How to Find the Most Reliable and Best Reverse Mortgage Loans

 

American senior citizens now have a powerful financial weapon for securing their home and improving their finances for the future — with the reverse mortgage loan.

Although many states and a few private lenders offer their own version of reverse mortgage loans, the most popular reverse mortgage is offered by the Federal Housing Administration. Officially labeled the Home Equity Conversion Mortgage (HECM), this FHA loan program is more commonly known as a reverse mortgage loan.

Like standard refinance loans, the reverse mortgage loan replaces the current mortgage loan, if any, with a new mortgage loan that cashes out a portion of the homeowner’s equity. Unlike standard refinance loans, however, the reverse mortgage loan offers incredible benefits for seniors who have paid off their mortgage or built up substantial equity in their property:

• No monthly payments. In fact, the loan never has to be paid back as long as the borrower still lives in the home. Upon the death of the borrowers, their beneficiaries will have a chance to retain the home by refinancing the current balance (with the accrued interest rate).
• No income qualification. Since this loan program has no monthly payments, there will be no need to document employment or calculate debt-to-income (DTI) qualification.
• No credit qualification. Again, since the loan will never have to be paid back, there is no need to look at credit history or FICO scores. However, the FHA reverse mortgage loan does require that borrowers not be currently delinquent on any federal debt.
• Additional income. The reverse mortgage loan liquidates the homeowners equity and can provide much needed cash or supplemental income for fixed-income retirees.
• Non-taxable. Because the funds received are from a loan, the reverse mortgage loan borrower will not have to pay any income taxes on any funds received from the refinance.
• No asset qualification. Unlike standard refinance loans, you do not need to show documentation of sufficient reserves or savings.
• Home security. The reverse mortgage borrower can rest assured with the knowledge that his or her home will never be lost to a mortgage loan foreclosure. If anything, the reverse mortgage loan often improves senior homeowners’ chances at long-term financial stability.
• Purchase option. You can actually use the reverse mortgage loan as a purchase loan, especially if you want to own a home without ever having to make a single monthly payment. Of course, it would require a very large down payment.

Sound too good to be true? In this case, it isn’t because there are several restrictions and requirements for the reverse mortgage loan program, so it’s not quite for everyone.

The FHA Reverse Mortgage Loan Parameters

Just as with all FHA loans, the FHA relies on approved private institutions to lend out the money. FHA simply provides insurance to lower those banks’ risk exposure. That means that banks want to make sure they make a profit, and FHA will be charging you mortgage insurance.

You can choose from four basic FHA reverse mortgage HECM (home equity conversion mortgage) loans:

1. HECM Standard fixed-rate – disburses only as a lump sum, but offers the highest lump sum loan amount; also incurs some of the highest closing costs and mortgage insurance.
2. HECM Standard ARM – uses the 1-month LIBOR index (which adjusts monthly); its lump sum disbursement is usually about 5% less than the fixed-rate program, but its credit line option can offer up 45% more funds than the fixed-rate.
3. HECM Saver fixed-rate – disburses only as a lump sum and offers slightly more funds than the HECM standard ARM loan and higher up-front mortgage insurance premiums, but charges much lower closing costs overall.
4. HECM Saver ARM – also uses the 1-month LIBOR to adjust the interest rates, but offers the lowest lump sum funds of the four programs, but still higher as a credit line.

In addition, you have four different options to choose to from for receiving your FHA reverse mortgage loan:

• Lump sum – all four of the above (Standard and Saver) programs offer a lump sum option.
• Credit line – the ARM loan programs can also be taken as a credit line and offer significantly more money over the life of the loan (as the credit limits increase over time).
• Monthly advance – the ARM loan program can also be disbursed in monthly payouts over the life of the borrower (as long as they live in the home). Note that you can choose to receive the monthly advances for only a set number of years (instead of for life) — which would give you more money each month.
• Combination – you can also choose a combination of a small monthly advance and a credit line for emergencies.

The following sections review the important details about the reverse mortgage loan that you need to know before proceeding.

Loan Funds

The reverse mortgage loan amount you can qualify for will depend on your age (or the age of the youngest co-borrower, if there’s more than one person), the property’s appraised market value and the specific reverse mortgage loan program you choose.

In general, you can expect to get between 40% to 75% of your property’s value. For example, a 65-year old reverse mortgage loan borrower with a home appraised at $200,000 can qualify for the following outlays:

• Lump sum. Depending on the program, the borrower can get a lump sum disbursement of between $81,000 (Saver ARM reverse mortgage) and $116,000 (Standard fixed-rate reverse mortgage).
• Credit line. With the Saver ARM program, the borrower can get an initial credit line of $81,000, which climbs to $120,000 in ten years if not used. The standard ARM program starts at $97,000 and can climb to $144,000 in ten years if not used.
• Monthly advance. The standard ARM program will pay the borrower $616 every month for the rest of his or her life (while living in the home). The Saver ARM option only pays $514 per month.
• Combination. Again, you can also choose a combination of the above.

The above calculations relies on current interest rates, as well as current actuarial tables of projected life expectancies.

Property Requirements for FHA Reverse Mortgages

Because the the reverse mortgage loan only provides 40% to 75% of your property’s value, your property must have significant equity or be completely paid off in order to qualify for reverse mortgage loan financing.

If you have a current mortgage loan balance, the reverse mortgage will have to pay off that amount — usually with the lump sum option.

The property itself must be the borrower’s primary residence. In addition to single family homes and HUD-approved condominiums, the reverse mortgage loan can also be used on 2- to 4-unit properties, provided that the borrower lives in one of the units.

Certain manufactured homes are acceptable, as long as they are less than 30 years old and are approved by FHA.

It’s important to note that just because you don’t have to pay off the mortgage loan while you live in the home, you will still have property-related expenses and responsibilities:

• Hazard insurance. You must maintain adequate and acceptable homeowners insurance coverage on your property, including flood insurance if you are in flood zone. Because your property is collateral for the loan, the lender and the FHA wants to ensure that they will eventually have a chance to get their money back.
• Property taxes. You must make sure that you pay your real estate taxes and other assessments on time. Failure to do so could result in a foreclosure suit, which would undermine the security for your reverse mortgage loan.
• Homeowners association assessments. As with property taxes, condominium and homeowners association dues must be paid in order to prevent any liens or foreclosures against the property.
• Property maintenance. Because your home is the collateral for the reverse mortgage loan, you also have a legal responsibility for maintaining the property, with required repairs and regular maintenance.

Individual Requirements for FHA Reverse Mortgages

The main requirement for FHA reverse mortgage loans is that you are at least 62 years old and occupy the property as your primary residence.

As mentioned above, older borrowers will be able to get higher loan amounts, because the reverse loan disbursements are partially based on actuarial tables of projected lifespans.

There are no other income, employment or asset qualification requirement. Your credit scores also don’t matter. However, one credit-related restriction is that you not be delinquent on any federally guaranteed debt, such as student loans (even those where you may have just been the co-signer).

A final requirement of the reverse mortgage loan — at least if you’re going for the FHA reverse mortgage HECM program — is that you must attend a consumer information session or workshop presented by an HECM-approved counselor.

Cost of the FHA Reverse Mortgage Loan

Even though the loan disbursements and calculations for the FHA reverse mortgage loan are fairly straightforward and set, there are still closing costs involved. Just as with standard refinance mortgage loans, you’ll have to deal with a variety of required loan expenses — including FHA mortgage insurance and lender-required fees.

The expenses involved with FHA reverse mortgage loans are actually the biggest disadvantages of this otherwise beneficial program:

• Accrued interest. Because no payments are made, the interest due on the reverse mortgage loan accrues and is compounded, which means you’re effectively accruing interest on unpaid interest.
• Closing costs. Reverse mortgage loans tend to charge much higher closing costs than standard refinance loans. In fact, the average closing costs for reverse mortgage loans can be up to 50% higher than for standard refinance loans.

Overall closing costs, not including lump sum mortgage insurance, may go as high as 4% of your loan amount. But this is where you also have a chance to save money on your loan. See the Saving Money on Your Mortgage Loan section for tips on general money-saving tactics during a refinance.

The closing costs may be financed into your reverse mortgage loan, and most people do use this option. But if you can afford to pay the one-time closing costs up front, you may want to consider doing so.

To get the best reverse mortgage loan available for your situation, start by shopping around and comparing approved reverse mortgage lenders in your area. You can review the most recent list on the FHA website. Again, compare their rates and customer reviews before you apply.