What is a Reverse Mortgage?
A Home Equity Conversion Mortgage (HECM), commonly referred to as a reverse mortgage, is a loan available to seniors over the age of 62 which allows them to access some of their equity in their home or purchase a new home. These loans were created to give seniors access to tax-free cash for expenses such as home improvements, unexpected medical costs, and in-home care by utilizing the accumulated equity in their homes without having to sell the home, give up the title, or take on a new monthly mortgage.
This type of loan is called a reverse mortgage because instead of the borrower making monthly payments to their lender as they would with a traditional mortgage, the lender makes payments to the borrower. Unlike a traditional home equity loan or second mortgage, a reverse mortgage does not have to be repaid until the borrower no longer occupies the home as their primary residence. The amount the borrower receives is based on the age of the youngest borrower, the value of the property, product and interest rate.
If you are looking for a reverse mortgage in Chico, Walnut Creek, Paradise CA, Sacramento or anywhere in the state of California, contact Tim Kemper at Guild Mortgage – Tim Kemper at 530-624-6964 today.
Reverse Mortgage Basics
- All borrowers must be 62 years old, or older.
- All borrowers must be US citizens or legal residents.
- HECMs are federally insured.
- Only primary residences qualify.
- The property must be owner-occupied.
- The maximum claim amount is $625,500, renewable annually.
- All borrowers must receive counseling. The reverse mortgage provides a list of 12 counseling agencies to the borrower.
How Can a Reverse Mortgage Help?
Older adults who obtain a reverse mortgage:
- Have financial security
- Have additional income
- Can remain in their homes
- Can purchase a new home
- Can change their lifestyles and improve their home
- Have money for the rising cost of healthcare
- Can contribute to their children’s or grandchildren’s education
- Satisfy monetary obligations
- Have a dream vacation
- Stop foreclosure
- Have additional options for retirement and estate planning
Origins and History
Many studies were conducted on the reverse mortgage concept between 1961 and 1980.
- 1989- FHA insures the first HECM, and then observes the program closely.
- 1994- First lenders are approved as HECM DE. Lenders can now underwrite their own loans.
- 1997- National Reverse Mortgage Lenders Association (NRLA) is formed.
- 2000- Wall Street investors enter the market. Fannie Mae exits. Ginnie Mae now guarantees loans.
- 2008- The Housing and Economic Recovery Act was passed with sweeping changes to the program. Included provisions, such as:
- Origination Fee Limitations.
- Cross Selling Limitations.
- Independence of counselors from lenders.
- HECM for Purchase Program.
Financial Implications of a Reverse Mortgage
The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM) which is insured by the FHA. The proceeds from a HECM are not considered to be income, and should not impact borrower eligibility for:
- Property Tax
- Social Security
Borrowers should consult with a tax consultant and/or an accountant to review eligibility for all such programs with the granting agencies or independent experts. Because HECM proceeds are not considered income, there are no taxes on the proceeds.
Counseling for Reverse Mortgages
All borrowers, as well as non-borrowing spouses, agents under Power of Attorney, guardians, and all persons with an ownership interest in the property at the time of application even if they are not borrowers on the loan, must participate in mandatory third party counseling. I recommend that all family members including grown children that are concerned or have an interest in the well being of the borrowers attend as well.
Lenders cannot spend money on the borrower’s behalf or begin the reverse mortgage process until the counseling is complete. The counselor discusses the following:
- Other financial options besides a reverse mortgage
- Financial implications of a reverse mortgage
- Advantages and disadvantages
- Alternatives and options for payment plans
- Disclosure information
- Approximate calculations
Tim is located in Chico but works with Reverse Mortgage borrowers across the State of California including but not limited to Walnut Creek, Paradise, Yuba City, Sacramento, and San Jose.
Agencies and Associations
Department of Housing and Urban Development (HUD) founded in 1965: HUD administers federal programs dealing with better housing and urban renewal.
Federal Housing Administration (FHA) : FHA is a government agency whose primary purpose is to insure residential mortgage loans.
Ginnie Mae: This is a government-owned corporation that guarantees bonds backed by home mortgages, including HECMs that have been guaranteed by FHA.
National Reverse Mortgage Lenders Association (NRMLA): An association that serves as the national voice of the reverse mortgage industry, and acts as an educational resource, policy advocate, and public affairs center for lenders and related professionals. It was established in 1997 to enhance the professionalism of the reverse mortgage business.
Consumer Financial Protection Bureau (CFPB): An independent agency of the US Government that is responsible for consumer protection in the financial sector, including mortgages.
Each HECM loan includes with the closing costs the initial premium for mortgage insurance. Then, each month, we add 1/12 of the annual premium to the loan. The initial amount –“Initial Mortgage Insurance Premium (IMIP)”- is based on the amount the borrower takes at closing and has available for the first 12 months of the loan:
- If a borrower uses or makes available MORE than 60% of the principle limit, the IMIP is 2.5% of the Maximum Claim Amount.
- If the borrower uses or makes available 60% or Less of the principle limit the IMIP is 0.5% of the Maximum Claim Amount
The annual premium is then 1.25% of the outstanding loan balance, and appears as “MIP” on the borrower’s monthly statement.
Why the Insurance Fund?
The original statute of the National Housing Act of 1987 required a guarantee to borrowers that they would be protected against disappearance of their lender and obligations beyond the value of their home at sale by the General Insurance Fund. The insurance is now referred to as the Mutual Mortgage Insurance Fund.
The insurance is generally funded within the closing costs of the HECM loan as an upfront fee. It is also a percentage of the annual outstanding balance.
Principle Limit Factors
Principal Limit Factors are similar to loan-to-value (LTV) ratios. They are different in that the age is factored in. Principle Limit calculations determine the amount of loan proceeds available to the borrower. These calculations include:
- Age of the youngest borrower, or eligible non-borrowing spouse.
- The HECM product chosen.
- The appraised value of the home.
- Expected interest rate.
- Closing Costs; including origination fees, mortgage insurance and other costs, such as title insurance or document fees.
- The maximum claim amount
In 2009, the national claim amount increased to $625,500 and has been renewed annually since then. This means that a person with a high value home cannot receive proceeds in excess of $625,500 with a standard HECM.
However, we have a proprietary jumbo reverse mortgage loan product that does not impose this limitation called the HomeSafe Reverse Mortgage.
Apply for a Reverse Mortgage
To apply for a reverse mortgage in Chico, Walnut Creek, Paradise CA, Sacramento or anywhere in the state of California, contact Tim Kemper at Guild Mortgage – Tim Kemper at 530-624-6964 today! For more information on how reverse mortgages can help you, visit our Scenario Examples.