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What Is a Reverse Mortgage?

This post outlines key points regarding reverse mortgages and provides a good starting point for your investigation into this type of loan. Until recently, 1988 to be precise, there were essentially two primary methods of getting cash from your home:

First, you could sell your home, but then you would typically have to move; or second, you could borrow against your home, but then you would be required to make monthly loan repayments. The later is considered forward financing due to the way in which it is amortized or paid down. Reverse mortgages now offer you a third way of getting money from your home without requiring you to leave your home or make regular loan repayments.

What is a Reverse Mortgage Loan?

A Reverse Mortgage is a home mortgage loan that allows someone age 62 or older to convert his or her home equity into income or cash. Money from loan proceeds can be taken as a lump sum, a line of credit, a monthly annuity or payment, or in any combination. Unlike a regular mortgage loan, there are NO monthly payments and the repayment of principal and accrued or accumulated interest is due in full only when the last surviving borrower moves out, sells the property, or passes on.

Credit status, health, income, and assets are not considered for loan approval. Lenders generally require an appraisal of the home, an acceptable standard of home maintenance, a clear termite or other wood destroying infestation report, and clear title. HUD, the US Department of Housing and Urban Development, also requires borrowers to receive third party counseling from a certified Reverse Mortgage Counselor.

Who’s Eligible?
All owners of the home must apply for the reverse mortgage and sign the loan papers. And again, all borrowers must be at least 62 years of age to be eligible for most reverse mortgages. Owners generally must occupy the home as a principal residence (where they live the majority of the year).

Eligible Properties: Single family one-unit dwellings are eligible properties for all reverse mortgages. Some programs also accept 2-4 unit owner-occupied dwellings, along with some condominiums, planned unit developments, and manufactured homes. Mobile homes and cooperatives are generally not eligible.

How Do They Work?
Reverse mortgage loans typically require no repayment for as long as you live in your home. But they must be repaid in full, including all interest and other charges, when the last living borrower dies, sells the home, or permanently moves away.

Because you make no monthly payments, the amount you owe grows larger over time. As your debt grows larger, the amount of cash you would have left after selling and paying off the loan (your “equity”) generally grows smaller. But you can never owe more than your home’s value at the time the loan is repaid. Keep in mind that the payments you are not making, the monthly payments you are receiving, and/or the cash you take out through a reverse mortgage provides a benefit in today’s dollars, as the same dollar will be worth less 5, 10 or more years from now. This becomes another important consideration in evaluating the benefits of taking out a reverse mortgage.

Reverse mortgage borrowers continue to own their homes. So you are still responsible for property taxes, insurance, and repairs. If you fail to carry out these responsibilities, a standard condition with any mortgage loan, your loan could become due and payable in full. Although out-of-pocket expenses on a reverse mortgage are generally restricted to an appraisal, interest and administrative (servicing) charges are added to the loan balance during the period of the loan. Over time, the equity that you have in your home is reduced and the debt balance you owe grows — exactly the reverse of a traditional mortgage.

What Do You Get?
These loans can be paid to you:

1) all at once in a single lump sum of cash,
2) as a regular monthly loan advance
3) as a line of credit that lets you decide how much cash to use and when to use it
4) Or you can choose any combination of these payment plans.

Some reverse mortgages are offered by state and local governments. These “public sector” loans generally must be used for specific purposes, such as paying for home repairs or property taxes. Other reverse mortgages are offered by banks, mortgage companies, and savings associations. These “private sector” loans can be used for any purpose.

The amount of cash you can get from a private sector reverse mortgage generally depends on your age, your home’s value and location, and the cost of the loan. The older the borrower, the greater the allowable lending limit. The greater the equityvalue of a home, the greater the potential cash available.

The amount of cash you can get also depends on the specific reverse mortgage plan or program you select. The differences in available loan amounts can vary greatly from one plan to another. Most homeowners get the largest cash advances from the federally insured Home Equity Conversion Mortgage (HECM). HECM loans often provide much greater loan advances than other reverse mortgages. HUD recently created a new HECM that enables qualifying senior adults to purchase homes. This program enables homeowners to use the reverse mortgage feature to buy a home and finance a large portion without having a monthly payment.

What Will You Pay?
The lowest cost reverse mortgages are normally offered by state and local governments. They generally have low or no loan fees, and the interest rates are typically low or moderate as well, but they are not available on a large scale. Private sector reverse mortgages include a variety of costs. An application fee usually includes the cost of an appraisal and a credit report. Other loan costs typically include an origination fee, closing costs, insurance, and a monthly servicing fee. These costs generally can be paid with loan advances, which mean they are added to your loan balance (the amount you owe). Interest is charged on all loan advances.

Reverse mortgages are most expensive in the early years of the loan, and then become less costly over time. The cost can be very high in the short term, and is least costly if you live longer than your life expectancy. The federally insured Home Equity Conversion Mortgage (HECM) is generally the least expensive private sector reverse mortgage. Unlike a home equity loan or traditional mortgage, with a reverse mortgage, there are no monthly payments. The loan becomes due when you sell the home, move out, vacate for a period of 12 months, or when all of the homeowners are deceased. At that time, the loan principal, interest charges, and any fees must be paid in full. This can be done by selling the property, refinancing through a conventional mortgage, or using other assets. The loan does not become due if just one of the co-borrowers passes away; the surviving borrower can continue to own and live in the home, and enjoy all the benefits of the reverse mortgage

Taxes, Estates, and Public Benefits
Reverse mortgages may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner. Reverse mortgages are non-recourse loans, which means that the property alone stands for the loan amount to be repaid. The lender may not seek repayment from the homeowner’s income, other assets, or heirs. If you or your heirs choose to repay the loan by selling the home, any sale proceeds in excess of the loan balance belong to you or your heirs. If you sell your home for a fair market price that is less than the loan balance, there will be no proceeds to keep, but the bank cannot claim from you or your estate more than the sale amount received.

An American Bar Association guide states that generally “the IRS does not consider loan advances to be income.” The guide explains that if you receive SSI, Medicaid, or other public benefits loan advances are counted as “liquid assets” if you keep them in an account past the end of the calendar month in which you receive them. If you do, you could lose your eligibility for these programs if your total liquid assets (for example, money you have in savings and checking accounts) are greater than these programs allow.
For some homeowners age 62 or older, a reverse mortgage can be an important tool for providing a broad array of personal and financial benefits. It provides a way to tap in to your home equity to receive cash for what you want or need while you still live in and own your home.

Some lenders offer “proprietary” loans available with different terms than the HECM. These loans can sometimes have higher loan limits or otherwise be more flexible. The charges and interest rates may be higher or lower than the HECM.

— — — — — — —
Reverse mortgages are not appropriate for all homeowners. Please be sure to read your lender’s disclosure statement and obtain free independent counseling to help you decide if a reverse mortgage is right for you.
 

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October 20, 2008

MORTGAGEE LETTER 2008-33

TO:                 ALL APPROVED MORTGAGEES

                        ALL HUD-APPROVED HOUSING COUNSELING AGENCIES

SUBJECT:     Home Equity Conversion Mortgage (HECM) for Purchase Program

            The Housing and Economic Recovery Act of 2008 (HERA) provides HECM mortgagors with the opportunity to purchase a new principal residence with HECM loan proceeds.  Section 2122(a)(9) of HERA amends section 255 of the National Housing Act to authorize the Department of Housing and Urban Development (HUD) to insure HECMs used for the purchase of a 1- to 4-family dwelling unit.   Accordingly, eligible mortgagors now have the opportunity to purchase a principal residence with HECM loan proceeds.  HECM for purchase transactions, for which the FHA case number is assigned on or after January 1, 2009, must satisfy existing program requirements and the provisions of this Mortgagee Letter.

            The Federal Housing Administration (FHA) defines “HECM for Purchase” as a real estate purchase where title to the property is transferred to the HECM mortgagor, which the mortgagor will occupy as a principal residence, and, at the time of closing, the HECM first and second liens will be the only liens against the property.  HECM mortgagors must occupy the property within 60 days from the date of closing.  Lenders are required to ensure all outstanding or unpaid obligations incurred by the prospective mortgagor, in connection with the HECM transaction, are satisfied at closing. 

Eligible Property Types

            Only properties where construction is completed, as defined in Mortgagee Letter 2007-06, are eligible for FHA insurance under the HECM for Purchase program.  Loan proceeds may be used to satisfy outstanding payment obligations associated with a land contract, contract for deed or other similar purchasing arrangements that will ensure the property, which will be used as collateral for the HECM, meets FHA’s title requirements.  Those requirements, as provided in section 255(b)(4) of the National Housing Act and implemented in the HECM regulations at 24 CFR 206.45, provide, in part, that the HECM must be on real estate held in fee simple, or on a leasehold under a lease for not less than 99 years which is renewable, or under a lease having a remaining period of not less than 50 years beyond the date of the 100^th birthday of the youngest mortgagor.  

Ineligible Property Types

            The following property types are ineligible for FHA insurance under the HECM for Purchase program:

• Cooperative units; 
• Newly constructed principal residence where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority;
• Boarding houses;
• Bed and breakfast establishments;
• Existing manufactured homes built before June 15, 1976; and
• Existing manufactured homes built after June 15, 1976 that fail to conform to the Manufactured Home Construction Safety Standards, as evidenced by affixed certification labels (e.g. data plate and HUD certification label) and/or lack a permanent foundation as required in HUD’s Permanent Foundations for Manufactured Housing Guide.

Property Flipping

Prospective mortgagors should be alert to efforts to coerce them into obtaining a reverse mortgage as part of a purchase contractual obligation, or purchasing a distressed home in need of substantial repairs but being sold at or above market rate.

            As such, HECM lenders must take steps to ensure that: a) only current owners of record may sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) for resales that occur between 91 and 180 days where the new sales price exceeds 100% of the previous sales price, FHA will require additional documentation validating the property’s value.  Lenders providing HECM financing for purchase transactions must comply with guidance provided in Mortgagee Letter 2006-14.

Refinancing and Existing Upfront Mortgage Insurance Premium (MIP)

            The HECM refinance authority is only applicable when the property that serves as collateral for FHA-insurance remains the same.  Therefore, existing HECM mortgagors who participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and lenders must enter the transaction into FHA Connection as a new HECM.

Monetary Investment

            Consistent with existing policy, the maximum claim amount and principal limit will continue to be calculated in accordance HECM regulations at 24 CFR 206.3, HUD Handbook 4235.1 REV-1, and applicable MLs.  At closing, HECM mortgagors must provide a monetary investment which will be applied to satisfy the difference between the HECM principal limit and the sales price for the property, plus any HECM loan related fees that are not financed or offset by other allowable FHA funding sources.

HECM mortgagors may choose to provide a larger investment amount in order to retain a portion of the available HECM proceeds for future draws.

Required Investment Examples

* Appraised Value/MCA is defined as the maximum claim amount and is used to determine the principal limit which is the lesser of the appraised value or the FHA national mortgage limit.  The principal limit is the maximum amount available to the HECM mortgagor.

 ** Assumes the age of the youngest HECM mortgagor is 67 and a principal limit factor of .665 for a 5% expected average mortgage interest rate. 

In each example above, loan fees are deducted from the principal limit of the HECM.  However, it is not required that loan fees be deducted from HECM proceeds.  The mortgagor may pay loan fees as part of the required monetary investment and use all HECM proceeds toward the purchase transaction.

Funding Sources

HECM mortgagors must use cash on hand or cash from the sale or liquidation of the mortgagor’s assets for the required monetary investment.

Verification of Funding Sources

Lenders will be required to verify the source of all funds prior to closing.  A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts.  If there is a large increase in an account, or the account was opened recently, the lender must obtain a credible explanation of the source of those funds.  Such documentation must be provided in the FHA case binder.  Failure to provide the necessary documentation may result in a notice of rejection and delay of endorsement. 

Gap Financing

            Consistent with existing regulatory requirements at 24 CFR 206.32(a), HECM mortgagors may not obtain a bridge loan (also known as “gap financing”) or engage in other interim financing methods to meet the monetary investment requirement or payment of closing costs needed to complete the purchase transaction.  This restriction includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing. 

Gap Financing Example

A prospective HECM mortgagor completes the required reverse mortgage counseling and receives an estimate stating the required monetary investment could be $25,000.  The prospective HECM mortgagor has $20,000 in liquid assets but is short the remaining $5,000.  The prospective HECM mortgagor cannot take $5,000 from a credit card or obtain interim financing in order to deposit the money into their banking account in anticipation of being required to bring this amount to closing.  However, the prospective HECM mortgagor may obtain the $5,000 from an allowable FHA funding source. 

Enhanced Counseling

            HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling, must counsel those who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.

Right of Rescission

            The three-day right of rescission period is not applicable to HECM for Purchase transactions.  Therefore, all initial advances may be disbursed on the day of closing by the settlement agent.  However, FHA encourages lenders to seek their counsel’s opinion to assure compliance with Federal or State laws.

Closing Guidance

            Lenders are required to ensure the property, when used as collateral for the HECM, meets the following property requirements:

·        Will serve as the principal residence of the HECM mortgagor.

·        Construction is complete and a certificate of occupancy or its equivalent has been issued.

·        Any construction loan financing for the property, which will serve as the collateral for the HECM loan, is satisfied and the HECM liens will be in a first and second lien position and, at the time of closing, no other liens against the property exist.

            Consistent with existing lending practices, lenders are responsible for determining whether a particular HECM loan is open or closed-end credit.  In accordance with 24 CFR 206.43, lenders must comply with the regulatory disclosure requirements.

Data Entry

            Instructions on how to enter HECM for Purchase transactions into FHA Connection and Insurance Accounting Collection System will be provided in a separate instruction.

Information Collection Requirements

The information collection requirements contained in this Mortgagee Letter were approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).  Approval of HECM Program is covered by OMB control number

2502-0524, with disclosures requirements being covered by OMB control numbers 2502-0265 and 2502-0059.  An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a valid control number.

            If you have questions regarding this Mortgagee Letter, please call FHA’s Resource Center at

1-800-CALL-FHA (1-800-225-5342).  Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).

                                                                                    Sincerely,

                                                                                    Brian D. Montgomery

                                                                                    Assistant Secretary for Housing-

                                                                                       Federal Housing Commissioner

 
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December 5, 2008

MORTGAGEE LETTER 2008-38

TO:  ALL APPROVED MORTGAGEES

ATTENTION:  SINGLE FAMILY SERVICING MANAGERS

SUBJECT:  Home Equity Conversion Mortgages (HECMs) – Clarification regarding borrower’s recourse for repayment of HECM loan debt and termination of a HECM mortgage

            The purpose of this Mortgagee Letter is to provide a policy clarification regarding the requirements for repayment of Home Equity Conversion Mortgages (HECMs) and for termination of a HECM mortgage.

            Specifically, HUD Handbook 4235.1 REV-1, Home Equity Conversion Mortgages, provides in Paragraph 1-3C, that:

The HECM is a “non-recourse loan”.  This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.

Some program participants mistakenly infer from this language that a borrower (or the borrower’s estate) could pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home.  This is not correct and is not the intended meaning of the quoted provision.  Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.  (For additional guidance please reference 24 CFR 206.27(b) (8)).

Most situations regarding the termination of a HECM mortgage fall into the following general categories:

1. If the mortgage is not due and payable, and the borrower desires to retain ownership of the property, the mortgage debt may be repaid in full at any time. 

1. If the mortgage is due and payable and the borrower (or estate) desires to retain ownership of the property, the mortgage debt must be repaid in full.  Lenders may assist the borrower (or estate) in obtaining other financing to pay off the HECM loan in full.

1. Whether or not the mortgage is due and payable the borrower may, at any time, sell the property for at least the lesser of the mortgage debt or the appraised value. 

1. If the mortgage is due and payable and the borrower (or estate) will not be retaining ownership of the property, the property may be sold for at least the lesser of the unpaid mortgage balance or 95% of appraised value. 

In any circumstance where a mortgagee agrees to the acceptance of less than the full mortgage balance, such sale of the property by the borrower (or the borrower’s estate) should be an arm’s length transaction.  An arm’s length transaction is characterized by the following (1) the absence of a relation between the buyer and seller; (2) a selling price and other conditions that would prevail in an open market environment; (3) transaction costs paid by the seller that are considered both reasonable and customary for the market in which the property is located; and (4) the adherence to ethical standards of conduct by all parties involved in the HECM short sale transaction, including the borrowers (or the estate), mortgagees and appraisers.. 

Any questions regarding this Mortgagee Letter may be directed to HUD’s National Servicing Center at 1-888-297-8685 or hsg-lossmit@hud.gov.   Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).  

The clarifications in this Mortgagee Letter are effective immediately.

                                                                        Sincerely,

                                                                        Brian D. Montgomery

Assistant Secretary for Housing –

    Federal Housing Commissioner