Reverse mortgages can help those in financial distress by converting part of the equity they have built up in their home into cash. They can use the money for anything they want including supplemental income, home repairs, paying off their original loan, taxes, college expenses for their grand kids, a new car or whatever they want. It’s their money.
These loans allow the homeowner several payment options from single disbursement to fixed monthly cash advances to a line of credit, where you can draw down the loan proceeds at any time.
The difference between a regular home mortgage and a reverse mortgage is all about how the payments work. With a standard “forward” mortgage, you pay your lender over a certain time period to pay for your house. A reverse mortgage is a loan in which the lender pays you. The best part of it all is that the money you get is usually tax-free, according to the Federal Trade Commission (FTC).
“The reasons why people get reverse mortgages are diverse. But the vast consistency is that they don’t have other assets, and now they are going to tap into their equity,” says Ken Seal. He is a Certified Reverse Mortgage Professional (CRMP) at Neighborhood Mortgage, Bellingham, Wash.
Types of Reverse Mortgages
Reverse mortgages were designed in 1989 to help people age in place and access their equity in their home without qualifying for a loan. It was an FHA loan with no payment requirement to help those in financial distress, he says.
The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender. The FHA insures that your reverse mortgage will never be underwater. However, you can use up all of your equity and have nothing left when you need to sell your home.
There also are propriety reverse mortgages which are private loans backed by the companies that offer them. If you own a much greater valued home, you could get a bigger loan advance from this type of mortgage, the FTC says. Private reverse mortgages are the least expensive option, and are offered by some state and local government agencies as well as non-profit organizations.
Reverse Mortgage Changes in 2015
“The HECM loan wasn’t based on credit scores, but your ability to pay and your intent to make payments,” says Seal. “Virtually, anyone that was 62 years and older back then was qualified as long as the house was their primary residence. We didn’t even have to look at your income or your credit scores.”
But a lot of things changed April 27 this year, he says. The rules about qualifying got stricter. It all happened because a lot of people had gone into foreclosure on reverse mortgages back when the market crashed and the years following. The FHA needed to make the program sustainable again. So, it reduced its risk by increasing the mortgage insurance. Plus, reverse mortgage consultants like Sears now need to look at applicants’ tax returns, their credit and income history.
“We have to make sure they can pay their taxes and house insurance,” he says. “It’s sad because they say now that there will be a 58 percent reduction of who will now qualify for these loans. These loans were created to help certain people. But if someone is behind on their property taxes, they won’t qualify.”
Reverse Mortgage Borrowers are Now Younger
Scott Funk, reverse mortgage consultant at Reverse Mortgage Funding in Barre, Vt., says that most of his clients today are far younger than they used to be – many in their 60s not mid or late 70s.
“Perhaps this is because Baby Boomers have learned from the experiences of their parents. We have also just gone through the worst financial crisis since the Great Depression,” he said.
Property and stock values are not as certain as they had been in the generation before the Baby Boomers, too.
“Baby Boomers are not adverse to debt, plus people are more proactive and think more out of the box,” he says. “The potential in this industry is phenomenal.”
Shop Around for a Reverse Mortgage
Just like a regular home mortgage, Funk and Sears both agree that people should shop around.
“There are lots of ads on TV, sites on the internet and offers stuffing your mailbox,” Funk says. “My rule of thumb is to take your time. Avoid anyone who pressures you with too many phone calls or emails. Look for a person and company you are comfortable with.”
Sears also feels that if you look for a local lender who is willing to come out to your house that you will be much better off, too.
“I always go to their home to take the application,” Sears says. “I want to see the house before the appraiser does. I find several things that people can do to up their appraisal. If they have peeling paint or a tree limb touching their roof, they need to get those fixed. That can add several hundreds or thousands of dollars to the appraisal.”
With an FHA appraisal, there are many problems an appraiser can find and require homeowners to fix. And then they charge another $150 to come back the house to make sure it got fixed.
“Lenders make a lot of money on these, especially with the fixed rate options,” Seal says.
With reverse mortgages, counseling is required and can typically cost $125 to $150. Sometimes, there is grant money where applicants can get free counseling.
Reverse mortgages used to have a really bad reputation in the beginning. But now, things are much more regulated and checked out before anything is sealed and delivered.
“There are multiple safety nets, even at the closing when a notary looks through everything to make sure someone isn’t being taken advantage of,” Seal says.
With today’s extra safeguards, a reverse mortgage helps older homeowners stay in their homes, while ensuring the program is sustainable for the long term.