REAL ESTATE – CRAIG FOSTER – Now, don’t click away as soon as you read this title! Although the reverse mortgage remains the most misunderstood financing instrument in real estate, some big changes were put in place in October 2013 by the Fed that dramatically changed the scope and flexibility of this product. More about that shortly, but first let’s review the misconceptions that have swirled around reverse mortgages since their inception in the late eighties.
First and foremost, when you take out a reverse mortgage you do not deed your home to the lender. A reverse mortgage creates a lien on your property just like any other mortgage, period.
Second, your house does not revert to the lender upon your death. Your heirs have one year from the death of the surviving borrower (husband or wife) to pay off the reverse mortgage balance through refinancing, cash from other assets, or sale of the property.
Third, you cannot be “mortgaged out” of your house. The loan including accrued interest cannot by law exceed 95% of current market value of the property.
Now to cover the basic criteria for a loan of this type. Age of the youngest borrower must be at least 62. The loan amount is based upon an appraisal of the property coupled with the age of the borrowers. Typically a 62 year old couple can borrow up to 50% of the appraised value, with higher loan to value percentages available for older borrowers.
Someone in their early 90’s for example can borrow around 70% of the appraised value. There is no credit check or income verification. Only appraisal of the property and age of the borrowers is considered because there are no payments on a reverse mortgage. Historically, reverse mortgages have and still are a refinancing tool. An age qualified property owner can use the loan proceeds to pay off an existing mortgage, create a stream of monthly income, take a one-time lump sum payment, establish a line of credit, or any combination of these four proceeds.
The exciting changes that were incorporated into the scope of reverse mortgages last Fall are as follows:
- All reverse mortgages are now FHA loans, which means that they come with a guarantee to the lender.
- They are no longer just a refinance product, but can also be used for a purchase. Let’s say you’re in your early 70’s and still living in the house that you raised your family in. It’s starting to need updating, has a large yard you don’t like having to work in anymore, has gotten too big for just the two of you, and least I forget, has lots of stairs. You’ve had your Realtor stop by and give you a market analysis, or CMA on the house and it looks like you could net around $400,000 after closing if you decided to sell now.
- Before signing the listing though you want to get an idea of what the $400,000. will buy you in today’s market. Naturally, you want a newer one-level home on an easy care lot, hopefully in a cul-de-sac. As you start looking around though, you realize that there aren’t many homes that fit your criteria and price range, assuming you’d like to pay cash. If price is the problem, you could look at properties up to $800,000, put down your $400,000 and finance the balance with a reverse mortgage and have no payments. Or, hire a builder to build your dream house up to twice as much as you receive from the sale of the old house and still have no payments.
- As an additional feature of new reverse mortgages, since they all now come under FHA lending guidelines, you could buy a duplex, triplex, or four plex for up to twice as much cash as you have to put down, live in one unit and rent out the others for income and still have no payments. This is because the FHA lending guidelines are the same for one through four units.
This is a short overview of the new features of reverse mortgages and a clarification of the myths that have surrounded these type of loans for over 25 years. A reverse mortgage is certainly not for everyone, but with the new purchase options along with the safeguards built in by the FHA they now offer a lot more than they ever did in the past.
I am a Realtor and not a loan officer, but if you would like additional information I can refer you to competent professionals who can answer all of your questions.