issued which allows that a reverse mortgage (HECM) shall protect borrowers even when one spouse is younger than 62. Both the  purchase or traditional reverse mortgage amount will be based on the younger spouse’s age. Given the number of variables, and the complexity with how these new factors work please contact your trusted reverse mortgage loan originator.

For all FHA case numbers issued on or after August 4, 2014 this revolutionary new rule becomes effective. This rule will allow younger spouses of borrowers that no longer live in their home to stay in their home without the threat of foreclosure. In a nutshell, the requirements are this:

  • They must have been married when the mortgage was taken,
  • Have remained married,
  • The surviving spouse shall continue to pay taxes, insurance, and HOA fees (if applicable).

Prior to August 4, 2014, the full repayment of the reverse mortgage was due and payable following the death of the borrower, leaving the surviving spouse whose name was not on the mortgage in the lurch for the debt or forced to sell the home. This change defers that settlement until after the surviving spouse’s death.

This new rule comes at a cost. Lenders factor in the age of the younger spouse when calculating the reverse mortgage payout; in a nutshell, the younger the spouse the longer the loan will be outstanding resulting in the lesser payout.

Reference: FHA Mortgagee Letter: ML 2014-07

Readers of this blog may also wish to read: What Is A Purchase Reverse Mortgage? as well as The New Reverse Mortgage.

Image attribution

Notice: The information provided is not intended to be an indication of loan approval or a commitment to lend. Additional program guidelines may apply. Information is subject to change without notice.
DISCLAIMER – This post does not represent that any of the information provided herein is approved by HUD or FHA or any US Government Agency or Department.
Financially Speaking™  James Spray, MLO, CNE, FICO Pro 
CO LMO 100008715 / NMLS 257365 | August 2, 2014

 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Reverse Mortgages In The NEWS

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Three Choices and More

There are two versions of the Reverse Mortgages, which are known as Home Equity Conversion Mortgages (HECM). There is the traditional HECM refinance which includes the Line of Credit where applicable and the more recent HECM purchase product. All are designed to benefit folks age 62 and above. Within both the Purchase and the Refinance is an option for either a Fixed or an Adjustable rate. With the traditional HECM one may set up a line of credit which grows at a handsome and tax free rate and may do so with minimal closing costs.

The point is, there is a great deal of flexibility today to design a product best suited for an individual’s or couple’s needs and wants. In fact, if desirable, one can make monthly payments as on a home equity line of credit or mortgage. Keep in mind that monthly mortgage payments are not required.

Insured and Guaranteed by the USA

Both the traditional HECM refinance and the HECM purchase are insured by the Federal Housing Administration (FHA) and guaranteed by the US Department of Housing and Urban Development (HUD) as discussed by the Federal Deposit Insurance Corporation (FDIC) and further explained by the Consumer Financial Protection Bureau (CFPB).

Eligible Properties

The HECM can be used for FHA acceptable properties of 1-4 units, provided one unit is occupied by the owner. In addition, it can be used for an FHA approved condominium as well as an FHA acceptable manufactured home.

Recent Media Publications

9 surprising ways to use a reverse mortgage: #2 Buy a New Home written by Mary Beth Franklin, published in Investment News September 20, 2017. “A reverse mortgage can be used to purchase a new home. Rather than using all of the proceeds from a home sale, downsizers can use some of the sale profits and take out a reverse mortgage to make up the balance, resulting in a new home without monthly payments and additional cash to add to savings for future needs or to supplement current income.

Borrowers’ Children Weigh in on Reverse Mortgage Successes ‘“A lot of the myth out there is that the bank will take the home at the end. People don’t understand how deferred interest works. They don’t know they can still leave the home to their children with the remaining equity,” she said.” Reverse Mortgage Daily – December 6, 2017

“Will I run out of money before I die?” George Gagliardi gets that question all the time from clients. A certified financial planner in Lexington, Mass., Gagliardi rarely dishes out a simple answer. Instead, he explores creative solutions to preserve retirees’ funds. This adviser says not to buy long-term-care insurance — and to do this instead Morey Settner Market Watch June 13, 2017

“In any case, preserving an inheritance probably shouldn’t be your top priority. You should focus instead on preserving your quality of life and your financial flexibility.” Liz Weston, June 11. 2017 L.A. Times Why a reverse mortgage might be a good idea for some older homeowners

What’s stopping seniors from accessing the wealth stored in their home equity? The most important factor affecting low rates of home equity extraction among seniors is limited demand, which might arise for two reasons: • Seniors are typically financially conservative and want to avoid debt. This behavior could be related to their desire to leave a bequest or to save for emergency expenses or long-term care. Others might avoid mortgage debt because they’re worried about losing their home. • Continued improvements in health and medicine are allowing more seniors to work and earn well into old age, reducing the need to depend on home equity extraction. Published by Urban Wire on February 27, 2017

Homebuilders Are Betting on Boomers to Be Big Buyers is the title of an article published in the National Mortgage News on January 23, 2017. Of essence to the article is the high cost of purchasing a home. As stated, “… boomer buyers are finding that home cost is the biggest issue in making their move.” A solution to consider, for many in this situation, is the Purchase Reverse Mortgage.

China’s Real Estate ‘Godfather’ Says Reverse Mortgages Are The Answer “Under these circumstances, participating in the house-for-pension plan can be regarded as an important option for China’s elderly to improve their living conditions and live better in their later years,” New York Times December 26, 2016 | Of note, reverse mortgages or house pensions are utilized in, among others, the following countries: Australia, Canada, Germany, India, Japan, Korea, New Zealand, Norway, Spain,  Sweden and the United Kingdom where they are known as Equity Releases.

‘Silver’ Divorce Puts Strain On Retirement Income “…an often overlooked and underutilized tool for dividing assets in silver divorces is the reverse mortgage. A reverse mortgage can be used to provide the liquidity needed to help divide the value of the home, paying out the spouse who wants the money while allowing the other spouse to remain in the home without making any mortgage payments. Monthly mortgage payments could be a huge strain on his or her retirement income each month.” Forbes October 24, 2016 Jamie Hopkins | Further reference: Using Housing Wealth to Facilitate Asset Division in “Silver Divorce” by Barry H. Sacks, Ph.D., J.D. and Stephen R. Sacks, Ph.D.

CONFLICT OVER INHERITANCES – “Mary’s going to do what’s good for Mary” … some children of clients may expect an inheritance in the form of the family home. But as reverse mortgages and home equity loans become more popular, …those real estate windfalls are likely to decline Excerpted from THE LONGEVITY PARADOX by Elizabeth MacBride on August 22, 2016 and republished in the Investment News on December 24, 2016.

5 Ways A Reverse Mortgage Can Help Your Retirement October 12, 2016 Forbes.com “The old notion that reverse mortgages should only be taken out as a last resort simply is no longer true today. In fact, I believe there are five ways reverse mortgages can improve your retirement income plan. …There is a healthy skepticism about reverse mortgages, and that’s not necessarily bad, because people should exercise caution when utilizing debt. But reverse mortgages can improve retirement spending outcomes in a sensible way.”

A Surprising Suggestion for Retirement Income October 10, 2016 TIME.com/Money “Used strategically, a reverse mortgage can greatly improve the sustainability of your retirement income,” says Pfau, a professor of retirement income at the American College of Financial Services. For instance, you might use a reverse mortgage to provide income for several years while you delay claiming Social Security–or you could tap a reverse-mortgage line of credit to minimize withdrawals from your portfolio in a stock-market downturn. You should consider signing up for a line of credit early in retirement even if you don’t think you will ever need it.

How will you manage longevity risk? There are some time-honored ways to deal with the risk of outliving your assets. Those include the use of annuities, a sound asset-drawdown plan, delaying Social Security to age 70 for the higher wage earner, and a reverse mortgage. October 5, 2016 USA TODAY For your retirement planning, count on living until age 95 by Robert Powell

The Street published an announcement titled The American College Of Financial Services Aligns With Funding Longevity Task Force on September 28, 2016. This is a significant combination of forces which will be of great help in bringing Reverse Mortgage Facts to the forefront of Financial Planners for the benefit of American Consumers.

“The American College of Financial Services, the nation’s largest nonprofit educational institution devoted to financial services, and the Funding Longevity Task Force announce a partnership designed to expand the body of knowledge on issues related to reverse mortgages and home equity in retirement planning.” To continue reading, click here.

Retire on the House: The Use of Reverse Mortgages to Enhance Retirement Security July 26, 2016 MIT Center on Finance and Policy “There is a near-consensus in the professional literature that many, perhaps, most American households working today will face a significant retirement funding gap, on present trends, behaviors, conditions, and policies. Some have even gone so far as to term this finding in the literature a retirement crisis. Although many solutions have been offered to reduce the estimated funding gap, that is, to improve the retirement security of working households and even current retirees, this paper focuses on one that uses a currently available financial tool – the reverse mortgage, also known as the HECM (home equity conversion mortgage).”

A Reverse Mortgage to Buy a Home? Here’s How | Here’s how it works: Seniors 62 or older buying a primary residence make a down payment and pay closing costs. They then get a lump-sum loan that goes toward the home purchase. No monthly payments are required to pay down the debt. Instead, interest accrues on the loan, and the principal and interest are usually due when the last co-borrower or spouse on the loan moves out or dies.” Published by the Wall Street Journal on June 20. 2016.

“…protect your portfolio in retirement … But only if you open a reverse mortgage line of credit early in retirement for just this purpose.

Good financial planners have long hated reverse mortgages, which allow people 62 and over to tap their home equity without having to make payments on the debt. Advisors traditionally have seen these loans as a last resort for retirees who exhaust all their other assets.

Today’s reverse mortgages are cheaper and safer than in the past, however, thanks to improvements in the Federal Housing Administration’s Home Equity Conversion Mortgage program. Also, recent research indicates that reverse mortgage lines of credit offer an important safety valve in retirement. When the stock market plummets, retirees can tap credit lines instead of their portfolios, which allows their investments time to recover when the market rises. This “standby reverse mortgage strategy,” as some researchers call it, significantly improves the odds of a portfolio lasting through retirement.”  Published in NerdWallet on June 20, 2016 in an article by Liz Weston titled 5 Good Reasons to Tap Your Home Equity.

“We also propose to strengthen programs that support and advise consumers on reverse mortgages, which can be a good option for some older Americans.” Securing Our Financial Future a report titled the Report of the Commission on Retirement Security and Personal Savings from the Bipartisan Policy Center, published June 9, 2016.

Click on the Bolded title to view a 2:23 minute video featuring Jane Bryant Quinn, author of How to Make Your Money Last: The Indispensable Retirement Guide titled Why a reverse mortgage may be right for you. In this brief video, Ms. Quinn discusses the changed rules of reverse mortgages which provide greater protection for consumers. CNNMoney, May 11, 2016.

“Steven Sass, program director at the Boston College Center for Retirement Research, says that reverse mortgages make sense not just for low-income people who want to stay in their homes but also for wealthier retirees who have considerable equity but want to goose their income streams.” Written by Dave Lindorff and, published on May 1, 2016 in FIANCIAL PLANNING.

“. . . opening the line of credit at the start of retirement and then delaying its use until the portfolio was depleted created the most downside protection for the retirement income plan. This strategy allowed the line of credit to grow longer, perhaps surpassing the home’s value before it was used, which provided a bigger base to continue retirement spending after the portfolio was depleted. Using home equity last did reduce upside potential, because when markets were strong the portfolio grew faster than the loan balance.Journal of Financial Planning: Incorporating Home Equity into a Retirement Income Strategy by Wade D. Pfau, Ph.D., CFA., published by the Financial Planning Association, 2016.

Why Financial Advisors and Reverse Mortgages Don’t Get Along “As a practical matter, (financial) advisors who don’t have mortgage licenses can’t make direct commissions from a HECM or earn a finder’s fee for a HECM referral,” writes Kerry Pechter for the Journal. “Second, most brokerage advisors don’t practice ‘life-cycle’ investing, which considers an investors’ entire ‘household balance sheet,’ including home equity.” Published in Reverse Mortgage Daily on April 25, 2016.

“…you could set up a reverse mortgage as a standby line of credit, says John Salter, a certified financial planner and professor of personal financial planning at Texas Tech University in Lubbock. That way the money is available if you have big unexpected expenses, such as a health emergency. “It’s there if you need it, and if you don’t, you never need to tap it,” he says.

Also, Salter suggests that if the financial markets are down, you could take income from a reverse mortgage line of credit rather than from other investments. Once those investments recover, you can repay the loan. You could also put off taking Social Security longer by using a reverse mortgage to supplement income early in retirement. Delaying Social Security allows the benefit payment to grow, which would give you a higher lifetime guaranteed income stream that is adjusted for inflation.” Writes Donna Rosato in an article titled Reforms Come to Reverse Mortgages published by Consumer Reports on April 4, 2016.

Home Title: A commonly held false belief is that the lender receives the title to the home as part of a reverse mortgage. This is simply untrue. It is an enduring myth about HECM reverse mortgages. Professor Wade Pfau discusses this and other misconceptions of the reverse mortgage in the Forbes article, of February 23, 2016, titled, How Did Reverse Mortgages Get Such a Bad Reputation? 

Reverse mortgages have long suffered from a negative public perception. The problem is the result of several factors, including common misconceptions about a somewhat complicated financial product that have been hard to dispel. Most Americans simply don’t understand the ins and outs of the product, with many holding on to the false belief that the bank owns a borrower’s home. Even some financial professionals are uninformed about the details of the loan.” Writes Jessica Guerin in a excellent feature article titled, The Public’s Perception published by the Reverse Review in their February 2016 issue.

Evaluate how to use the house as a financial asset to produce retirement income: For many middle-class Americans, the home represents their single greatest financial asset. A good planner should be able to decide if a reverse mortgage is a good fit for your situation. A great planner should know about how the standby reverse-mortgage strategy can be used to extend the time you will have usable financial assets in retirement… The above excerpt is from a brief, yet comprehensive, discussion of what a great financial planner needs to know about retirement planning. This was written by Kenn Tacchino and published in Market Watch on January 26, 2016.

Beth Patterson, a fellow blogger and a remarkable reverse mortgage professional in MN offers many factual observations in her post of January 11, 2016 titled: What You Need To Know When A Reverse Mortgage is Due and Payable – Respond QuicklyShe offers this excellent question: “How long do I or my children have to pay off the reverse mortgage?” On this, one of her observations is: Once a loan payoff is requested the funds from one’s line of credit and/or monthly payments will be frozen. If you, the borrower, are thinking funds will be needed for the move, fixing the home for sale, etc. make sure funds are requested prior to the move and payoff request.  The heirs, because they are not borrowers, cannot request funds.

The following comprehensive study of utilizing a reverse mortgage to maximize retirement income in conjunction with conventional retirement income streams is primarily directed to professional Financial Planners. I have captured a few lines from their conclusion for those of us in the lay community. “We have considered retirement income in the classic mode of constant purchasing power (except where the safeguards are invoked) over periods of up to 30 years. The income sources we have considered consist of a securities portfolio plus withdrawals from home equity by means of a reverse mortgage credit line…We have also found that use of these active strategies is likely to result in a higher residual net worth after 30 years than the use of the conventional strategy.” Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income by Barry H. Sacks, J.D., Ph.D., and Stephen R. Sacks, Ph.D. Published in the Financial Planning Association in February 2012.

On using the reverse mortgage as an income vehicle: “The second benefit of opening the reverse mortgage early, especially when interest rates are low, is that the principal limit that can be borrowed will continue to grow throughout retirement. Reverse mortgages are non-recourse loans, and for sufficiently long retirements there is a reasonable possibility that the line of credit may grow to be greater than the value of the home. I wrote about this last year. In those cases, the mortgage insurance premiums paid to the government on the loan balance are used to make sure the lender does not experience a loss, but also the borrower and/or estate will not be on the hook for repaying more than 95% of the appraised value of the home when the loan becomes due.” For the rest of the article see, Advisors Need a Fresh Look at Reverse Mortgages by Wade D. Pfau, Published in the Advisors Viewpoint on December 1, 2015.

“…a lot has changed in the past several years, and the result is that reverse mortgages have an undeserved bad reputation.” States Wade D. Pfau in The Experts segment of the Wall Street Journal on November 30, 2015 in an article titled The New Case for Reverse Mortgages.

“…if you are looking for a big lever, a reverse mortgage line of credit will be the most powerful tool available for many people.” This statement was written by Scott Burns and published in the Dallas Morning News on October 23, 2015 in an article titled Do reverse mortgages help out?

The Financial Planning Association recently published an analysis of the HECM as a source for supplemental income for Baby Boomers. This is an excellent read for all even though it is directed to financial planners. Retirement Trends, Current Monetary Policy, and the Reverse Mortgage Market.

Citing John Salter, associate professor of personal financial planning at Texas Tech University, The Dallas Morning News states that opening a credit line while interest rates are low—even if the borrower does not need the money now—can result in a larger credit line now than when rates are higher. 6 strategies to stretch your retirement savings. Published September 23, 2015.

In the September 2015 issue of The Reverse Review, Jason Perez published an article titled: When the Last Surviving Borrower Dies. In part, he writes, “I regularly receive questions about what happens when the last surviving borrower dies, and when I think back to my responses just a few years ago, I realize they were once very simple. But in the wake of major product change these past two years—like so much within our product and industry—it has gotten complicated! I’ll do my best to simplify what has become a more layered, complex and ultimately rewarding process for borrower’s heirs and estates…”

On August 28, 2015, the Wall Street Journal published an article by Jason Zwieg titled: Buying The Dips Doesn’t Work For Everyone. An essence of this post highlights the value of setting up a HECM Line of Credit as a standby for troubling financial times. The point missed is for optimal results, one should set up the HECM LOC a the earliest opportunity. “…Another possibility, says Prof. Pfau, is to consider taking out a line of credit under the Home Equity Conversion Mortgage program guaranteed by the federal government, using it only during periods when the value of your stock portfolio is declining. This way, you reserve the right to borrow against your home at reasonably competitive rates. But you would draw on the money only at times when you would otherwise have to lock in losses on your stock portfolio.”

4 Advantages FHA Reverse Mortgages Have Over HELOCs  by JEFF TAYLOR was published by Origination News on September 4, 2015. The information is primarily for financial planners. The content is good and mostly accurate; for clarity, the actual Mortgagee Letter discussed is 2015-02. A paragraph I particularly like is: “Although it’s often the subject of negative press, the HECM product is sound. Complaints emerge largely from “last resort” borrowers versus borrowers seeking a retirement supplement or a HELOC option. The education gap, and occasional “piling on” of negative media stories, has unfairly tarnished the HECM reputation. Consumer Financial Protection Bureau data shows HECM complaints are minimal compared with forward mortgage complaints.”

Robert Massi of Fox News published: Is a reverse mortgage right for you? on August 21, 2015. While the article has several good points for the traditional reverse mortgage, it simply does not address the purchase reverse mortgage. However, this cautionary sentence adds great value to the post: Beware of the hard sell. Unscrupulous brokers may target older people and offer high-cost loans. If a salesman tries to convince you that a reverse mortgage can be used to free up money for investment in other financial products, like annuities or long-term care insurance, walk away.”

On August 7, 2015, the New York Times published an article titled 6 Strategies to Extend Savings Without Working Longer. In part, the discussion focuses on the reverse mortgage as a forward looking strategy for retirement income stability: “One approach is a standby reverse mortgage, where borrowers open a line of credit that can be tapped when necessary. Opening a credit line while interest rates are low, even if you don’t need the money now, can result in a larger credit line now than when rates are higher, said John Salter, an associate professor of personal financial planning at Texas Tech University. And the line of credit continues to grow over time.”

In the May 18, 2015 issue of Forbes, Jamie Hopkins published an article suggesting how to use the New Reverse Mortgage titled: New Reverse Mortgage Rules Open Door To A More Secure Retirement. His article examines three different strategic uses of reverse mortgages within a retirement income plan and illustrates how these strategies are for more than just the cash-poor, house-rich client.

In April, 2015, The Motley Fool reproduced a report from the FBI which they titled, Don’t Get Duped! How to Avoid Reverse Mortgage Scams According To the FBI. It is brief and to the point; it’s well worth the time for your review.

On January 9, 2015, Consumer Affairs reporter, Mark Huffman published: A reverse mortgage should always be in both spouses’ names. This article nicely summarizes the new rule whereby a spouse under the age of 62 may remain in the property when the older spouse pre-deceases the younger mate. Very briefly, you will wish to make sure both names are on the title to the property. Feel free to contact me for information you will wish to share with your legal advisor.

In a November 24, 2014, CBS News’ MoneyWatch writer Steve Vernon, discusses several options one should consider to supplement retirement income and savings, these include utilizing a reverse mortgage. Mr Vernon referenced the acclaimed Boston College eBook (below) in writing this article: Should you use your home equity for retirement income?

PLANADVISER (writes) that a reverse mortgage “could be right if you plan to stay in the house your entire life. It’s not great if you are going to move. Of course, you don’t know if you’re going to move, so there’s risk, but there’s risk in everything.”

“…many retirees could benefit from paying the closing costs necessary to have a reverse mortgage line of credit (which lenders can’t close down, unlike home equity lines of credit) on standby for times when their investments have fallen.” Love Them or Loathe Them, Reverse Mortgages Have a Place New York Times, September 26, 2014

A must read:  USING YOUR HOUSE for INCOME IN RETIREMENT. This is a fabulous, brief eBook from Boston College written for folks like you and me. It is fun and easy to read, loaded with info graphs. Contact me for a no-cost to you copy.

Reverse mortgage can be a useful financial tool“For consumers, the most important thing they can do is to become educated on how (a reverse mortgage) works… A reverse mortgage is not the solution for everybody, but clearly it’s an option for many people and the more information they know, the better they can understand how the product works and they can make an informed decision.” September 5, 2014  published in The Houston Chronicle.

The Boston Globe on June 3, 2014 published New reverse mortgage rule aims to keep surviving spouse in home which does a reasonably good job of explaining the new rules being implemented by FHA on August 4, 2014. In part, these new rules allow the surviving spouse who was not age 62 at the time the mortgage to remain in the home following the death of the older spouse who was on the mortgage. The surviving spouse simply needs to pay the taxes, insurance, HOA dues (if applicable) and maintain the property.

“If you are approached by a financial professional to do a reverse mortgage in order to fund a particular investment, keep in mind that all investments carry risk and costs—and the higher the promised return, the higher the risk. It’s best to steer clear of investments that are risky or underdiversifed—as well as those that make it expensive, if not impossible, for you to access your money if unexpected expenses arise.” from a position statement titled Reverse Mortgages: Avoiding a Reversal of Fortune published by the Financial Industry Regulatory Authority on May 1, 2014.

Reverse Mortgages: What Advisors Should Know: “If you think that reverse mortgages are only for cash-strapped retirees without any other financial options, think again. The features of reverse mortgage loans have been evolving over the years and a growing body of research suggests that these loans can help older adults manage a dependable stream on income during their retirement years.”  April 21, 2014 published in bic by Paul Norr

“…elder law and reverse mortgage experts say they frequently encounter resistance from children less concerned about the terms of the loan than about losing their presumed inheritance.” April 10, 2014 New York Times by Lisa Prevost titled: Reverse Mortgage Realities.

NBC News reporter Shelley K. Schwartz published an article on March 24, 2014 titled: Reverse Mortgage: Sounds Too Good To Be True. How Does it Work? This article outlines how the loans work and the costs tied to them. The article is brief and refreshingly accurate.

The Wall Street Journal published an article  on March 22, 2014 written by Tom Lauricella titled: A Kinder, Gentler Reverse Mortgage focusing  on recent safeguards and borrower protections implemented by FHA.

For an in-depth, academic look at reverse mortgages as a financial planning tool for retirement, an article written by David W. Johnson, Ph.D and Zamira S. Simkins, Ph.D recently published in the Journal of Financial Planning titled Retirement Trends, Current Monetary Policy, and the Reverse Mortgage Market offers very clear insights into the suitability of the product and is particularly suited for professionals.

Kiplinger’s Retirement Report Published in March 2014 has an excellent article by Rachel L. Sheedy titled What Heirs Need To Know About Reverse Mortgages.

The New York Times published an article on February 14, 2014 titled Retiring On The House discussing the facts of this product. It is brief and to the point, I encourage all to read it.

For facts on the costs of a reverse mortgage, read Beth Paterson’s blog – Surprise! Reverse Mortgage Closing Costs Actually Compare to Conventional Mortgage Costs.

NASDAQ released an article on February 5, 2014 written by Joe Young titled Reverse Mortgages: The Pros and Cons. I will add one “Con” that Mr. Young did not mention and that is proceeds from a reverse mortgage should not be used to purchase an annuity or mutual funds without the advise of both a Reverse Mortgage HUD Certified Housing Counselor and an attorney specialized in Elder Law to make certain there are no abuse of trust issues.

The Government’s Redesigned Reverse Mortgage Program from the Boston College Retirement Center – January 2014 – Click Here for the Summary

 Aldo Svaldi of The Denver Post published an article on September 29, 2013 titled FHA tightens the rules on reverse mortgages discussing changes about to be implemented by FHA. These changes are meant to preserve the HECM program by lowering the available cash and limiting the distribution in many cases. This has a relatively minimal impact on the Purchase Reverse Mortgage program.

“I cannot find a downside,” Fran Ciaccia, a retired high school cafeteria cook from Levittown, Pennsylvania, said in an interview.  “We have told so many people about it.” This quote from the blog: Reverse Mortgages Get No Respect published July 25, 2013.

An excellent comment was posted to the Wall Street Journal defending homeowners’ rights to access their Housing Wealth (published 12/21/2012).

As reported June 20, 2012 on PBS’s Money File: “You’ll never owe more than the house is worth, no matter how high interest rates go or how many payments you’ve received. The mortgage is due in full plus interest and fees only when you move, die or sell the home. Any remaining equity belongs to you or your estate.”

As Tom Kelly wrote in Inman News on June 6, 2012: “ …While there were some huge mistakes with the early reverse mortgages that were compounded by a few bad operators, today’s product is a needed, helpful tool that provides thousands of seniors access to funds otherwise untouchable. How many conventional lenders will grant a loan to a 70-year-old with no income?

Reverse mortgage rates and fees have come down. Fixed-rate programs are now in place. There is no other product where greater care is given, more counseling is mandatory and more questions are answered before anything is done.”

On May 22, 2012, real estate expert John Adams joined Good Day on FOX News Atlanta, reported in part: “Several years ago, the concept of a reverse mortgage was introduced, but they were very expensive and hard to understand.  Today, FHA has created a program that meets many senior needs at a reasonable price point.”

On May, 11 2012 CBS 42 of Birmingham, AL broadcast a Special Report titled: Is a reverse mortgage right for you? One consumer discovered this of her reverse mortgage,” . . . it’s been a win-win situation.  After losing her husband of 51 years to lung cancer, she thought the dark clouds would ever go away.  Thanks to a reverse mortgage, her financial worries are gone and her skies are sunny and clear once again. “I feel comfortable,” she said.  “I know now that I don’t have to do something drastic.”

DISCLAIMER – This blog post does not represent that any of the information provided is approved by HUD or FHA or any US Government Agency.

Image attribution

Financially Speaking™ James Spray, RMLO, CNE, FICO Pro
CO LMO 100008715 | NMLS 257365 | Updated frequently

 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

The PURCHASE Reverse Mortgage (H4P)

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What Is A Purchase Reverse Mortgage?

By way of background, a previous blog on reverse mortgages discusses the general facts regarding reverse mortgages. Let’s talk specifically about the purchase reverse mortgage, which is otherwise known as the Home Equity Conversion Mortgage (HECM) for purchase [H4P]. This product was created by the Housing and Economic Recovery Act of 2008 (HERA). The product is insured by the Federal Housing Administration (FHA) and guaranteed by the US Department of Housing and Urban Development (HUD). In short, the purchase reverse is a way to purchase a home with only a down payment. In addition to the down payment, the buyer is responsible for paying the homeowners insurance, property taxes and (if applicable) Home Owner Association (HOA) fees. There are no principal or interest payments required. However, one may make principal and interest payments by choice not necessity. Finally, if the loan balance on the reverse mortgage eventually exceeds the home’s value, the lender is insured against that loss.

Who Is It Good For?

BORROWER: Age 62 and older based on the youngest titleholder. A non-borrowing spouse under the age of 62 may be added to the loan providing the spouse is over the age of 18. There is no credit required, nor a credit score requirement and only minimal income requirements. This is a minimum documentation loan.

PROPERTY: Single family homes as well as 2-4 unit residential properties and all FHA approved condos are eligible. Title may be held as fee simple, a living trust, and leasehold or life estate. The property must meet FHA appraisal requirements. If the property does not meet FHA criteria (health and safety issues), a set aside account will be established for up to six months while the health and safety requirements of the FHA appraisal criteria are met. The property may be either an existing home or a new build home, so long as the property meets FHA standards.

Purchase Price Age Down Payment HECM Funds
$300,000 62 $174,688 $138,300
74 $153,088 $159,900
80 $138,388 $174,600
86 $118,888 $194,100
$636,150 62 $363,596 $293,265
74 $317,793 $339,067
80 $286,622 $370,239
86 $244,272 $411,589

October 9, 2017 – Pricing is subject to change at any time.

To illustrate – let’s look at the example of a $250,000.00 purchase at age 74: To purchase the residence, the HECM borrower would need $131,750 to close on the purchase of a $250,000.00 property. The balance of the proceeds are provided with the HECM as a benefit of the HECM program and include closing costs. In all examples of HECM purchase mortgages, no mortgage payments are required. All that must be paid out-of-pocket on an annual basis are real estate taxes, homeowners insurance and HOA fees (if applicable). There are no required payments of principal, interest, or other mortgage costs (including upfront costs) until termination of the HECM.

Who Likes Reverse Mortgages The Best? The Borrowers Who Have One!

95% Partially to fully meets my financial needs

93% Positive effect on my life

89% Would refer a friend

94% Report peace of mind

89% Report a more comfortable lifestyle

87% Report a better quality of life
                                                                             Source: AARP December, 2007. Survey of 1500 HECM Borrowers

Why It Can Be Good

A reverse mortgage for purchase allows older Americans to buy a house that better suits their needs without dumping all their retirement assets into it, which would be the case in an all-cash transaction. It also lets them avoid dipping into their monthly fixed income, which would occur if they took out a traditional mortgage. It provides more purchasing power  and doesn’t drain all of the assets. It allows a buyer the luxury to get a better lot, to add all the upgrades they want and to still have no mortgage payment.

The home is titled in the owner’s home; as with all mortgages, the lender retains a security interest in the title. There are no monthly mortgage payments. Instead, the loan is repaid when the home is sold or the borrower no longer resides in the home. The repayment to the lender includes the amount borrowed, plus accumulated interest. Any remaining equity belongs to the borrower, heirs or estate. The heirs may purchase the property for the balance due or 95% of the value, whichever is less.

TIPS: There are no concessions allowed by sellers, builders or agents; this includes any personal property. As well, the buyer must pay for the title insurance. There can be no repair set-asides; all repairs, where major property deficiencies, such as

  • No running water
  • Leaking roof
  • No primary heating source
  • Inadequate electrical system (including lighting)
  • Inoperable doors and windows (inhibited ingress and egress)
  • State or local code violations

which threaten the health and safety of the homeowner and/or jeopardize the soundness and security of the property, must be completed by the seller prior to closing. (H4P FAQs per HUD).

NOTICE: (1) Rates are subject to change without notice. For specific and current information contact me or your H4P Specialist. (2) The illustrations in the above chart titled: *Examples by Buyers Age and Purchase Price, are representative examples only. The figures are not intended to be anything other than representative illustrations in order to convey the concept of the purchase reverse mortgage.

DISCLOSURE: The information provided herein is not intended to be an indication of loan approval or a commitment to lend. Additional program guidelines may apply. Information is subject to change without notice.

DISCLAIMER: This post does not represent that any of the information provided is approved by HUD or FHA or any US Government Agency.

Image attribution
 
Financially Speaking™ James Spray, MLO, CNE, FICO Pro
CO LMO 100008715 | NMLS 257365January 11, 2010 | Updated April 15, 2017
 
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.