reverse mortgages

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

Reverse mortgages are available in two main flavors: FHA conforming and non-conforming, the latter is also known as a Jumbo Reverse Mortgage. An FHA conforming loan limit is the maximum amount of home value that is recognized in calculating the amount of money that will be lent on the home. Jumbos are considered by senior homeowners when the value of their home exceeds the FHA conforming loan limit for their county. Counties that have a maximum conforming loan limit for reverse mortgages of $362,790 (considered “high cost” areas) often have thousands homes worth far more and would be potential candidates for a jumbo.

Jumbo Versus Conforming
Senior’s that own a home valued significantly above $362,790 (or the conforming FHA reverse mortgage limit for their county) ought to consider all of the available Jumbo Reverse Mortgage programs.  Because Jumbo Reverse Mortgages do not have the same value restriction as FHA reverse mortgages, the borrower can qualify for a larger amount of money when their home value is much greater than the conforming limit. Still, for this to be a better deal than the FHA reverse mortgage (known as the Home Equity Conversion Mortgage or HECM), the home value must not only be above the $362,790 limit, but far above.  This is because, despite the loan limit, the FHA conforming loan offers a much greater percentage of the home’s value within that limit.

Example
A 68 year old with a home in Los Angeles, California that is worth $400,000 might qualify for $225,000 under the FHA reverse mortgage, while a Jumbo program would only offer $160,000. The reason is that Jumbo Reverse Mortgages are much more conservative in the percentage of the value of the home that they will offer. However, when the home value is considerably higher than the limit, this more conservative loan-to-value ratio will overtake the FHA reverse mortgage. If the 68 year old’s home is worth $700,000 for example, then they might qualify for $280,000, which is $55,000 more than the FHA reverse mortgage would offer.

When a Jumbo Reverse Mortgage Starts to Make Sense
The amount of money available under the Jumbo Reverse Mortgage increases as the home value goes up, while the FHA program does not change due to the conforming loan limits. Generally, Jumbos begin to offer an advantage when the home is valued above $600,000, but there are exceptions for both higher and lower values. The older the homeowner is, the more likely that a jumbo could offer more money on a home value of less than $600,000. Conversely, the closer to 62 the homeowner is, the higher the home value will have to be for a jumbo reverse mortgage to make sense. Check with a reverse mortgage lender for specifics.

Congress is discussing the possibility of raising the FHA reverse mortgage loan limit. Keep an eye on the FHA Modernization Act for the latest on their progress.

Luke
Reverse Mortgage Pro
California Reverse Mortgage Lender

You might think that reverse mortgage lenders and banks, with their gobs of protective equity, would be immune to the Wall Street mortgage lending crisis. After all, how bad could the default rate on a home loan with no payments and at 40% to 50% LTV be? Tell that to the Wall Street bears.

Since investors (so far) cannot own a separate reverse mortgage security, they are exposed to the overall health – or lack thereof – of the bank. Did you see Indy Mac Bank’s stock price this morning? Analysts are targeting a zero dollar value for it. IMB’s Financial Freedom arm is, or was, the largest non-FHA jumbo reverse mortgage lender in the country. FHA products, of course, are doing just fine because Fannie Mae buys them.

With investors valuing IMB’s stock so low and their cash flow suffering, there is no liquidity to fund their proprietary reverse mortgage, the Cash Account Advantage. As a result, IMB pulled their Cash Account program for brokers last month, though it reportedly is still available through their retail reverse mortgage channel, Financial Freedom.  Their recent exit from mortgage lending appears to apply only to their “forward mortgage” business. Bank of America, who acquired Reverse Mortgage of America last year, stopped offering their jumbo reverse mortgage product earlier this year. Other recent jumbo reverse mortgage casualties include Ever Bank, JB Nutter and Countrywide.

With all of these deaths in the non-FHA reverse mortgage battle, jumbo reverse mortgages are becoming scarce. The largest reverse mortgage lender, Wells Fargo, does not have their own jumbo program, but formerly brokered out the Cash Account product. Now, the few remaining non-FHA reverse mortgage lenders are scrutinizing deals like you would not believe – or perhaps you would. Look out for cutting values, LTV reductions and any other excuse not to fund. Only the squeaky-clean, lowest LTV deals are receiving funding.

At least we still have FHA’s reverse mortgage, the Home Equity Conversion Mortgage (HECM). It has relatively low lending limits and requires expensive FHA insurance, but liquidity does not yet seem to be a problem.

Luke Helm
Reverse Mortgage Pro