Reverse Mortgage and Inheritance

One of the central questions that many retirees have about Reverse Mortgages involves how such a loan affects their ability to leave an inheritance to their heirs.

In short, if you take out a reverse mortgage, you can leave your home to your heirs when you die, but you won’t be leaving them the entire worth of the property. It’s important to understand how a Reverse Mortgage works before you sign on such a loan because your heirs will need to deal with repaying the reverse mortgage if they want to keep the property.

Reverse Mortgages

A reverse mortgage is basically a loan that allows older homeowners to convert a portion of the equity in their home into cash in the form of monthly payments, a line of credit, or a combination of these options.

A Reverse Mortgage is different from a regular “forward” mortgage. With a reverse mortgage, the lender makes payments to the homeowner, rather than the homeowner making payments to the lender. As the property owner receives payments from the lender, his equity in the property decreases over time as the loan balance increases.

Reverse Mortgage Eligibility

Reverse Mortgages, also known as Home Equity Conversion Mortgages, are limited to borrowers who

  • are at least 62 years of age
  • occupy the property as their principal residence, and
  • own the home outright or have paid off more than half of the existing mortgage on the property

Repaying a Reverse Mortgage

The borrower must repay the lender when one of the following events occurs:

  • the borrower dies
  • the home is no longer the borrower’s principal residence (the borrower moves out or is hospitalized for more than 12 months)
  • the borrower sells the home (or transfers title), or
  • the borrower defaults on the terms of the loan (such as by failing to keep up with insurance premiums or property taxes). (

What The Reverse Mortgage Means For Heirs

When the person who has signed on for a reverse mortgage dies, the heirs can inherit the house, but they will not receive free and clear title to the property since the property is still subject to the reverse mortgage.

For example, if the homeowner dies after receiving $100,000 of reverse mortgage funds, the heirs inherit the home subject to payoff of the $100,000 debt along with any fees and interest that has accrued.

Option for Heirs

Individuals who inherit a home that is subject to a reverse mortgage can choose one of four options. They can:

  • pay back the loan
  • sell the property and use the proceeds to repay the reverse mortgage
  • deed the home to the lender, or
  • do nothing and let the lending institution foreclose.

Home Equity Conversion Mortgages

The Federal Housing Administration is the governmental agency that’s responsible for administering and insuring HECM loans. With a HECM, heirs can satisfy the loan by selling the property and paying the lending institution the lesser of:

  • 95% of the home’s appraised value. (Heirs can also choose to repay 95% of the appraised value if they don’t want to sell the home. FHA insurance then covers the remaining loan balance) or
  • the outstanding loan balance

Exploring Options

Reverse mortgages are complicated so before taking out a reverse mortgage and tapping into a home’s equity, a potential borrower should be sure to explore all of the facets of the loan including the borrower’s obligations, the third-party costs and the draw options. Borrowers should gather all information before making a decision by doing their own research, speaking to the lending institution and using their counseling session with a HUD-approved counselor to ask questions.

Reverse Mortgage Overview – Part 3

Over the past few weeks we’ve been taking a detailed look at the Reverse Mortgage product. HECM loans have undergone significant changes over the past 2 years and it was time to summarize these revisions into a comprehensive guide which will provide potential borrowers with a complete summary of the loan.

In parts 1 and 2 we examined qualifications, the impact of a HECM loan on taxes and other senior benefits, equity, interests, servicing fees, MIPs and some of the pros and cons of the Reverse Mortgage. In today’s post we will review some of the final features of the loan including payment options, HUD-mandated counseling sessions and loan obligations.

Payments

Q: How do borrowers receive their loan payments?

A: Borrowers are entitled to select their payment preference from one of three options.

1. A line of credit

2. Monthly payments

3. A combination of a line of credit and monthly payments

If the borrower chooses a line of credit, he can draw out his money on his credit line as he wishes. If he selects the monthly payment option he’ll receive his first monthly payment within one month of the loan’s closing.

It’s possible to change the type of payment plan by paying a small fee. Officials at the National Reverse Mortgage Loan Association advise borrowers to discuss the payment plan change options with their lender before the loan is closed so that the borrower gets the maximum benefit from the loan. If the lending institution doesn’t issue the payment within 5 business days of receiving the request for payment, a fine is charged to the lender which is compounded for each additional day in which the funds are not issued.

Income Taxes and Interest Charges

Q: Can the loan’s interest charges be deducted from income taxes?
A: Interest charges can be deducted once those interest charges have been paid.  Until payments have been made on the reverse mortgage, it is not possible to deduct interest charges. Any prepayments are assumed to apply to interest charges and can then be deducted from income taxes. .

Repair Rider

Q: What is a Repair Rider?
A: The lending institution can, in specific cases, require that repairs be made to the property to ensure that the property meets required lending standards.  If completing such repairs was a condition of the loan closing, a “Repair Rider” is attached to the loan agreement which stipulates the borrower’s commitment to complete the required repairs within a specified time frame.

Q: What is a “Repair Set Aside”?
A: The “Repair Set Aside” is the portion of the loan funds which are designated to be used for the completion of your required repairs.  This “set aside” is not considered to be part of the loan balance. The repair work will be inspected to verify that the required repairs have been completed.  If a borrower wants to arrange the payment of partial repair completion payments, interim inspections can be arranged
.

Occupancy

Q: How does the lender certify that the borrower meets the residency requirements of the loan, which require that the borrower lives in the home as his primary residence
A: Occupancy certifications certify that the borrower resides in the mortgaged property as his primary residence.  The borrower is asked to attest to occupancy by signing an Occupancy Certificate at intervals throughout the life of the loan.

Loan Obligations

Q: What obligations does the borrower have to the loan?
A: Yes, it the borrower’s responsibility to ensure that property taxes, homeowner’s insurance and home maintenance are maintained.  Failure to keep these payments current results in a default and may be grounds for calling the loan due and payable.

Many borrowers ask their servicer to pay these payments on their behalf from a “set-aside” fund. The amount that is estimated to meet these obligations will be “set aside” from the loan proceeds and will be used to make the payments.

There are some tax exemption programs which are permitted under the terms of the Reverse Mortgage program – it’s best to ask the lender about such an exemption.

Flood insurance must be maintained on any property which has been identified by FEMA as being in a flood hazard area. In addition, if FEMA identifies an area as a flood risk area, even after the loan has been closed, the borrower is obligated to obtain flood insurance.

Non-recourse Provisions

Q: What does “non-recourse” mean?
A: The HECM is considered to be a “non-recourse loan.”  This means that the borrower will never owe more than the value of the home. The reverse mortgage debt may be satisfied by paying the lesser of the mortgage balance or 95% of the current appraised value of the home.

Counseling Sessions

The HUD requires that, before submitting a Reverse Mortgage loan application, the potential borrower (and spouse, if applicable) attend a counseling session with a HUD-approved counselor where all these issues and more are fully explained.

FAQs about Reverse Mortgages – Part II

The rising popularity of Reverse Mortgages continues to create questions. Potential borrowers are obligated, by the HUD HECM rules, to complete a counseling session with a HUD-approved counselor before they formally apply for the Reverse Mortgage loan.

These sessions, however, don’t always address all of the issues that are raised when an individual considers taking out a Reverse Mortgage loan. The potential borrower doesn’t necessarily remember to ask all of his/her questions at the counseling session and sometimes doesn’t even know which questions s/he should be asking!

This overview, part two of a three-part series, continues from last week’s post as it examines the Reverse Mortgage from all angles. The series is designed to provide information which will help a potential applicant determine whether a Reverse Mortgage is the most financially appropriate tool for his/her particular set of circumstances.

A number of important changes have been instituted in the Reverse Mortgage product over the past 2 years and these posts include this new information.

Q: What percentage of a property’s value will the borrower receive?
A: The amount that the borrower is eligible to receive depends on the borrower’s age (or the age of the youngest spouse, when there is a couple), current interest rates and the appraised value of the property. As of 2014 the Federal Housing Authority’s lending limit is set at $625,500. If the property is worth more, the appraisal will still be based on the $625,500 loan limit. The older the borrower is, the higher the level of the appraised value of the house s/he can obtain.

After closing on the loan, for the first 12 months, the borrower will not be able to access more than sixty percent of the available loan proceeds. After the year passes the borrower can access as much or as little of the remaining funds as he wishes.

There are exceptions to the sixty percent rule. These exceptions include paying off a pre-existing loan or other debits or paying for medical expenses. In such a case the borrower can take an additional 10 percent of the available funds, even if that amount exceeds sixty percent.

Interest on the Loan

Q: Do you pay interest on a reverse mortgage loan?
A: With a reverse mortgage, you are charged interest on the proceeds that you receive. You have a choice between a fixed or variable interest rates. Interest is not paid out of your loan proceeds, but instead compounds over the life of the loan until the loan is repaid.

Rescission

Q: What is Rescission?
A: Reverse Mortgage borrowers have the right of rescission, meaning that they have the right to cancel the loan at any time within 3 business days after the loan’s closing. Interest cannot be charged on the funds which are held available during the three day rescission period.  Interest begins to accrue on the day after the first disbursement is made.

Two Mortgages?

Q: Why does the borrower sign two Mortgages Notes at closing?
A: When an individual takes out a Reverse Mortgage, the lender is placed in a first lien position and the Federal Housing Administration is placed in a second lien position. If the lender fails to meet its obligations the FHA can step in and assume responsibility for the loan to ensure that the borrower continues to receive access to his funds.

Servicing Fee

Q: What is the servicing fee for the HECM loan?
A: The monthly servicing fee covers costs which are associated with administering the reverse mortgage loan.  These tasks include maintaining accurate records of interest and mortgage insurance premiums, collecting interest payments and monitoring property tax and home insurance payments. The lender is also responsible for certifying the borrower’s occupancy status, issuing account statements and discharging the mortgage.

Q: What is the Set Aside for the Service Fee?
A: When the loan’s original principal limit is determined, the lender will set aside a service fee to ensure the future payment of the monthly servicing fee.  This is not considered part of the outstanding loan balance. Funds remaining in the service fee set aside at time of loan repayment are not subject to refund.

Mortgage Insurance Premiums

Q: What is the Reverse Mortgage’s MIP?
A: HECM borrowers are charged a mortgage insurance premium (MIP) based on the funds withdrawn during the first year. The MIP for borrowers who access 60% or less of their funds is 0.50 percent of the appraised value of the home. Borrowers who take more than 60 percent (available to pay off debts, an existing mortgage or for medical expenses) are assessed a 2.50% MIP.

In addition, there is an annual MIP which must be paid when the loan is called due. This amounts to 1.25 percent of the outstanding loan balance.

The MIP is collected by the FHA. This payment guarantees that if the lender goes out of business, the government will ensure that the borrower has continued access to the loan funds. The MIP also guarantees that the loan’s balance will never be more than the total value of the property.

FAQs about Reverse Mortgages

Reverse Mortgages are a growing force in the economy but many seniors don’t explore the option because they don’t fully understand the product. There are different types of Reverse Mortgages but the most common type of Reverse Mortgage today is the FHA-insured Home Equity Insurance Mortgage. HECMs enable senior homeowners to access a percentage of the equity that they hold in their home as a line of credit or as monthly payments. The extra income is meant to give the borrowers income to bolster their existing retirement funds.

Taking out a Reverse Mortgage is a serious decision. Although the funds can be a welcome supplement for retirement income, the mortgage itself involves costs and obligations. In addition to third party costs, borrowers commit to paying a monthly interest payments for the life of the loan, and obligate themselves to pay their home’s insurance premiums, property tax payments and other costs.

Still, reverse mortgages continue to grow in popularity. For individuals who are considering the option, here is some data that may prove helpful:

Qualification

Q: Do all homes qualify for Reverse Mortgages?
A: According to HUD rules, eligible property types include single-family homes, two-four unit properties in which the loan applicant lives in one of the properties, manufactured homes that were built after June 1976, some condominiums, and townhouses.

Other Requirements

Q: What other requirements are there to obtain a reverse mortgage?
A: The applicant must own the home, be at least 62, and have enough equity in the home to ensure that any outstanding loans will not constitute more than the HECM loan is worth.

As of August 2014, the HUD began to require that all individuals signed on the home’s deed become signatories onto the HECM loan. In addition, in November 2014, other changes are expected that will require that a financial assessment be conducted for HECM applicants to ensure that the applicant is able and willing to abide by the terms of the loan. If the financial assessment turns up information that indicates that the borrower may experience difficulty maintaining the loan, the lender will establish a set-aside fund where funds to cover monthly insurance payments, tax payments, insurance payments and other loan obligations.

Existing Mortgage

Q: How does a Reverse Mortgage proceed if there is an existing mortgage on the property?
A: The applicant may qualify for a reverse mortgage even if he still owes money on an existing mortgage. In such a case, the reverse mortgage must be in a first lien position, so any existing debts will be paid off, either by the loan itself or through other means.

Taxes, Social Security, Medicaid and Medicare

Q: Can a HECM borrower lose government assistance if he obtains a reverse mortgage?
A: A reverse mortgage does not affect the borrower’s regular Social Security or Medicare benefits. Medicaid or Supplemental Security Income (SSI) may be affected unless the borrower uses the proceeds from the loan immediately. Funds that are retained are considered an asset and could impact eligibility.

Reverse Mortgage payments are not considered as “income” for purposes of income taxes.

Circumstances Under which a Reverse Mortgage might be Counter-Indicated

Q: Under what circumstances could a Reverse Mortgage cause more difficulties than it would solve?
A: Upfront costs associated with a reverse mortgage are high so if the actual income that would be obtained through a Reverse Mortgage is low, a potential borrower might want to investigate less expensive ways to access needed funds.

In addition, borrowers who aren’t sure whether they’ll continue to live in the house long-term shouldn’t acquire a Reverse Mortgage. According to the terms of the HECM loan, the loan becomes due if the borrower dies or leaves the house.

Borrowers who are interested in applying the Reverse Mortgage to the purchase of another property may wish to access a HECM for Purchase in which the entire process of acquiring a Reverse Mortgage and buying a new house (to which the HECM loan will be applied) can be facilitated in one transaction.

Payment Options

Q: What are Payment Plan Options for a Reverse Mortgage?
A: Borrowers can receive the money from their reverse mortgage loan as a lump sum, via fixed monthly payments (either set term payments or for as long as they live in the home), as a line of credit, or a combination of these payment alternatives.

How HUD’s New HECM Rules Protect Seniors

New rules which have been and will be announced by the U.S. Department of Housing and Urban Development (HUD) will make reverse mortgages safer for senior citizens.

A HECM reverse mortgage allows homeowners aged 62 or older to borrow against the equity in their homes. These loans do not involve repayments, provided that the home remains the borrower’s primary residence. Once the homeowner moves or dies, the loan must be paid back or, more commonly, the house is turned over to the lender.

Reverse mortgages backed by the HUD must, as of August 4th 2014, include the names of both spouses on the mortgage. Previously, only one spouse’s name was required on a HECM Reverse Mortgage, which bases the amount of equity being cashed out on the age of the borrower. Previously, if the younger spouse was not yet 62, his/her name might be left off the mortgage so the couple could receive more money. But this sometimes resulted in the younger spouse having to pay off the mortgage or be evicted from the house when the older spouse died.

The AARP filed suit over the issue which forced HUD to make the change. In the lawsuit, two widowers faced foreclosure and eviction when their spouses died and they found that they could not pay off the reverse mortgage loan. The AARP won the suit for the widowers and then turned the issue into a class-action suit on behalf of all homeowners who had been harmed by HUD’s previous reverse mortgage policy.

Industry brokers are pleased with the change. The safety clauses built into the loan have created a more stable product which will, in turn, draw more potential borrowers to the market. Representatives of the Reverse Mortgage Brokers Association applaud HUD’s new “common sense rule” even though most lenders didn’t see evictions of younger spouses not listed on titles as widespread. Some lenders, however, did see the issue as cause for concern. “Whenever a couple, in which one spouse was younger than the other, took out the loan, and the younger spouse was taken off the title, you’d find yourself opening a can of worms” one lender noted. “It’s very dangerous and I warned the borrowers against the practice, but some people were more interested in the possibility of obtaining more cash immediately than in what might happen down the road.”

The new rule will not cover prior reverse mortgages that were done in one spouse’s name — borrowers who have already set up reverse mortgages with one name must refinance since it’s not possible to add anyone back onto the property’s title.

A second change in the Reverse Mortgage is set to take place this fall when HUD will start to implement new financial assessment rules on underwriting of the reverse mortgage borrower.

The new rules require a financial analysis of each reverse mortgage applicant to ensure the potential borrower has enough income to cover his/her personal expenses, along with property taxes, home insurance and home upkeep which are all required under the terms of a reverse mortgage.

In 2013 HUD began a two-pronged effort to restrict the loans in order to lower a high foreclosure rate which had created a $1.7 billion dollar shortfall in the Federal Housing Administration’s mortgage insurance program.

The FHA created new guidelines that reduced the amount of money that could be taken out of a home in a reverse mortgage by about fifteen percent. It also restricted the amount that could be drawn during the first year. The change, tighter financial underwriting, will tighten the eligibility requirements so that only those borrowers who are able and willing to live up their obligations under the terms of the loan will be able to obtain a HECM loan.

“If an individual doesn’t have the financial worthiness” one loan officer said “it’s better that they don’t take out the loan, rather than set themselves up for failure and, ultimately, foreclosure. People who obtain a reserve mortgage and spend all their money right away get into trouble when, a few years down the road, they aren’t able to pay for the required annual expenses needed to maintain the loan.”

Industry analysts believe that the new underwriting rules will go into effect in the next 60 days.

Seniors Can Use Their Home to Stay at Home

Senior homeowners who wish to access a reliable and free resource that provides them with an overview of their options for obtaining a Home Equity Conversion Mortgage Loan can look to the National Council on Aging’s free booklet, Use Your Home to Stay at Home. This booklet serves as a guide to older homeowners who are considering obtaining a Reverse Mortgage and who wish to research the product

According to the Department of Housing and Urban Development, prospective HECM borrowers must attend a counseling session with a HUD-approved counselor before they can submit the paperwork for the loan. This counseling session is meant to ensure that the borrower understands the loan’s framework as well as all of the HECM’s intricacies and borrower-responsibilities.

Taking out a HECM loan is a serious commitment and financial advisors caution that borrowers should do their research and have a good grasp of the loan before they head into the counselor’s office. The counseling session, the consultants say, should be used to ask specific questions that the potential borrower would like to review which came about as a result of his/her previous research.

In addition, reading the National Council on Aging booklet gives the potential borrower time to think about all of the loan ramifications and honestly consider whether the loan is the best product for his or her specific situation.

Use Your Home to Stay at Home offers a wide range of data about a HECM loan. Some of the points that the booklet presents include:

1. Reverse mortgages are reverse loans which are available to homeowners age 62 and older. The loan enables the homeowner to turn the equity that s/he has in his/her home into cash. This is cash that can be used for living expenses, home repairs, remodeling, debt repayment or other expenses. Unlike a regular mortgage the HECM loan doesn’t involve monthly payments. The loan is repaid when the owner sells the home, upon the owner’s death, or when the home is no longer the primary residence of the homeowner.

2. To be eligible for a HECM loan the borrower must live in a single family home, or home of up to four units, as a principal residence. There are also some eligible condominiums and manufactured homes are also eligible.

3. Once the Home Equity Conversion Mortgage has been obtained the homeowner will receive

a. a fixed monthly amount for a specified period of time

b. a fixed monthly cash benefit for as long as the homeowner lives in the home

c. a line of credit that gives the borrower the flexibility to draw on loan proceeds at any time up to an established limit

d. a combination of a monthly distribution and line of credit

e. a lump sum payment (this option requires special authorization and is available in limited cases, such as when an individual has to pay for health care or pay off debits)

4. The loan amount may vary according to the borrower’s age, the current interest rate, the appraised value of the property and the initial mortgage insurance premium. The borrower must agree to remain current on homeowner’s insurance premiums, property taxes, utilities other applicable local assessments. The property must continue to be maintained.

5. Reverse mortgage payments are subject to taxes. Income from Reverse Mortgages doesn’t affect Medicare or Social Security benefits (it may, however, affect Medicaid benefits).

6. The homeowner retains title to the home after s/he’s taken out a reverse mortgage. When the home is sold, the loan amount, interest and other HECM finance charges and fees are paid back and any remaining equity will be transferred to the homeowner’s estate. No debt will be passed along to the borrower’s heirs.

7. Potential borrowers should review some tips for HECM borrowers:

a. The loan involves third party costs including origination fees, mortgage insurance premiums and other closing costs. The lending institution may also charge servicing fees that must be paid throughout the course of the mortgage.

b. The balance of a reverse mortgage increases over time and interest will be charged on the outstanding balance each month.

c. Some HECMs have fixed interest rates while others have variable interest rates which change, depending on market conditions

d. A reverse mortgage can use up all of a home’s equity but the borrower, and the borrower’s heirs, will never owe more than the value of the home when it is sold. Heirs can repay the loan in full if they want to retain ownership after the property owner has died.

Copies of Use Your Home to Stay at Home. are obtainable via the National Council of Agine. Call (800) 510-0301 or download a copy at ncoa.org.

HECM for Purchase Grows in Popularity

The image that people have of the typical senior citizen generally involves a genial elderly person who’s content to putter around the home. Yet statistics tell us that retirees are, more than ever, on the go. Senior citizens are traveling more, working more, volunteering more and even picking up and moving to new homes. Some people make such a move because they want to be nearer to their family while others are looking to downsize or move to a more accommodating climate.

As the numbers of elderly home buyers rises, senior advocates note that other seniors would like to move but are intimidated by the difficulties that such a move entails. Many seniors delay their move or cancel their plans to move all together because they are concerned about the costs of moving and the emotional toll that such a move take.

Since 2008, when the HECM for Purchase was introduced, the Home Equity Conversion Mortgage program has been able to alleviate some of the stresses that comes with buying a new house by making the process as easy, worthwhile and bureaucracy-free as possible for individuals over the age of 62.

Before the HECM for Purchase was introduced, seniors who wanted to combine a home purchase with a reverse mortgage had to use a forward mortgage to finance the purchase. They were obligated to complete all of the paperwork and pay all of the costs of both transactions – a process that was intimidating and costly.

The senior purchaser had to qualify for the forward mortgage in the same way any other buyer would. Inability to document sufficient income or a bad credit history could cancel the transaction. In 2008, Congress authorized the HECM (Home Equity Conversion Mortgage) for Purchase loan, under which seniors can now buy a house and take out a reverse mortgage with one transaction. Most importantly, this program entails only one set of settlement costs.

Senior homebuyers can be divided into three groups: buyers who pay all cash; buyers who pay all cash and plan to take a reverse mortgage at a later date; and buyers who take a reverse mortgage when they buy.

An individual who can pay cash and who wants to leave a debt-free house to his or her heirs will avoid reverse mortgages. This is also true of seniors who have dependent children living with them, since if they take a Reverse Mortgage, the child must leave the house when the borrower dies.

Buyers who plan to have a new house built to their specifications won’t be able to finance the construction with a reverse mortgage since the program requires that seniors use a reverse mortgage to occupy the new house as their permanent residence within 60 days of purchase.

Buyers who can pay cash for their new home can defer the reverse-mortgage decision. If they elect to take one later, they will be older and their house will be worth more so the amount that they can draw under a reverse mortgage will be higher.

Other senior buyers, however, find that the advantages of the HECM for Purchase make it a worthwhile loan alternative.

Using the HECM for Purchase, a senior can purchase a house and take out a Reverse Mortgage simultaneously. The strategy ensures that the individual incurs only one set of settlement costs. Seniors can use the loan to buy an older construction or a home that is newly constructed if the building has been approved for occupancy by municipal authorities. The borrower must have the means to pay any difference between the sale price of the old property, settlement costs and the price of the new property. The maximum amount that the homeowner can access through the HECM for Purchase is based on the lower of the sale price, the appraised value of both the old and new properties and the FHA’s maximum loan amount. The borrower must physically occupy the home as his permanent residence within sixty days of purchase and must prepare to maintain the loan which involves paying the loan’s interest payments, property taxes, homeowner’s insurance and home maintenance.

A HECM for Purchase can also be used to satisfy any outstanding payment obligations that are associated with a land contract if the property will be used as collateral for the HECM loan.

HEMC for Purchase regards eligible properties as single family homes, manufactured homes built after June 15 1976 (and conform to the Manufactured Home Construction Safety Standards) and a unit within a two to four unit house.

The new property must be free of major property deficiencies (no primary heating source, inadequate electrical system, leaking roof, inoperable doors or windows, no running water) and not be in violation of any state or local building codes.

Reverse Mortgages and the Retirement Crisis

The United States is facing a retirement funds crisis as a rapidly growing number of people enter their 60’s without the ability to support themselves during ever-increasing life spans. One tool which could help deal with the crisis involves the HECM (Home Equity Conversion Mortgage), the reverse-mortgage program which allows seniors to convert some or all of the equity in their homes into cash.

The Reverse Mortgage is a well-designed program that enables seniors aged 62 and older to draw funds in a variety of ways so that they can meet their income needs. Since the program’s inauguration however, it has been not grown to its full potential. Some challenges include

· The HECM program is complex and leaves many potential borrowers befuddled by the bureaucracy and paperwork

· Some loan providers have resorted to deceptive advertising which has affected the entire industry.

· Organizations that advocate for senior rights have proven to be extremely cautious in recommending the program

Many financial advisors feel that the program is stronger than ever. Starting in 2013, the Department of Housing and Urban Development, with the backing of Congress, began to enact a number of new guidelines aimed at streamlining the program and making the HECM loan safer and more secure for both the senior homeowners who borrowed money through the Reverse Mortgage and the Federal Housing Administration which insured the loan.

The changes came about after a 2012 audit of the FHA which showed that the agency was experiencing a 16.5 billion dollar shortfall in its insurance program. The shortfall was due to foreclosures on homes of HECM borrowers who had not met their loan obligations – paying the loan’s monthly interest payments, keeping up their property tax and insurance payments and maintaining their home. HUD was able to determine that this was occurring because many borrowers were taking advantage of the one-time draw option. Then, the borrower accessed all of the proceeds of his/her loan, s/he was left with insufficient funds to maintain the loan.

With Congressional backing, HUD moved quickly to institute changes. The first change involved consolidating the HECM Standard and the HECM Saver into one loan package. This was quickly followed by a new draw option framework in which the one-time draw option was eliminated. As of 2013, unless a borrower gets a special dispensation to draw all of his money at one time – to pay off loans or cover health care expenses – he can only take his Reverse Mortgage funds as a line of credit, in monthly payments or as a combination of both. Another change which took effect this week affects borrowing couples.

A little background: the amount of money that a senior can draw under the HECM program is partially dependent on the senior’s age at the time that s/he takes out the loan. The older the senior, the larger the amount of money that s/he will receive every month.

Until this month, if two seniors were signed onto a home’s deed and both were signed onto the HECM, the age of the younger spouse was used which lowered the draw amounts. The borrowers could choose whether or not to include the younger spouse as a HECM co-borrower or not. If the younger spouse was included, the amounts that could be drawn under the program were lower but the surviving spouse could remain in the house and continues to draw funds after the older spouse’s death. If the older spouse drew larger amounts by leaving the younger spouse out of the HECM, the younger spouse was obligated to vacate the property when the borrower died.

Confusion about this aspect of the loan caused couples to leave the younger spouse off of the loan without fully understanding the consequences. A number of these non-borrowing spouses were forced to leave their homes when the borrowing spouse died. In 2012 the AARP sued to force HUD to allow non-borrowing spouses to stay in their homes after the borrowing spouse had died.

HUD put a hold on all cases in which non-borrowing spouses were on the path toward eviction after the death of the borrower. Now, in a move designed to protect non-borrowing spouses, the HUD has ruled that if the surviving non-borrowing spouse assumes ownership of the house and meets other obligations of ownership (payment of property taxes, homeowners insurance, etc) s/he can remain there indefinitely. Further, a non-borrowing spouse can be any age when the Reverse Mortgage is taken out, but the younger s/he is, the lower the amount that the HECM borrower can draw.

Under this new rule all spouses will be protected. If they are both 62 or older they will take out the loan as co-borrowers while if they are younger than 62 they will be recognized as borrowing + non-borrowing spouses with protected tenure.

This rule does not protect the tenure of dependent children, even if they are residing in the house, or of spouses who marry a HECM borrower after the HECM is taken out.

Using a Reverse Mortgage as a Financial Planning Tool for Seniors

Historically, there have been two major drawbacks to reverse mortgages. First, their closing costs were relatively high, including the insurance cost and the loan’s interest rate. Secondly, too many people took out their Reverse Mortgage funds as a lump sum draw, leaving them without adequate resources to pay their loan obligations.

Over the past 2 years, reforms have reduced the costs for reverse mortgages and have limited the amount of the loan value that a borrower can take out in the first year, making the loan safer and more secure.

Problems with reverse mortgages, also known as HECM loans, came about because these loans were often given to people who had no other assets and were often in debt. As a result, borrowers would take out the maximum amount in a one-time draw, leaving them without adequate income to make the subsequent required tax and insurance payments. The lenders were forced to foreclose on those loans and the FHA ended up paying the loans off.

In the fall of 2012 federal auditors identified a shortfall of 16 billion dollars in the FHA’s budget which was attributed to these foreclosures. Congress was forced to act quickly to empower the HUD to make needed changes in the loan structure.

Today, a completely revamped HECM loan is available. Financial advisors are now advising that, if a retiree aged 62 or older is healthy and has relatively balanced finances, they consider taking out a Reverse Mortgage to bolster their funds. The new reverse mortgage, these consultants say, can offer seniors a tool that allows them to better manage their retirement income and spending.

The change began about two years ago, when Barry and Stephen Sacks published an article in the Journal of Financial Planning which demonstrates how a reverse mortgage line of credit can be used to help seniors manage their retirement income. Their report noted that, by using a reverse mortgage line of credit, borrowers can increase the value of their net estate more efficiently than when compared to more conventional paths of money management.

Since then, other financial researchers have confirmed these findings. Reverse mortgage lines of credit serve as a working tool for financial planning. The money borrowed via a Reverse Mortgage is tax-free, since it is home equity. In contrast, withdrawals from retirement accounts can incur high tax rates. Having a Reverse Mortgage does not impact on a borrower’s Medicare assistance (though, in certain cases, it can affect assistance from Medicaid).

In addition to using the credit line draw option to maximize Reverse Mortgage income, financial advisors caution seniors to be sure to fulfill all of their obligations under the terms of the loan. These obligations include maintaining all property tax payments, continuing to maintain the home (including payments to any required homeowners organizations) and staying current with homeowners insurance payments. Failure to keep these payments current can result in the cancellation of the loan.

The loan also carries monthly interest rate obligations which the homeowner must pay monthly. Failure to meet any of these responsibilities can result in the loan being called by the lender.

Since 2009 HUD has mandated that any individual considering a Home Equity Conversion Mortgage Loan attend a counseling session with a HUD-approved counselor where they’ll receive answers to any of their questions. At the counseling session the counselor will help the individual calculate the amount of equity that he’ll receive under a HECM loan. If the individual is considering taking his HECM funds as a line or credit or as monthly payments the counselor can also help him calculate the income that he’ll receive. In addition, the counselor will review all the rights and responsibilities of the borrower under the terms of the loan including an estimate of the closing costs and the expected monthly interest rate. Counseling sessions may cost as much as $125 per session but many senior rights organizations provide the service for free or for a reduced cost.

HECM Loan Obligations and Benefits

The TV advertisements make Reverse Mortgages sound like a no-risk opportunity to access money in which your home equity can finance your retirement. According to this view, taking out a HECM loan will enable you to stay in your home without ever making a payment.

What the ads forget to mention is a Reverse Mortgage is not quite that simple. While it is a great way for retirees to age in their homes, the mortgage can cause complications when the borrower doesn’t fully understand the loan or his or her responsibilities.

A reverse mortgage allows a homeowner age 62 or older to withdraw up to 65 percent of the equity in his or her property. The money can be taken as needed with a line of credit, in monthly payments or some combination of these two options. No payments are required until the last borrower dies, sells the house or is has left the house.

The program is not as straightforward as it sounds. Recently Congress has added consumer protections but it’s still easy for unsophisticated seniors to be misled

Before you take out a Home Equity Conversion Mortgage it’s crucial to know what you’re getting into.

The most important thing to remember is that the Reverse Mortgage involves costs and obligations:

  • There is an origination fee ($0 to $6,000) in addition to the normal mortgage refinancing closing costs.
  • Borrowers pay an upfront cost for private mortgage insurance (0.5 percent or 2.5 percent of the appraised value of the home).
  • Potential borrowers are assessed a one-time fee of about $125 for mandatory counseling (many senior rights organizations offer free or discounted counseling)
  • There is a yearly mortgage insurance fee (1.25 percent of the amount borrowed every year) and servicing costs of approximately $30 to $35 a month.

More than 90% of reverse mortgages today are issued through the Federal Housing Administration’s HECM program. The mortgage insurance amount is set by the FHA so that will be the same no matter which lender you use.

Other charges, such as the origination fee, which is capped at $6,000, and the loan’s margin, are negotiable. Financial advisors caution potential Reverse Mortgage borrowers that it’s important to shop around to ensure that they get the best deal. Listen to each lender’s proposal for his institution’s the interest rate, origination fees and other fees. Pay special attention to the proposed margin – many lenders will not volunteer that information unless asked.

Demonstrating past financial solvency and a good credit record are one way of pressuring a lender to give you the best deal possible. Other tips for people considering a Reverse Mortgage include:

Put both partners on the title and on the mortgage since, once the last person on the mortgage dies or is absent from the property for 12 months, the mortgage becomes due.

Review your entire financial picture to make sure that you’ll be able to keep up with the insurance payments, property taxes, home maintenance and other loan costs if you take out a HECM loan. You might wish to create a set-aside fund to ensure that the loan costs will always be covered to protect your interests.

If the lender tries to sell you other products, find another lending institution. The Department of Housing and Urban Development reminds seniors that such practice is illegal. However, there are still cases in which unscrupulous lenders have encouraged seniors to take out reverse mortgages and use the proceeds for risky annuities. It’s not a good idea to take financial advice from someone who is motivated by a commission.

Discuss the Reverse Mortgage option with a financial planner who doesn’t benefit in any way by your decision. The Reverse Mortgage can only be approved if the couple has attending a counseling session with a HUD-approved counselor, but it’s still a good idea to sit with a financial consultant and discuss your income sources and economic situation before making a decision about the Reverse Mortgage loan. Senior-rights organizations often provide free financial counseling for retirees.

Consider how you want to draw your money. You have the option of receiving monthly payments or a line of credit or a combination of the two. For most people, the line of credit is the best option because you only draw on it if you need it. The unused portion sits in your account and continues to draw interest. In specific cases you may receive permission to access your funds in a lump sum but if you take more than 60% of the principal limit upfront, you’ll be charged 2.5% of your home’s appraised value in mortgage insurance upfront rather than 0.5%.

New Protections for Reverse Mortgage Non-Borrowing Spouses

As the generation of Baby Boomers age the United States finds itself facing a retirement funds crisis – more and more retirees lack the financial capacity to support themselves during their ever-increasing life spans. Financial advisors are working with these individuals to help them explore ways in which they can stretch their existing income and even find new sources of income to supplement their retirement funds.

One such strategy involves the federally-insured Home Equity Conversion Mortgage (HECM), a reverse-mortgage program in which older homeowners can convert some or all of the equity in their homes into cash. Financial analysts see the HECM product as a well-designed program which allows seniors to draw funds in a variety of ways to meet their needs. The program was launched in 1989 but over the years it has remained small and a relatively small number of seniors have taken advantage of it. Major revisions in the program were initiated over the last 16 months and the HECM program now gives every indication that it is on the verge of significant expansion.

Beginning in the fall of 2012 Congress began to pressure the Department of Housing and Urban Development, the agency overseeing the Reverse Mortgage, to make changes that would make the HECM loan safer, both for the borrowers and for the government, which insures the loans.

Changes included removing the one-time draw option from the list of alternatives that a borrower has to access his/her money, limiting the amount of equity that a borrower can draw and establishing more oversight to ensure that a borrower can and will maintain the loan.

Recently HUD issued new Mortagee Letters to further minimize complexities that have left many senior borrowers confused about their loan, their rights and their obligations. HUD is clamping down on deceptive merchandising providers and is more willing to work with senior rights organizations and agencies to which many seniors look for guidance on financial products. These moves, together with the 2008 requirement that mandates that all HECM borrowers complete a counseling session with a HUD-approved counselor, ensure that the Reverse Mortgage product is stronger and more transparent than ever.

Finally, a new change is scheduled to come into effect on August 4th that may actually increase the amount of cash or monthly payments that a senior can draw under the HECM program. This sum of money that a borrower can access is based on the borrower’s age at the time at which the Reverse Mortgage was taken out — the older the individual, the larger the draw amount. If the property that is being mortgaged under the HECM loan is owned jointly by a married couple and both partners are covered by the HECM, the age of the younger one is used, which lowers the draw amounts.

Up until this month seniors had a choice of including their younger spouses as HECM co-borrowers, or not. If the partner was included the amounts that could be drawn under the Reverse Mortgage were lower. However, the surviving spouse could remain in the house and draw whatever funds were available before the death of the borrowing spouse. Alternatively, the couple could choose to draw larger amounts by leaving the younger spouse off the HECM. If the couple chose that option and the older spouse died first, the surviving spouse was obligated to vacate the property upon the borrowing spouse’s death.

The new rules are designed to protect non-borrowing spouses (NBSs) from being evicted after the HECM borrower dies. Starting on August 4th, if the surviving NBS assumes ownership of the property and meets other obligations of ownership including payment of property taxes, s/he can remain there indefinitely. Additionally, an NBS can be any age when the HECM is taken out, but the younger s/he is, the lower the amount that the HECM borrower can draw.

According to HUD, under this new rule, all spouses will have their tenure protected. If they are 62 or older, they are co-borrowers while if they are younger than 62 they are NBSs with protected tenure.

This is good news for many couples who otherwise wouldn’t take the risk of acquiring a HECM loan. Younger spouses will now have tenure protection — the cost will depend on the age of the NBS. For example, the borrowing power of a senior of 79 years old married to a NBS of 39 will be reduced by 36%. If the NBS is 25 years of age, the reduction becomes 47%. NBSs must be aware that, while their tenure is protected, they will not be able to draw funds under the HECM — only the borrower can do that.

How to Use your Reverse Mortgage

You’ve decided to take out a Reverse Mortgage and are looking for the wisest way to use it? Financial advisors offer an overview of the Reverse Mortgage product as well as some suggestions as to how the Reverse Mortgage can be used efficiently for your long-term financial security.

What are the biggest misconceptions about reverse mortgages?

The reverse mortgage is technically known as the FHA’s Home Equity Conversion Mortgage (HECM). Many people are familiar with the product from the commercials that feature well-known 60somethings discussing the benefits of the product. There are, however, aspects of the loan which the ads don’t address. It’s true that the HECM product can be used to increase a consumer’s monthly cash flow. There are, however, other benefits to the loan as well.

· HECM for Purchase program is an opportunity for individuals aged 62 and older to relocate. The loan makes it possible for seniors to take out a Reverse Mortgage and then apply it to a new home, all in one swoop. Many seniors want to downsize or move closer to their families, but find the procedure of obtaining a new mortgage, selling their existing house and financing their new house to be overwhelming. With the HECM for Purchase the entire procedure is taken care of when the borrower applies their Reverse Mortgage to their new home. All of the regulations and obligations of a standard HECM loan are applicable to a HECM for Purchase, including the requirement that the borrower maintain his/her new home and pay taxes and insurance on the new property.

· The HECM Line of Credit is a tool which can be utilized as part of a larger financial planning strategy. When the borrower decides to access part or all of his/her Reverse Mortgage assets as a line of credit, s/he can draw on the line of credit as needed but keep unused funds in savings where they grow.

· HECM Monthly Payment Plan is probably the product’s most popular option. Borrowers are entitled to receive a monthly payment, based on the value of the percentage of their equity that they obtain through their Reverse Mortgage Loan. These monies can be used to bolster existing retirement funds or may be used to fund extra projects or activities.

Why do originators promote Reverse Mortgages? How do they benefit from offering reverse mortgages?

Reverse mortgages add to the bottom line of a mortgage company because they decrease the average origination cost per loan. As more customers are helped, the origination cost decreases. This is one of the reasons that borrowers are advised to select a lender who has a strong Reverse Mortgage clientele.  The HECM program allows the lender to originate more loans and assist each consumer understand how the product will affect him or her personally. Originating Reverse Mortgages help lending institutions expand referral business through the customers served, realtors and builder partners.

The Reverse Mortgage is a HUD-insured product so the lender knows that he won’t lose money, even if the value of the property declines or the borrower defaults.

How can HECM loans be used as part of smart financial planning?

The HECM is an important tool in numerous financial planning strategies, including

1. Helping borrowers pay off existing liens, mortgages or other debts. By accessing Reverse Mortgage funds the senior borrowers are able to free up hundreds of dollars every month for significant cash flow relief. Borrowers are assured that, as long as they meet their loan requirements, they will be able to age in their own home.

2. Allowing borrowers to spend down the equity in their home before they tap into their existing cash assets. This allows the senior borrower’s cash assets to grow for additional years.  The equity diminishes over time, but the trade-off involves the promise of more cash assets down the road.

What are borrower obligations for a reverse mortgage?

The borrower is responsible for paying property taxes, home insurance and HOA dues (if any). The borrower must maintain the loan by paying monthly interest payments and reside in the home – if the borrower leaves the home for 12 months, the loan ends and the home reverts to the lending institution.

Do reverse mortgages burden the borrower’s heirs?

When an HECM borrower no longer lives in their house the loan and interest come due. The house is sold and if the selling price is for more than the amount of the interest and loan, then the homeowner, or heirs, receive the difference.

If the house is worth less than what’s due, the FHA, the HECM insurer, covers the remaining balance. Reverse mortgages are non-recourse loans so heirs are not responsible for paying the negative difference.

Heirs do have the opportunity to buy the house if they pay off the loan amount and the remaining loan interest — either with a new mortgage or by selling the house. This is their choice.

New FHA Letter Cautions Potential Borrowers to be Cautious about Misleading Practices with Reverse Mortgages

Recently the Federal Housing Administration published a mortgagee letter that reiterates its policies against potentially misleading advertising practices which, it writes, it has observed in industry marketing techniques. Reverse Mortgage lenders target “baby boomers” – individuals who are in their 60s or approaching that age and are thinking about ways that they can supplement their income. Some of these potential borrowers are financially savvy but others have been misled by lender misrepresentations.

Applying for a Reverse Mortgage through the FHA’s Home Equity Conversion Mortgage initiative is an increasingly popular alternative which enables a borrower to access a percentage of the equity that he holds in his home as either a line of credit or via monthly payments. The loan product is popular among senior citizens who see HECMs as a way for them to get real benefits from their years of hard work and struggle. Throughout the second half of the 20th century most American families sunk their savings into their homes. Now, in their retirement years, they have a chance to take out a Reverse Mortgage in which the lending institution buys the house but does not take possession of the house until the owner(s) die or move away.

HECM loans are regulated and insured by the FHA, an agency of the Department of Housing and Urban Development. HUD issues periodic Mortgagee letters which serve as guides to the banks and financial institutions that act as the lenders. In a letter dated June 18th 2014 the HUD warned financial institutions against deceptive or misleading marketing practices.

Most Reverse Mortgage lenders present the loan product to potential borrowers carefully. There are many advantages to the loan including the borrower’s ability to access part of his home’s equity as cash and the assurance of a federally-insured loan product. The lenders are also required to remind potential borrowers about borrowers’ obligations under the loan such as requirements that the borrowers continue to pay their homeowner’s insurance and taxes, that they maintain their property and that they pay the loan’s monthly interest payments.

Above and beyond that, however, HUD wrote that “the Department has become aware of a variety of marketing and advertising strategies currently employed or being proposed by mortgagees to encourage borrowers to obtain HECMs”….including the attempt to minimize or ignore the “risks in connection with new fixed interest rate HECM products” and to “mitigate the potential for abuse, largely related to the advertising and presentation of these particular products.”

In its June 2014 Mortagee Letter the FHA reminded financial institutions that they were obligated to ensure that their marketing efforts didn’t include “misleading advertising and presentations that appear to limit their options” and that they present potential borrowers with ” the full complement of HECM-supported products.”

The HUD mortagee letter stated that “Senior borrowers deserve freedom of choice when considering whether a reverse mortgage is appropriate for them… guidance is intended to make sure lenders know we’re keeping a watchful eye on their marketing and advertising practices that might steer borrowers toward reverse mortgage options that limit their available choices.”

The mortgagee letter cautions lenders against potential subterfuge and product misrepresentations in their dealings with senior consumers. In spelling out specifics of this policy, the Letter reminds lending institutions to inform potential borrowers that:

  • FHA insures fixed interest rate mortgages, as well as annual and monthly adjustable interest rate mortgages;
  • the mortgagor has the ability to change the method of payment under the HECM at any time provided funds are available;
  • fixed interest rate mortgages are limited to the Single Disbursement Lump Sum payment option where there is a single, full draw at loan closing and the mortgage does not provide for future draws by the mortgagor under any circumstances;
  • adjustable interest rate mortgages provides for five, flexible payment options and allows for future draws
  • the amount of funds available to the mortgagor is currently determined by the age of the youngest mortgagor,
  • the disbursement of mortgage proceeds during the first twelve month disbursement period is subject to an initial disbursement limit as determined by requirements set by the Secretary.

In summary, the Mortagee Lesson reiterates prohibitions on restricting a mortgagor’s freedom of choice and on using misleading product descriptions.

Reverse Mortgage Market is Expanding

When the Federal Housing Administration (FHA) changed the regulations regarding the percentage of a home’s equity that a Reverse Mortgage borrower could access, along with a change in the options that the borrower had for receiving those funds, most financial observers predicted that Reverse Mortgages would decline. The change, which took effect in the summer of 2013, was thought to lessen the attraction that the HECM product would have for senior borrowers.

In a startling development lenders have actually been reporting an increase in new loan applications. The new regulations have, it seems, made the HECM even more attractive to retirees who want to use the equity that they have in their home to add to their retirement income.

Today senior borrowers can access just 60% of their Reverse Mortgage funds, and only as a line of credit or as monthly payments. These regulations were introduced in order to make sure that borrowers spread out the proceeds of their loan to avoid the kind of financial distress that sometimes occurred in the past when borrowers could access a higher percentage of their equity and could take it as a lump sum payment.

Financial advisers believe that the 2014 upswing in Reverse Mortgage applications is due to the fact that seniors have more confidence than ever in the Reverse Mortgage loan. They see it as a stable product that has built-in safeguards to guide them in using their funds in moderation while they maintain their ability to meet their loan obligations.

In 2012 the Department of Housing and Urban Development presented a financial statement to Congress that showed that, due largely to the Reverse Mortgage product, the FHA was experiencing a shortfall of 16.3 billion dollars in their insurance fund. It soon became clear that this was largely due to instances in which borrowers accessed their loan funds as a lump sum payment and were left without enough reserves to make their HECM interest payments and other obligatory loan payments. In 2013, with the bi-partisan support of Congress, HUD revised the rules. The amount of equity that a borrower could access was reduced and the draw options were limited to accessing loan funds as a line or credit or via monthly payments.

Other regulation changes were also instituted. These new rules include the requirement that reverse mortgage lenders conduct financial assessments of potential borrowers to ensure that borrowers will have the necessary residual income to pay taxes, insurance, loan interest payments and maintain the property.

The new regulations are also changing the way in which reverse mortgages are advertised. More retirement planners now view a HECM loan as a valuable retirement tool which forces the industry to market differently. Whereas in the past, borrowers may have defaulted when they couldn’t afford to pay taxes and insurance, the new rules protect the borrowers as well as the future of the entire program. .

In addition, the adjustable-rate line of credit, a more stable product than the fixed line of credit, has come to dominate the reverse mortgage industry. About 75% to 80% of HECMs being originated today are adjustable-rate loans with the most popular reverse mortgage product being an adjustable-rate HECM with a 10% lifetime cap. This means that, with a starting interest rate of 3%, the rate of a reverse mortgage cannot go higher than 13%. This is good news for reverse mortgage borrowers who feel more confident than ever in the HECM product.

The FHA reported that HECM originations totaled $4 billion in the first quarter of 2014, up from $3.4 billion in the last quarter of 2013.

Tax Obligations and Reverse Mortgages

Home Equity Conversion Mortgages (HECMs) have become popular among older homeowners who are searching for additional sources of income. That’s because this type of loan, which is only available to homeowners who are 62 years or older, allows property owners to turn part of the equity that they have in their homes into regular cash payments.

HECMs are known as a “reverse” mortgages. If you take out a Reverse Mortgage you receive a payment, based on the amount of equity that you own in your home and your home’s worth. Instead of sending a check each month to your mortgage lender, the lender pays you. You are exempt from paying back your reverse mortgage loan until you sell your home, move or die. Until that time, your only loan obligations involve paying the loan’s monthly interest rate and other household expenses.

If, for instance, you have $200,000 of equity in your home, based on today’s HECM limit of a 60 percent Reverse Mortgage ceiling on that amount, you would be able to access $120,000. You can take your payment as a line of credits or you can receive a set amount each month.

When you, or the last surviving borrower, dies, sells the home or permanently moves out the loan will need to be repaid. This is generally accomplished when the lending institution sells the home and uses the proceeds to recoup its investment. If you anticipated leaving the home to your heirs, they will be obligated to repay the loan plus loan servicing fees, interest and mortgage insurance premiums.

In addition to the monthly interest payments you’ll be responsible for your home’s upkeep which includes paying property taxes and insurance payments. If you fall behind on these payments the lending institution may foreclose on the home. You can, however, request that the lending institution create a “set aside” fund which will automatically take care of these payments so that you’ll be protected from any difficulties that may arise from unpaid taxes and fees.

Seniors should be aware of how a Reverse Mortgage can impact their taxes and other benefits. The IRS does not require borrowers to pay taxes on the income that they receive from a Reverse Mortgage. IRS Publication 936 explains that “because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable.”

In addition, a Reverse Mortgage will not affect your Medicare benefits. In some instances a Reverse Mortgage may affect your eligibility for Supplementary Social Security or Medicaid benefits. Generally, payments from a Reverse Mortgage will not be counted as income as long as they are spent within the same month that they are received. However, the unspent balance from a reverse mortgage loan could put you over the allowable limit for SSI eligibility and/or Medicaid benefits.  Even if the loan is taken as monthly payments or as a line of credit, your payments could accumulate and push your resources over the SSI or Medicaid limits.

Social Security and Medicaid regulations are quite complex and differ from one circumstance to the next, so senior financial advisors suggest that that a potential borrower consult with a senior advocate or a financial planner who specializes in elder law before signing on for a HECM loan. It’s important to consult with an advisor IN YOUR STATE because local laws differ from state to state.

New Guidelines for Reverse Mortgage Spouses

Long-awaited new guidelines have been announced by the Department of Housing and Urban Development to allow the spouses of deceased borrowers to stay in their home without the threat of foreclosure. As of August 4th, these surviving spouses will not be evicted from their homes as long as they continue to pay taxes, insurance and other fees associated with the Reverse Mortgage.

The issue of how HUD will deal with non-borrowing Reverse Mortgage spouses has been a bone of contention for many years, pitting government offices responsible for administering the Reverse Mortgage against senior rights advocates. When the Home Mortgage Equity Conversion (HECM) program was created, the government believed that it was clear to borrowers that, in the event that only one spouse signed on the loan, the Reverse Mortgage would be terminated upon that person’s death. At that point the surviving spouse would either have to pay back the loan or leave the house so that the lending institution would be able to sell the property and recoup their investment.

Over the years many non-borrowing spouses of Reverse Mortgage borrowers were taken by surprise by this interpretation of the rule. They believed that they would be allowed to stay in their homes, even after the borrowing partner died or had to leave the home. The Federal Housing Administration, however, held that these surviving spouses had forfeited their rights to stay in the house and were no longer the owners of the home. Reverse Mortgage guidelines stated that full repayment of the reverse mortgage was due after the death of the borrower. This left a widow or widower whose name was not on the mortgage liable for the debt or obligated to sell the home.

As of August 4th 2014 that payment will be deferred until after the spouse’s death.

The change came as a result of a court case in which two non-borrowing spouses sued the Department of Housing and Urban Development. They claimed that by evicting non-borrowing spouses HUD was circumventing the intention of the Reverse Mortgage, which had been created specifically to allow seniors to age in their own homes. Reverse mortgages, also known as HECM loans, allow seniors 62 or older to convert their home equity into cash. The loan is structured so that, instead of paying the bank each month, the borrower gets paid, either as a line of credit or in monthly payments.

Reverse Mortgages constitute a significant part of the housing market. In 2011, the Consumer Financial Protection Bureau counted 740,000 reverse mortgages nationwide. But as more baby boomers become eligible for the product the market is expected to grow significantly. Most reverse mortgages are not taken out until homeowners are in their late 60s to early 70s so lending institutions are expecting to see an upsurge in Reverse Mortgages in the coming years.

Odette Williamson, an attorney with the National Consumer Law Center, said that, in the past, borrowers may have been counseled to leave younger spouses off reverse mortgages so the payout amount would be higher since the older the borrower is, the more they can receive from their reverse mortgage.

Williamson commented that “A lot of spouses were being taken off the loans, and were being encouraged to do so with bad information. Sometimes they were plain misled and didn’t understand the consequences.”

The new rule addresses the problem by ensuring that a non-borrowing spouse can remain in the home after the borrowing spouse’s death. In addition, the new guidelines also allow a reverse mortgage to be written if one spouse is younger than 62. The payout amount, however, will be based on the younger spouse’s age.

In order to remain in the home after a borrower’s death, the non-borrowing spouse must have stayed married to the borrower throughout his or her lifetime, live in the house as a primary residence and pay all loan interest payments and property tax payments. The individual must maintain the house and keep up the homeowner’s insurance.

Reverse Mortgages, Terms, Changes and Important Updates

This fiscal year has brought significant Reverse Mortgage changes, both for borrowers and for lenders. Under the Reverse Mortgage Stabilization Act of 2013 new changes are aimed at making these loans less risky and less prone to default.

Home equity conversion mortgages (HECMs) are for senior homeowners who are at least 62 years of age. The Reverse Mortgage allows the homeowner to draw on his or her home equity without repaying it as long as s/he stays in the house. The borrower receivess the money upfront and repayment is deferred until the borrower dies or moves to a nursing home.

Questions—and litigation—continues over the status of non-borrowing spouses and whether they can remain in their homes when their partners die or leave the house (oftentimes for a long-term care facility). The Federal Housing Administration (FHA) recently issued a new advisory concerning that—more on that below.

First, here’s a recap of HECM rules that took effect in September 2013 and January 2014.

  • Financial assessments and set-asides: Lenders are now required to analyze borrowers’ credit history, cash flow, and residual income. The potential borrower’s income, credit, property charges (taxes, association fees, ground rents, insurance and assessments) and assets are all verified and past credit history is reviewed to ensure that the borrower is ready and willing to pay the loan’s obligatory payments (insurance, home upkeep, property taxes, loan interest). Where a question exists about the borrower’s ability/preparedness to make these payments, the lending institution must create a set-aside account in which a portion of loan proceeds or monthly loan payments are set aside to cover taxes and insurance.
  • Principal limit: Borrowers can access up to 60 percent of their home’s equity, based on the claim amount, the youngest borrower’s age and the interest rate.
  • Type of disbursement: Borrowers can access their loan payments as monthly payments, as a line of credit or as a combination of the two draw options. This includes the greater of 60% of the principal limit or mandatory obligations plus 10 percent of the principal limit. (Mandatory obligations involve origination and closing fees, federal tax debt, warranties and inspections, mortgage insurance, removal of liens and repairs.)
  • Mortgage insurance premiums: The existing annual 1.25 percent MIP will stay in effect. For disbursements of 60% or less of the principal limit, an additional one-time premium of 0.50% is charged while an additional one-time premium of 2.50% is charged for a disbursement of more than 60 percent.

The new rules have not addressed the nagging issue of non-borrowing spouses. Recent such suits have reached the United States Court of Appeals in which non-borrowing spouses sued the US Department of Housing and Urban Development (HUD).

The cases relate to surviving spouses who removed their name from the house deed so that their spouse could take out the loan. The plaintiffs contend that HECM lenders advised them to relinquish their interest in their homes so that their older spouses could obtain larger loan payments. They also contend that the lenders told them that they wouldn’t lose their homes if their spouses died.

After their spouses died the plaintiffs were notified that the Reverse Mortgage loans were due as per the mortgage agreement which states that the loans become payable when a borrower dies and the property is not the principal residence of at least one surviving borrower. HUD foreclosed on the homes because the surviving spouses were unable to repay the loans.

In their lawsuits the plaintiffs contend that HUD violated federal law which defines a “homeowner” as one which includes a surviving spouses. In their brief to the court the plaintiffs wrote that HUD’s required HECM mortgage contract contradicts the law because it states that a Reverse Mortgage ends when the borrower dies, regardless of whether a non-borrowing spouse survives.

The Appeals Court sided with the plaintiffs and, as of April 2014, the foreclosures in the cases became inactive. HUD is now considering its options and the FHA, which insures HECMs, issued an advisory to lenders.

The FHA continues to maintain that the earlier “due and payable” interpretation is accurate but the agency does note that “recent events have advanced another possible interpretation” of the law — FHA insurance can be issued on HECMs that include the non-borrowing spouse at the time of the mortgage’s origination.

All relevant rules and regulations pertaining to the HECM loan are reviewed for potential applicants in the federal-mandated counseling session in which loan applicants must participate before they make their application for the loan.

Individualizing a Reverse Mortgage

Not every senior citizen qualifies for a reverse mortgage. Some seniors have not yet reached the age of 62, which is the minimum age to apply for a Reverse Mortgage. Others are still paying off their mortgage and the balance that they owe on their existing mortgage is too high for them to acquire a Reverse Mortgage.

Reverse Mortgages are counter-indicated for many retirees as well. Seniors who want to pass on a debt-free house to their estate are advised that a Reverse Mortgage isn’t consistent with their plans. A reverse mortgage builds up debt and the beneficiaries of the individual’s estate must pay that debt off if they want the house to stay in the family. Even if you simply want those now living with you in your home – your spouse, your children, your grandchildren – to be able to continue to live there after you die, you should pass on a Reverse Mortgage because the terms of the loan state that after your death the property reverts back to the lending institution which can then sell it to recoup their investment.

Finally, the Reverse Mortgage carries costs and monthly interest payments. If you don’t need the cash that you’d receive from the loan, you should find other ways to invest your money

Who Should Consider a Reverse Mortgage

Senior homeowners who need some additional cash should research the benefits that they’d get from a Reverse Mortgage. These are generally people who are retiring. Many are still paying on a mortgage. The cash that they would be able to draw from their HECM reverse mortgage might allow them to pay off the old mortgage and give them extra income for their retirement years.

Another population of potential reverse mortgage borrowers includes people who retire before they’re 65 but who want to wait until after they’re 65 to collect social security. Social Security payments are larger when they are deferred until age 65 (or later) so drawing a term monthly payment under a HECM reverse mortgage for the period until you’re ready to draw social security can provide a temporary source of income and ensure you higher social security payments later on. Even if you’re looking for some temporary income for special projects (renovating your house) or events (a vacation) the extra Reverse Mortgage income can help you achieve your goals.

For those living on Social Security or small pensions and are looking to supplement their incomes indefinitely, drawing a tenure payment under a HECM reverse mortgage can grant them needed monthly income for as long as they live in the house. This population also includes individuals who are living on retirement income or on a nest egg and are afraid that their money might run out. Having Reverse Mortgage income can eliminate the anxiety – in particular, the HECM credit line draw options which grows if you don’t draw it

There’s a special Reverse Mortgage, the Reverse Mortgage for Purchase, which is specifically for people who want to buy a new house but who don’t want to commit to monthly payments. In effect, this mortgage allows a borrower to complete the purchase transaction and the Reverse Mortgage transaction in one action, eliminating the need to conduct several different transactions as the Reverse Mortgage passes from one property to the next.

Seniors with fluctuating incomes can draw on a HECM credit line when their income drops and then repay the line when their income recovers. With this strategy, the credit line continues to earn interest at the mortgage rate, rather than the lower deposit rate that a bank loan would provide.

The HECM calculator helps you determine the amount that your Reverse Mortgage would be worth so that you can decide if, how and when to take out a HECM loan.

Who Takes Out Reverse Mortgages?

If you think that reverse mortgages are only for cash-strapped seniors without any other financial options, think again. Reverse mortgage features have been evolving over the years. Research now suggests that the Reverse Mortgage loan is actually most helpful for retirees who want to find a strategy that will allow them to manage a dependable stream of income during their retirement years.

There are different types of reverse mortgages but these days almost all reverse mortgages involve Home Equity Conversion Mortgages. These HECMs are issued by a variety of lenders but they are all insured and regulated by the Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development (HUD).  The HECM program has evolved over the years as it developed new rules which make the home equity conversion mortgage more dependable and sustainable for the majority of borrowers. Many problems with earlier versions of the HECM have been addressed including more practical safeguards, better consumer protections and some attractive new features.

In September 2013, HUD made some important changes which removed some of the risks of the HECM loan.  First, the HUD limited the amount of a home’s value which a borrower could access. This change was instituted to ensure that borrowers don’t overextend themselves.  Secondly, after finding that excessive first-year payouts strongly correlated to problem loans, HUD instituted strong incentives which were designed to encourage borrowers to limit their first-year’s maximum payout to 60% of the maximum loan value. This was accomplished by raising the loan’s interest rate if a borrower exceeded 60% of his total loan’s value

Finally, in early 2014, HUD began to require that all potential borrowers go through financial counseling with a third party before applying for the loan. This requirement was implemented in order to establish that the borrower had the ability to manage the loan.  If, via a financial assessment, a lender determines that a borrower’s income may be insufficient to manage his cash flow, the lender can set aside a portion of a borrower’s loan funds to pay ongoing loan obligations.

Research at several financial planning institutions, including the financial planning program at Texas Tech University, suggests that the current structure of reverse mortgages offer the best benefits to borrowers who are planning to use the loan to balance their household budget while they simultaneously stabilize their retirement income.

So, at what point should an individual start thinking about a Reverse Mortgage?

Financial advisors suggest that for borrowers who are able to organize their loan income to ensure that they won’t use the proceeds from a Reverse Mortgage in a way that leaves them without sufficient income to pay the loan’s costs and obligations, the loan can offer the advantages that they’re looking for. A HECM loan can provide them with the opportunity to utilize the equity that they hold in their home to access cash that gives them more disposable income.

A few things to remember:

1. If you are married or otherwise live with someone who relies on the home as their primary residence, keep in mind that the property reverts back to the lending institution when the individual who signed on the loan no longer lives in the house.

This clause means that, if only one partner signs, when that partner dies/leaves the home first, the other spouse must either buy the home back from the lender or leave the home.

2. You must budget the loan to include the loan’s costs – third party costs that pay the lender for processing the loan – as well as for the loan’s monthly interest payments. These payments must continue throughout the life of the loan, even if you have used up your funds that you received from the loan.

You will also be expected to continue to pay all property tax payments, home upkeep and insurance payments. Failure to keep up these payments can result in foreclosure.

3. Before you apply for the loan you must attend a counseling session with a HUD-approved counselor. At this session the counselor will help you determine whether the HECM loan is the best solution for your needs and situation.

Five Important Things to Know When You’re Checking Out a Reverse Mortgage

Reverse mortgages have gained a bad reputation over the years but experts say that acquiring a Reverse Mortgage can be a good financial move for a certain segment of the market.

Susan Tiffany, director, consumer periodicals at the Credit Union National Association says “they do make sense for people who have no other alternatives. What happens over time is people build equity in their home and until recent years, the equity was illiquid. They couldn’t tap it without selling the house or getting a home equity loan. A reverse mortgage lets you get at that equity.”

Regardless of whether you’re looking to pad your nest egg or you simply need some extra cash, financial advisors suggest that before you move ahead with a Reverse Mortgage you make sure that you fully understand the mortgage product’s framework as well as your responsibilities as a borrower.

Your Age

Eligibility for a reverse mortgage is determined by your age. You must be age 62 or older to apply for a reverse mortgage. The older you are, the higher the payouts that you receive, based your home’s equity. You can draw your mortgage as a line of credit, monthly payments or a combination of both. Since the money that you get is based on the total value of your home and the age of the youngest borrower, the older you are, the more you receive.

Maintenance, Taxes and Insurance

Home Equity Conversion Mortgage is the official name of the federally-insured Reverse Mortgage product. The loan provides access to the equity that you have in your home but you shouldn’t look at it as free money.

When you take out a Reverse Mortgage you’ll have to pay fees that are associated with taking out this type of loan. These fees include an origination fee and other closing costs. In addition you must also maintain the house, pay your property taxes and home insurance and pay for the loan’s interest payments. If you don’t take care of those things, the mortgage can come due You should also be aware that the interest on a reverse mortgage can’t be written off on a tax return until the loan is paid, either partly or in full.

Financial advisors note that the mortgage insurance portion has slowly been dropping over the course of the last few years and has been cut down to half-a-percent. The Federal Trade Commission reminds borrowers that the amount they owe will increase over time since interest is charged on the outstanding balance and then added to the amount that’s owed.

The interest rate can also change based on market conditions since the rates are tied to a financial index.

Tax and Heir Considerations

Borrowers are not obligated to pay taxes on the income that they receive through their Reverse Mortgage. Reverse Mortgage income does not affect Medicare benefits but it may, in some instances, affect Medicaid benefits.

If your heirs want to keep the Reverse Mortgage house in the family they will have to purchase the home from the lending institution after the house reverts back to the lender when you die or leave the house. Although reverse mortgages have a non-recourse clause which prevents you or your heirs from owing more than the value of the home when the loan comes due, if your heirs want to retain ownership of the home they will have to repay the loan in full.