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RE104R22: Understanding the Basics of Reverse Mortgage

Update from RE104R18

Why do real estate professionals need to know about Reverse Mortgages? Licensees are often the first point of contact when people start to make housing changes. Having a basic knowledge of the Reverse Mortgage product will help licensees to better serve their clients and customers. As baby boomers consider downsizing, upsizing, aging in place, or making any housing transitions, all options can be presented. Mortgage Banking requires a federal license and Real Estate Licensees should be careful not to advise the consumer in areas beyond the scope of their real estate license . It is advisable to provide the consumer with a list of experts in the field of finance and financial planning to assist them.

  1. Origins of Reverse Mortgage
    1. 1st reverse was written in 1961
    2. 1969 congressional hearings regarding Reverse Mortgage as” Housing Equity”
    3. 1983 the Senate approved reverse mortgages being insured by FHA
    4. 1984 the American Homestead set the foundation for the loan to stay in place until the borrower permanently leaves the house
    5. 1987 congress passed a bill called Section 255 National Housing Act of 1987, a pilot program that authorized FHA to insure reverse mortgages
    6. 1988 President Reagan signed the reverse mortgage bill which made reverse mortgages government insured loans.
    7. 1994 lenders required to disclose to borrowers the total annual loan costs at the application process and to shop around.
    8. 1996 adjusted to allow 1-4 family homes, as long as 1 unit is owner occupied.
    9. 2000-2005 saw minor changes and follow up with borrowers
    10. 2008 The Safe Act was established and Safeguards put in place for consumers, and guidelines for counseling.
    11. 2009 The HECM (Home Equity Conversion Mortgage) for purchase is introduced
    12. 2013 HUD put new HECM policies that make the product safe, stronger and less risky. Reverse Mortgage Stabilization Act 2017, the loan limit for HECM reverse mortgage loans increased from $625,500 to $636,150. This is the first time the HECM lending limit has been raised since President Barack Obama signed into law the American Recovery and Reinvestment Act in 2009. FHA has since modified the HECM limit on January 1 each year to equal 150% of that calendar year's conforming limit.
    13. The 2022 lending limit increased to $970,800 (relative to the appraised value)
    14. It is advised that instructors check the limits prior to teaching the class.
  2. Eligibility Requirements
    1. At least one person residing in the property Must be at least 62 years old
    2. Live in the home as a primary residence
    3. Have sufficient equity in the house
    4. Not be delinquent on federal debt
    5. Meet credit and income guidelines
    6. Participate in a consumer information session held by an independent counselor that is approved by HUD.
    7. Home must meet FHA property standards and be a 1-4 family home or FHA approved condominium that is either FHA approved or qualifies for single unit approval condominium. If a single unit approval is required, borrowers must meet standard FHA underwriting criteria. (have expert speak to this exception)
  3. Benefits of Reverse Mortgages
    1. Ability to “age in place”- use home equity to maintain a more comfortable standard of living in the current home.
    2. Can be used to purchase a new principal residence* with no mortgage payments.
    3. Can be used as a financial planning tool
    4. Flexibility:
      1. Use proceeds as a line of credit
      2. Have monthly advances for a set period of time
      3. Have a monthly stream of funds for as long as they live in the home
      4. Have a lump sum
      5. Have a combination of options
      6. No required monthly principal & interest mortgage payments (must occupy and maintain the home and pay all property charges including real estate taxes and insurance.)
      7. Have ability to pay off other debt and lower expenses
      8. Limited credit and income considerations
      9. Non-recourse loans-neither the borrower nor their estate will owe more than the home is worth at the time the loan is due
      10. Disbursements are not taxed as income
      11. Owner/borrower retains title at all times. Homeowner is responsible for paying property taxes, homeowners insurance and homeowner association dues, if applicable
  4. Safeguards/Consumer Protections
    1. Overseen by HUD (Housing & Urban Development)
    2. Insured by FHA
    3. Prospective owner/borrowers must receive counseling by a HUD approved Housing Counselor before submitting an application for reverse mortgage
    4. In MA, Owner/BorrowerCounseling must be done Face to Face
    5. Housing Counseling conducted by Independent 3rd party housing counseling agency
    6. Housing Counselors are HUD approved, exam qualified, professionals
    7. The Consumer Financial Protect Bureau has oversight
  5. How Much Money can be received.
    1. Factors Considered
      1. Age of youngest borrower or non-borrowing eligible spouse
      2. Home value or FHA lending limit may be adjusted annually
      3. Amount of equity
      4. Current interest rates
      5. Reverse mortgage product and payment option chosen
      6. Existing mortgages/liens that will be paid first
      7. Down Payment amount is also based on this criteria.
  6. Cost of Reverse Mortgage
    1. Origination fee are not typically waived right now (in 2022) Max origination fee is $6,000
    2. Mortgage Insurance fee (2% of property value up to the HECM limit)
    3. Traditional closing costs: title, appraisal, flood certs
  7. Inspections
    1. Home and Pest may be required for existing construction
      1. A state requirement
      2. A contract requirement
      3. An appraiser requirement
      4. An underwriter sees possible issues noted on the appraisal
      5. Well testing and/or septic inspections may be required
  8. Survey
    1. May be required by a licensed surveyor if:
      1. There is a discrepancy in the legal description
      2. Lot size or ingress/egress
    2. Encroachments are present
    3. The appraiser or underwriter calls for it
  1. Pay-out options
    1. Lump sum - A withdrawal of your available benefit at loan closing, to pay off your existing mortgage balance, if any, and to provide cash
    2. Fixed Monthly Payments
      1. Tenure: a fixed monthly payment for as long as loan is in good standing
      2. Term: a fixed monthly payment for a specific term the borrower choose
    3. Line of Credit - A credit line the borrower can access at any time. The unused balance has a growth feature, which means the borrower will have access to additional benefits the longer they remain in the home.
    4. A combination of any of these options.
  2. Differences between a Home Equity Line of Credit ( HELOC) and a Reverse Line of Credit ( HECM)
    1. Greater flexibility in repayment. No monthly payments required UNLESS the borrower dies, no longer lives in the property or fail to pay taxes and insurance & maintain the property
    2. HECM can be repaid at any time without penalty. As long as terms are met, a reverse line of credit cannot be frozen, reduced or canceled.
    3. Limited income and asset qualifications as they relate to homeowners ability to pay monthly housing expenses, including taxes and insurance.
    4. Adjustable rate HECMs offer a credit line growth rate, so the unused portion increases over time.
  3. How a Reverse Mortgage can help your clients
    1. Avoid selling assets to maintain cash
    2. Use funds to purchase a vacation property without depleting significant amounts of assets.
    3. Receive tax-free proceeds to assist with daily living expenses.
    4. Use the proceeds as an emergency line of credit
    5. Use the proceeds to fund long term care services as long as the property is maintained as a primary residence, 6 months and 1 day per year.
    6. Use the proceeds to retrofit existing home to age in place
    7. Cover monthly expenses and hold on to their asset portfolio
    8. Combine proceeds with sale of one home to buy a new home without monthly mortgage payments associated with a traditional mortgage
    9. Pay off credit card debt to lower monthly expenses
  4. What is a “reverse for purchase”?
    1. HECM for Purchase allows older borrowers to purchase a new principal residence and obtain a HECM in a single transaction. The transaction involves the sale of an existing property, or the use of funds from other approved means, toward the purchase of a new principal residence. The HECM for Purchase finances the remaining balance.
    2. The new residence must be owner occupied within 60 days of closing.
    3. At least 1 Homeowner must be 62 or older to qualify
  5. Process & Protections
    1. Owner/Borrower Counseling (counseling certificate required)
    2. All borrowers must be counseled by HUD approved counseling agency. Face to face counseling is typically required. That is subject to change. Certificate is good for 180 days. Fee ranges from $125-$250 per couple and is subject to change
      1. Counseling packet includes financing assessment and information to receive the mandatory counseling. (HUD approved counselor)
      2. Prequalification in reverse mortgage is collateral and age based.
      3. Review of P&S before final signing
        1. Amendatory/Escape Clause signed with the contract
        2. Real estate certification signed with the contract
      4. Application is processed
        1. Appraisal
        2. Inspections
        3. Title
      5. Underwriting
      6. Closing
        1. No TRID, no Closing Disclosure. Done on a HUD
        2. If borrowers have separate funds they can maintain both properties provided they show income to cover both properties.
  6. The 4 NEVERS of Reverse Mortgage (Pros)
    1. The homeowner & his estate NEVER give up the title to the home
    2. The homeowner, when leaving the house to his/her estate, can NEVER owe more than the home’s values. When the house is sold, proceeds in excess of the debt belong to the homeowner or his/her estate.
    3. Even if all the money that can be borrowed through the reverse mortgage has reached its limit the homeowner NEVER has to move, provided taxes, insurance and home maintenance are continued.
    4. Monthly repayments are NEVER required or expected, although voluntary payments are accepted.
  7. Caveats to consider (Cons)
    1. There is less equity left for the heirs. You are making the equity in the house liquid and therefore useable. When used, there is less available for heirs.
    2. Property taxes and homeowners insurance must be kept current
    3. Property must be maintained and kept in good repair
    4. Property must remain as your primary residence, or the loan will become due. Non-occupancy for 12 consecutive months for mental or physical illness (assisted living or nursing facility) is a maturity event
    5. Like any other loan product, borrower/owner should be aware of cost
  8. Loan Maturity/Foreclosure - The loan becomes due with the following maturity events
    1. Non payment of property taxes
    2. Non payment of homeowners insurance
    3. Not maintaining the property to meet HUD minimum housing standard
    4. Moving out, selling or when the last borrower passes away
  9. Impact of death of a spouse
    1. If one spouse passes away, nothing changes provided both were on the loan originally.
    2. An eligible non-borrowing spouse may be able to defer the “due and Payable” status of the loan after the death or incapacity of the borrowing spouse. This will allow the non-borrowing spouse to continue living in the property until another maturity event occurs. Note: This is more likely for loans with case numbers assigned on or after August 4, 2014, where non-borrowing spouse protection was included in the closing disclosures.
  10. FAQ’s
    1. How expensive are the HECM loans? How much are closing costs?
    2. Does the lender now own the house?
    3. Are HECM only for people who are cash poor and house rich?
    4. Do I have to have a job to qualify for a HECM loan?
    5. Is there ever a monthly mortgage payment owed?
    6. What are the options for my heirs after I pass? Do they owe money?
    7. What if my heirs want to keep my house?
    8. Can I qualify for a HECM if I previously had a short sale or bankruptcy?
    9. Is it difficult to sell or buy a property that has a Reverse Mortgage Loan?​​​​​​​
  11. Examples of HECM loans and purposes.

Acronyms:

HUD           Housing and Urban Development

FHA            Federal Housing Authority

HECM        Home Equity Conversion Mortgage

 

Resources

 

Federal Regulations:

Section 255 National Housing Act of 1987

The Reverse Mortgage Stabilization Act H.R. 2167 (2013)

 

Massachusetts Regulations:

209 CMR 55.00 Reverse Mortgage Loans

M.G.L.c 167E Section 7Aand M.G.L. c 171 Section 65C1/2

 

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