2. FIRST STOP: Upfront Education
A reverse mortgage expert at Team USA Mortgage will:
- Present you with a full range of reverse mortgage products that are available from his/her company;
- Explain the terms, benefits and costs of each product;
- Clearly explain his/her responsibilities to you;
- Clearly explain your responsibilities under the terms of a reverse mortgage, including paying property taxes on time, maintaining insurance and maintaining your home in good condition;
- Carefully review your income, assets and expenses to help you assess whether you can meet these obligations and determine whether the reverse mortgage is the best financial product for your situation;
- Meet with you as frequently as you need and, at your request, also meet with other members of your family or your financial advisors;
- Explain that, according to Federal statute, you must complete a reverse mortgage counseling session and provide you with a list of HUD-approved counselors you may contact. (As a means of maintaining a hands-off relationship so that you get unbiased third-party advice, a lender is not permitted to recommend any specific counselor);
- Prepare you for making your counseling session the most effective by providing you with questions you might want to ask and information you should confirm.
Types of Reverse Mortgages
The products, all or some of which a lender may have available, include:
Home Equity Conversion Mortgage (HECM)
HECM is the commonly used acronym for a Home Equity Conversion Mortgage, which is a reverse mortgage insured by and regulated by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD).
The maximum amount of loan proceeds you may access during the first 12 months after closing is equal to 60 percent of the full loan amount. For example, if you are eligible for a $100,000 loan, you may only access $60,000. After the initial year has expired, you may use as much or as little of the loan proceeds as you wish. There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, that exceed the 60 percent limit. You must pay off these "mandatory obligations" as the government calls them, before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount -- in which case that's an extra $10,000, or 10 percent of $100,000.
FHA collects a Mortgage Insurance Premium (MIP) at closing based on the amount of funds withdrawn during the initial year. As long as you don’t take more than 60 percent of the available funds in the first year, you will be charged an upfront MIP of 0.50 percent of the appraised value of the home. If, however, you take more than 60 percent, the upfront MIP will be 2.50 percent.
A HECM is not a government loan. It is a loan issued by a private lender that is insured by the FHA. The borrower pays an insurance fee upfront at loan origination, and each year the borrower is charged an annual insurance fee of 1.25% of the outstanding loan balance. Your loan balance thus increases by the amount of this fee. The insurance purchased by this fee protects the borrower (1) if and when the lender is not able to make a payment; and (2) if the value of the home upon selling is not enough to cover the loan balance. In the latter case, the FHA will pay off the remaining balance. Currently, HECMs make up the vast majority of reverse mortgages offered in America. HECMs come with rules and regulations that include a requirement that the borrower receive third-party counseling.
HECM Single Disbursement Payment Option
Historically, HECM borrowers had to take all of the loan proceeds available to them. HUD has created a HECM “mini” option that allows you to take less money at closing. If you are eligible for a $100,000 loan, for example, but don't want that much money, you can choose a single disbursement equal to 60 percent or less of that sum. Unfortunately, if you wanted more money at a later time, you would not be able to access any additional funds. However, this is a great option for someone who wants to preserve the equity in his home by utilizing a smaller amount of funds.
HECM for Purchase
While retirees typically use a HECM to cover living expenses, supplement income, eliminate debts, or pay for healthcare, a growing segment of the senior population is using HECMs to purchase new homes that better suit their needs. The advantage of using a HECM for Purchase is that the new home is purchased outright, using funds from the sale of the old home, which are then combined with the reverse mortgage proceeds. This homebuying process leaves you with no monthly mortgage payments. While study after study reveals that an overwhelming percentage of seniors want to continue living in their current home for as long as possible, for some people that isn’t the best, or safest, option. HECM for Purchase offers a solution for downsizing into a place that’s more easily navigable, possibly more energy efficient, with lower maintenance costs, or which is closer to friends and family.
Proprietary Reverse Mortgages
Right now, very few proprietary reverse mortgages exist. However, it’s important to mention them, because market conditions may change in the foreseeable future when property values stabilize.
Proprietary reverse mortgages are non-FHA insured reverse mortgages offered by banks and mortgage companies. They are not subject to all of the same regulations as HECMs. In some states, no counseling is required, although it is always recommended and required by some lenders.
Proprietary reverse mortgages are sometimes called “jumbo” reverse mortgages, because they are taken on higher-valued homes, generally $750,000 or more.
To obtain a reverse mortgage on a home, that home must be your primary residence, which means you must reside there 183 days or more per year. After you obtain a reverse mortgage, you must confirm your residency by signing an Annual Occupancy Certificate that will be provided to you by your Servicer. If you must leave your home for an extended period, due to work or health or for some other reason, you should notify your Servicer and coordinate winterization and other preservation issues. If you are out of the home for twelve consecutive months, your loan could be in default. If, for any reason, you rent the property to someone else, it precludes the property from being your primary residence and the loan is in default. If the loan is in default, your Servicer will request HUD approval that the loan become due and payable.
In addition to company-specific educational materials provided by a lender, a prospective applicant can gather information from independent sources, such as newspapers, magazine articles and informational websites. Educational material is available from HUD (hud.gov). Prior to being counseled, you will receive an information packet from either the counseling agency, or the lender, depending on who you contact first. This information packet will include the following materials:
- An informational document called "Preparing for Your Counseling Session" (click HERE to view a copy)
- A printout of loan comparisons, so the counselor may review what you are potentially eligible to receive from the reverse mortgage
- A printout of the Total Annual Loan Cost (TALC) Disclosure required by the Federal Reserve Board on all reverse mortgage transactions. This form illustrates the cost of the loan if it is outstanding for different durations of time
- The National Council on Aging (NCOA) booklet, Use Your Home to Stay at Home – A Guide for Homeowners Who Need Help Now. Click HERE to view a copy in English. Or click HERE to view a copy in Spanish.
Loan originators may not require you to purchase other financial products (i.e., annuities, long term care insurance, life insurance) as a condition for getting a reverse mortgage. If they do, you should report this to HUD or NRMLA. However, once you complete your reverse mortgage loan process, you are free to use your proceeds to purchase anything you choose.