It is reported that almost every reverse mortgage that is in an amount under the Federal Housing Administration (FHA) limit ($679,650 in 2018), is a federally insured Home Equity Conversion Mortgage (HECM). Because of this, we will be limiting our discussion today to HECMs, which are backed by the U.S. Department of Housing and Urban Development (HUD). For purposes of today’s column, we will be using “reverse mortgage” and “HECM” interchangeably.
As a result of a 2016 actuarial study of the FHA costs of running the HECM program, there are three major changes that took effect in late 2017. According to HUD Secretary Ben Carson, these changes are “needed and prudent steps to put the HECM program on a more sustainable footing so that it can remain a resource for senior borrowers”. The three major changes were the upfront reverse mortgage insurance premium rate, the annual ongoing mortgage insurance premium rate, and the calculation of the maximum amount that can be borrowed. We will be covering these changes today along with a broader discussion of reverse mortgages.
What is a reverse mortgage?
A reverse mortgage is a special type of mortgage that differs from a traditional mortgage or home equity loan in that it does not require regular monthly payments during the term of the loan. So long as you continue to meet the requirements of the loan, you can take advances on the loan, but need not make any monthly payments. The loan does not need to be repaid until you no longer use the home as your principal residence or otherwise fail to meet the requirements of the loan.
Who can get an HECM?
If you are 62 years of age or older, have received consumer information from a HECM counselor, and have adequate equity in a home which you either own or are purchasing, you may be eligible. Since all co-borrowers must be at least age 62, if you have a spouse and/or children on the title and who are under 62, their names must be removed from the title to the home before you can qualify for a reverse mortgage.
What types of homes qualify?
To qualify for an HECM, your home must be a 1-4 family home in which you occupy at least one unit as your primary residence. Certain HUD-approved manufactured homes and condominiums that meet FHA guidelines are also eligible.
How much is my upfront and annual mortgage insurance premium (MIP)?
Effective October 2, 2017, upfront MIP is a flat 2% of the maximum loan available, rather than 0.5%-2.5% under the old program. Also effective October 2, 2017, the annual MIP was lowered from 1.5% to 0.5 percent of the current loan balance outstanding. Your MIP can be paid by the proceeds of your HECM.
If no monthly mortgage payments are needed, what about taxes, insurance and other costs?
You are still required to pay your real estate taxes, maintain homeowners insurance and pay all other required property expenses, such as condominium or homeowners association fees, utilities, maintenance, etc. To fund these expenses, you may be required to have a set aside account, which is like an escrow account with a traditional mortgage.
How much money can I borrow?
The amount of money that you can get from a reverse mortgage varies. It is dependent upon the current interest rate, the age of the youngest borrower, appraised value, HECM FHA mortgage limit, purchase price of new-to-you home, and initial MIP. Generally, the older you are, the more valuable your home is and the lower the interest rate, the more you can borrow. However under new rules and tables effective October 2, 2017, the total you can borrow will be less than under the old program.
How do I get my money from my reverse mortgage?
According to the HUD website, you have five types of payment plans for adjustable interest rate mortgages:
- Tenure– equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term– equal monthly payments for a fixed period of months selected.
- Line of Credit– unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
- Modified Tenure– combination of line of credit and scheduled monthly payments for as long as you remain in the home.
- Modified Term– combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
For fixed interest rate mortgages, you will receive the single disbursement lump sum payment plan.
Do my loved ones get anything after I am gone?
Because no monthly payments are made on a reverse mortgage, the balance increases over time, instead of decreasing as is the case with a traditional mortgage. Generally, if the amount borrowed from a reverse mortgage, together with interest, fees and costs is less than the value of your home at the time the loan is due when the home is sold or no longer used as your principal residence, then there would be some equity that you could pass on to your loved ones upon your death.
HECMs differ from traditional mortgages in the event the balance of the loan exceeds the value of your home. In such instances, you or your estate typically do not have to pay the lender the excess of the debt over the value of your home at that time. This provision is referred to as non-recourse. No debt is generally transferred to you, your estate or your loved ones, but the lender keeps the home. If however, you or your loved ones want to keep the home in the family, you generally would only have to pay the lesser of the total balance of the loan or 95% of the home’s appraised value.
If you are co-borrowing your HECM with a spouse or anyone else, any co-borrower can stay in the home after any other co-borrower dies or moves out of the home. If you live with a HUD qualifying non-borrowing spouse or partner, they may be able to remain in the home after your death, but not more than 6-12 months if you move out of the home. Any other occupants will have to move out upon your death or moving out of the home.
How much should I pay a service to find a reverse mortgage for me?
Nothing! The FHA recommends that you do NOT use a service that charges a fee to locate an approved lender. You should be able to find a lender for free by searching online at www.hud.gov or by contacting an HECM counselor. HECM counselors can be found online or by calling 800.569.4287 toll-free.
Is there a way out of the reverse mortgage after I have closed?
With most reverse mortgages, you can cancel the loan for any reason, without penalty within at least three business days after closing. Your cancellation with the lender must be in writing. I recommend that you mail your cancellation notice certified mail, return receipt requested in order to document who received what, when.
When or why would I use a reverse mortgage?
The only time I have seen reverse mortgages used is as a last resort bailout when homeowners have no other options. If you have no assets other than your home, your monthly income is insufficient to pay your expenses and you want to stay in your home, you may be a reverse mortgage candidate. In such instances, if you didn’t use an HECM, you would not be able to stay in your home. Without the HECM, you would either have to sell your home or lose it due to the lack of payment of your traditional mortgage or real estate property taxes. Before you jump into a reverse mortgage, do your homework and speak to a HECM counselor.
By Matthew M. Wallace, CPA, JD
Published edited February 11, 2018 in The Times Herald newspaper Port Huron, Michigan as: HUD changes reverse mortgage rules