More of our clients are looking at Reverse Mortgages as a way of both increasing their loan origination volumes and providing a real benefit to their borrowers. The Reverse Mortgage may be the answer for those borrowers who haven’t put aside enough funds for the retirement they were hoping for.
A 2013 survey by the Employee Benefit Research Institute found in part that 57 percent of workers surveyed and their spouses have less than $25,000 in total savings and investments, not including their home and defined benefit plans; 28 percent of respondents report having less than $1,000. And if that’s not enough, 49 percent said they’re either not too confident or not confident at all, about having enough money for a comfortable retirement. For many, a Reverse Mortgage may be the answer they’re looking for.
FHA provides funding for the most popular Reverse Mortgage, called the Home Equity Conversion Mortgage Program (HECM). Unlike a standard mortgage, a Reverse Mortgage requires no repayment until the borrower no longer occupies the residence. The lender actually pays the borrower for a portion of the equity in your home. The borrower still pays the real estate taxes, HO insurance, flood insurance, and association dues.
Homeowners must be over the age of 62 to take advantage of Reverse Mortgages. The government is careful to provide as much consumer protection to seniors as possible, so originators must take care to follow all of the rules. This is not a demographic that government regulators will allow to be abused by noncompliant lenders. The keys to compliance here are to ensure that the borrower qualifies for the program and to be careful not to mislead the borrower into the benefits and disadvantages of the program.
To ensure that the borrower qualifies, the loan officer should make sure they are 62 or older, have either paid off their home loan or have a very small balance (which must be paid off upon closing of the reverse mortgage) and that the home is a 1-4 unit property that they currently live in.
The maximum amount that can be received from a reverse mortgage depends on the following factors: (a) the age of the youngest borrower; (b) the lesser of the value of the property (home equity) or up to the max. county limit of $625,500. The older the borrower, the more home equity, or the lower the interest rate will increase the amount of funds that a borrower may receive.
There are a number of ways the Reverse Mortgage pays out.
- Lump Sum Payout - single proceeds payment at the time of closing
- Line of Credit - funds are in a line of credit that may be drawn when needed
- Term - fixed number of payments for a fixed period of time
- Tenure - equal monthly payments that continue if at least one borrower continues to occupy the residence
- Modified Term - combination of the line of credit and a fixed number of payments for a fixed term
- Modified Tenure - combination of the line of credit and monthly payments for as long as at least one borrower continues to occupy the residence
When the home is sold or no longer used as the primary residence, the cash, interest, and other HECM finance charges must be repaid. Any proceeds left from the sale of the property beyond the amount owed belong to the borrower(s)or their heirs.
Seniors have been cheated out of their homes by fraudsters pretending to be Reverse Mortgage lenders, so originators intent on offering these products to their borrowers must take care to describe in detail all aspects of the loan product and make sure their facts are exactly right.