luke

The FHA Reverse Mortgage (Home Equity Conversion Mortgage or ‘HECM’) is now, just about, the only viable reverse mortgage program out there.

First, in April, it was Bank of America’s jumbo reverse mortgage to be suspended; then in June, Financial Freedom stopped funding their Cash Account program; in September Gold Reverse pulled their fixed rate jumbo program.

These developments leave only World Alliance Financial’s Equity Plus Advantage (EPA) as the last remaining jumbo program – albeit at a 5.0% margin on top of LIBOR and at dramatically reduced LTV’s in most high-cost areas. I’m trying to get one funded right now in Los Angeles, where they cut the appraisal by 45% (cutting the loan amount by the same). If you have heard of any other viable jumbo programs, please comment!

But, as any of these lender’s wholesale reps will be quick to tell you, the FHA reverse mortgage limit is being increased to $417,000, with a projected effective date of November 1st. This amount is up from $362,790 in high cost areas. The FHA limit, in the reverse mortgage world, is the amount of home value that the lender will recognize in calculating how much money is available to the borrower at closing. If the senior’s home is worth $450,000, the value above $417,000 is ignored. If senior’s home is worth $350,000, then the increase in the loan limit does not help them, because the old limit was high enough already.

While the increased limit is not panacea, it will help many seniors whose homes are worth between $400,000 and $600,000 who may have owed just a little too much on their home to qualify for a reverse mortgage. Run the numbers in a reverse mortgage calculator after November 1st  to see how it would work for a particular scenario.

Luke
Reverse Mortgage Pro

In response to the Housing and Economic Recovery Act of 2008 (HR 3221), Bank of America has announced that it will no longer accept reverse mortgage applications containing a broker advisor agreement. I suspect that other reverse mortgage lenders are likely to interpret the new law in the same way and follow suit. This means that non-FHA approved brokers will no longer be able to receive the common 25% “application assistance fee” (read: referral fee) on the FHA reverse mortgage.

If you do not work under an FHA-approved broker and have been offering reverse mortgages to your clients, this means that you better find an FHA-approved broker to work under (or have your broker obtain FHA –approval).

The good news is that this same bill will increase the FHA 203(B) (HECM reverse mortgage) lending limit. This means that senior homeowners, whose homes are currently worth more than the lending limit for their area, will likely see an increase in the amount of money available to them under the FHA HECM reverse mortgage. The specific increases for each county are still under review with HUD.

Luke
Reverse Mortgage Pro

Now I’m not one to preach, but this is a topic that can get my blood boiling. I get at least 5 calls a week from seniors who did a cash out loan, often a option ARM, and can no longer afford the payments. Now they are calling me practically begging for a reverse mortgage because they think it can save their home from foreclosure, or at least keep them from being forced to sell their home. But, thanks to the loan that they have, they usually do not have enough equity remaining to qualify for a reverse mortgage. And I get to break the bad news to them. But, cash out loans are the right choice in some situations – just do your clients a favor and know when to recommend a reverse mortgage.

First, for those who are not familiar with the program, a reverse mortgage is a home loan for people over the age of 62 that allows them to pull out some of their home equity.  This money can be used for any purpose that they want. A defining element of this mortgage for seniors is it never requires any monthly mortgage payment whatsoever for the life of the loan. The loan may be kept until the homeowner(s) either sell the home or permanently move out. Essentially, a reverse mortgage is similar to a line of credit, in that it has a credit limit and the ability to take cash out and put it back in. The senior does not pay the monthly interest that accrues, but instead the interest gets added to the principal balance.  The lender actually cannot ask the homeowner for any payments for as long as they live in the home. At the end, the total amount borrowed- principal plus interest- is collected by the lender.

In evaluating the reverse mortgage versus a cash-out loan, it is essential to take into account the seniors’ individual situation. The cash out loan would be a poor choice if the senior does not have an abundance of income and wants to stay in their home for many years to come. If they are planning to use the cash out to afford the monthly payments (yikes), then you are handing them a ticking time bomb – it is only a matter of time before the money runs out. In this particular case, the reverse mortgage if preferable because it carries the guarantee of no mortgage payments for as long as the homeowner lives in the home.

For ease of qualifying, the reverse mortgage offers the advantage of not requiring any minimum credit score, income, or assets (other than home equity). Cash-out loans, of course, require those items.

Although the closing costs will probably be greater for the reverse mortgage, the cash out loan will probably cost far more than a reverse mortgage over the long run.  For starters, the interest rates on the FHA reverse mortgage (including FHA insurance) are currently in the low 4% range. That’s tough to beat with a traditional cash out loan. But far more costly is the fact that with traditional loan, you must take all the money at once from rather than being able to take it out of a reverse mortgage’s line of credit on an as-needed basis. By utilizing a credit line you keep the mortgage balance lower for a longer period of time, so you’re paying interest against a smaller balance as you go.

Loan officers should carefully evaluate the reverse mortgage before putting their senior clients into a cash-out loan.  These loans may be perfect for working people who need to finance a home remodeling project or pay for their kids’ college. But in most cases, a reverse mortgage is a far better choice for seniors.

Luke
Reverse Mortgage Pro

If you have ever seen a reverse mortgage quote, you know that it looks quite different than traditional loan quotes.  In case you haven’t, you can see a sample reverse mortgage quote as you read the explanation.

As an aside, don’t confuse the results produced by an online reverse mortgage calculator with an actual quote for a reverse mortgage. These online calculators are helpful in that they, in an instant, can tell you whether the senior is likely to qualify.  They can offer information on how much money the senior might get and in what forms they can receive it. But there are questions that these online calculators do not answer, such as interest rate details, closing costs and which of the programs presented are the best of all available choices for this particular senior. For that information, you need a quote.

There are a number of key elements found in a reverse mortgage quote.  It will usually offer a comparison of two to three programs in side-by-side columns.  Each column will have some form of the items listed below that define the basic financial terms of the loan.  All of these terms may or may not appear on your particular quote since different reverse mortgage lenders use slightly different quote forms.

1. Program Description.  Be aware that you are looking at just a small sampling of the available reverse mortgage programs since there are 10 to 15 available in United States.
2. Interest Rate. As of this writing, all reverse mortgages carry adjustable rates except two, so this section will show you the interest rate index and the margin that is added to the index to get your total interest rate.  Two common indexes for reverse mortgage loans are used:  the LIBOR and the 6 Month Treasury Index.
3. Mortgage Insurance.  FHA lenders add one half of one percent (0.5%) to the interest rate for ongoing mortgage insurance.  All FHA reverse mortgage products have this added on, which effectively increases the interest rate by that amount.  The amount does not vary from lender to lender.
4. Credit Line Growth Rate.  When the reverse mortgage has a line of credit component, then this is the annual percentage by which the ceiling on the credit line will increase. This rate varies with the interest rate.  It would be as if your credit card company automatically increased your spending limit each year.
5. Interest Rate Cap is calculated by adding a given number of points to the starting interest rate.
6. Expected Interest Rate.  Represents a reasonable estimate of the average rate you will see over the long run (excluding mortgage insurance). It is calculated by adding the margin to the long-term index, such as the 10 year Treasury.
7. Monthly Fees. These are service fees that will be added to your loan balance each month to pay the servicer for record keeping, for the call center and to send you monthly statements.
8. Value of the Home. This figure is provided by you when you tell your lender the amount that you think your home is worth. This number will be adjusted by the outcome of an appraisal.
9. Lending Limit. The amount of home value that the program recognizes in calculating your principle limit and often varies by county. If your home is worth more than the limit, then the excess is ignored.
10. Service Fee Set-Aside. The total amount of the Monthly Service Fees projected into the future for the homeowner’s actuarial lifetime. It reduces the principle limit for the purpose of calculating the figures that follow, but is actually charged in the future at the monthly rate.
11. Principle Limit. Based on the age of the homeowners and is the maximum gross loan amount that this reverse mortgage program will offer.
12. Origination Fee.  The amount that the lender and/or broker is paid for their work.
13. Mortgage Insurance Premium.  When charged on for the program, this is a fee for FHA reverse mortgage insurance and is non-negotiable.
14. Other Costs.  An estimate of the total cost for title, escrow, credit check, appraisal, loan docs, notary, and other fees charged to complete your loan. For a complete breakdown, refer to the Good Faith Estimate (GFE).
15. Net Principle Limit. The actual amount of money available to the homeowner after deducting the line items above.
16. Total Liens and Debt.  Because no unpaid liens may remain on the home, this indicates the total amount to be paid off by the reverse mortgage.
17. Program is short by. If shown, then the particular program does not offer enough money to pay off the existing liens. The borrower can bring this amount to closing in order to get that program.
18. Lump Sum Cash. The lump sum amount that may be received at closing of the reverse mortgage (if requested).
19. Credit Line.  How much money is available through a credit line (if requested).
20. Monthly Advance. If requested, this is a monthly amount the lender will pay to the borrower. If “Tenure” is indicated, this amount will be paid for as long as the senior keeps the loan. “Term” indicates that the amount will be paid for a predetermined period of time.
21. Total Costs and Fees. These are usually financed in the loan and represent the sum of the Origination Fee, Mortgage Insurance Premium and Other Costs.

This information should make the reverse mortgage quote easier to understand.  Make sure that you talk to a reverse mortgage specialist to learn details for your particular circumstances.

Luke
Reverse Mortgage Pro