What are
some of the key features of a reverse mortgage?
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There are no credit or income requirements
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The loan is due for repayment when you permanently move out or sell the
property or upon the death of the borrowers.
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Loan proceeds are not taxable and do not effect
Medicare or Social Security
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The cost of loan is dependent on how long you reside
in the property.
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Equity release amounts are based on age and home value
and can range from 25 % to 75 % of the existing home equity.
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What
are the qualifications?
Applicant(s) must be at least 62 years of age and must own their home free and clear or nearly free and clear.
In many cases borrowers use the reverse mortgage to pay off existing liens or mortgages, which eliminates their monthly loan payments.
Reverse mortgages can be done on single-family homes, condos, planned unit developments, and owner-occupied 2-, 3-, and 4-flats.
Borrowers must also live in their home as their primary residence.
Mobile homes have specific requirements that must be met in order to be eligible for reverse mortgages. Please contact us for a list of these requirements.
Commercial properties are currently ineligible for reverse mortgages.
How is the loan value determined?
The loan amount is based on the home value, the number and age of the homeowner(s), the current interest rate and the maximum allowable home value. The maximum allowable home value varies depending on the reverse mortgage program selected. The FHA-Insured reverse mortgage Program has limits, called Maximum Claim Amounts, ranging from $132,000 to $280,749. This amount varies by county. The Fannie Mae Home Keeper program has a nationwide limit of $333,700. The limits in Chicago for the FHA are $237,500, and for Fannie Mae, $333,700.
How is the
amount of benefit calculated?
The amount of benefit that you will qualify for, will depend on your age at the time you apply for the loan, the type of reverse mortgage you choose, the value of your home, current interest rates, and for some products, where you live. As a general rule, the older you are and the greater your equity, the larger the reverse mortgage benefit will be.
Does the lender take my home when I die?
Absolutely NOT! When the last surviving spouse passes away, the loan becomes due. The heirs or estate can then sell the house, pay off the reverse mortgage balance (just as you would with a conventional loan on the property), and keep the remaining equity. If the loan balance exceeds the value of the property, your estate can deed the property back to the FHA and walk away with no further obligation.
Can the lender take my home away if I outlive
the loan?
NO! The reverse home mortgage loan does not become due until your home is sold, is no longer your primary residence or until you die. You cannot be forced to sell your home to pay off the mortgage loan even if the loan balance grows to exceed the value of the property And, HUD's Federal Housing Administration guarantees that you'll receive all the payments that are owed to you.
Will my kids owe more on my home than the home
is worth?
No. The loan is "non recourse" meaning that the lender can only collect payment based on the value of the property. The heirs to the property are not liable for any overage.
Why should I consider a reverse mortgage?
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No repayment for as long as you occupy your home
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No taxes are paid on the cash from a reverse mortgage
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No pre-payment penalty with reverse mortgages
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You retain the title to your home
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You may sell your home at any time
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Cash may be used for any purpose
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Cash may be received in a variety of ways
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Social Security and Medicare benefits are NOT affected
by reverse mortgages
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After your estate pays the lender ALL remaining equity
is paid to your heirs
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Can I apply if I didn't buy my present house
with FHA mortgage insurance?
Yes. While your property must meet FHA minimum standards, it doesn't matter if you didn't buy it with an FHA-insured mortgage. Your new HUD reverse mortgage will be a new FHA-insured mortgage loan.
What does "non-recourse" mean?
Non-recourse refers to the lien-holder's rights to collect on the loan amount. In the case of a reverse mortgage, the lien-holder (lender) can only collect up to the value of the property in the event that the loan value rises past the value of the property.
What fees are involved?
The loan costs are different for each program. There are loans available with no closing costs at all.
FHA loans include the following fees: an origination fee (generally 2% of the home value), appraisal fee, credit check fee, title insurance, 2% mortgage insurance premium and normal mortgage closing costs.
As this is a senior friendly loan, all of the closing costs can be financed through the loan so there is no out of pocket expense for the borrower.
What's the difference between a Reverse
Equity Mortgage and a bank home equity loan?
With a traditional second mortgage or a home equity line of credit, you must have sufficient income to qualify for the loan, and you are required to make monthly mortgage payments.
A reverse mortgage works differently. The reverse mortgage Lender pays you, and it is available regardless of your current income. You don't make payments, because the loan is not due as long as the house is your principal residence.
Like all homeowners, you still are required to pay your real estate taxes and other conventional payments like utilities, but with an FHA-insured HUD reverse mortgage, you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."
How long does it take to close a reverse
mortgage?
The entire process usually takes 4-8 weeks.
What are the tax implications of receiving
the funds?
Proceeds from a reverse mortgage are considered to be a loan, not income. Therefore, the funds received are not subject to income tax and do not affect Social Security Benefits. Borrowers receiving Medicaid or SSI may not be affected if the funds from the reverse mortgage are spent in the month they are received. We recommend you consult your tax advisor for further details.
Do I still pay property taxes and insurance?
Yes, as the titleholder you must continue to pay taxes, insurance, and keep the property in livable condition as you do now.
What does a first lien mean?
The first lien refers to the priority given to the reverse mortgage loan relative to other loans on the property. Existing mortgages typically carry this designation, and therefore must be paid off from the proceeds from the reverse mortgage.
How is the interest rate calculated?
Each of the three lenders uses a different financial-industry, standard index and then adds in a margin to calculating loan rates. Rates are not adjusted by the brokers, instead they are provided to the brokers weekly. The FHA uses the 10-Year Treasury rate, FNMA uses the 1-month Fed CD rate, and Financial Freedom's Jumbo loans use LIBOR. This information is captured on the loan comparison sheet that you receive when you contact us.
Why am I charged a monthly servicing fee on
FHA loans and what is it?
The servicing fees on reverse mortgages cover the monthly costs of processing payments, mortgage insurance premiums (if applicable) and record-keeping. This is a flat fee that is added to your loan balance each month.
What is the Mortgage Insurance Premium
(MIP)?
If you have chosen the FHA's Home Equity Conversion Mortgage (HECM) reverse mortgage, the Mortgage Insurance Premium (MIP) paid to FHA protects the investor against the risk that your loan balance might at some time exceed the value of the home. The mortgage insurance premiums on HECM's consist of two types of charges: a one-time premium at closing of 2 percent of your maximum claim amount, and annual premiums of 0.5% per year on your mortgage loan balance. This 0.5% is added to your loan balance in twelve monthly installments (1/12 of the 0.5% per month). This charge will appear on your monthly statement.
What is a repair rider?
A repair rider is a form that is part of the reverse mortgage loan agreement that sets forth the home repairs or improvements required as a condition of closing the loan.
Why am I required to attend counseling?
Counseling by an independent counselor is one of the safeguards built into the reverse mortgage process. The counselor's job is to educate you about reverse mortgages, to inform you about other alternative options available to you given your situation, and to assist you in determining which particular reverse mortgage product would best fit your needs if you elect to get a reverse mortgage.
This counseling session is at no cost to the borrower and can be done in person or over the telephone.
This counseling ensures that the prospective borrower is aware of all of their options for borrowing, and all of the facts regarding the reverse mortgage product.
We will be able to refer you to the reverse mortgage counselor nearest you. The counselors often will be willing to do the counseling session over the telephone if you are unable to go to their office.
What are the closing costs?
Most closing costs are financed into the loan and consist mainly of usual and customary fees related to securing any type of mortgage, including: appraisal costs, title insurance, origination fee, legal and recording fees, and mortgage insurance. We will supply you with a Good Faith Estimate of Closing Costs when we meet with you.
How do current interest rates factor into the
reverse mortgage?
The interest rate charged varies depending on the reverse mortgage program selected by borrower. All programs offer adjustable rates, and have lifetime caps on the maximum allowable rate.
When is repayment required? What if I don't
spend all of the money I agreed to borrow?
The reverse mortgage becomes due and payable at the time the borrower permanently leaves the home. The reverse mortgage can be repaid either from the proceeds of the sale of the property; other liquid assets or the heirs can obtain a conventional mortgage to pay off the reverse mortgage. The loan balance consists of the cash that was advanced to the borrower, the financed closing costs, and any interest that accrued. Remaining equity belongs to the borrower or their heirs. The reverse mortgage is subject to a non-recourse limit, which states that the borrower or their heirs are only required to repay the loan balance or the fair market value of the home, whichever is less.
Aren't I passing on an additional burden to my
heirs?
Reduction in equity is important to consider. However, most borrowers understand that the benefits of putting the money to work outweigh the costs. For most borrowers, several activities can offset and actually improve their overall estate value. Actions such as buying a life insurance policy for the amount borrowed (to offset the equity reduction), making beneficial home improvements (to improve home value) establishment of a trust (to shelter assets from taxes), home equity appreciation, annual appreciation of equity line of credit can also have a positive impact. Finally, high net-worth individuals can actually benefit by reducing the overall value of their estate, as they may fall below the federal estate tax valuation.
What is the origination fee?
The origination fee covers a lender's operating expenses - including office overhead, marketing costs, etc. - for making the reverse mortgage. The origination fee is similar for both the HECM and the Fannie Mae Home Keeper reverse mortgage.
Under the HECM program, the origination fee is equal to the greater of $2,000 or 2 percent of either the home value or the FHA lending limit in your county. Currently, the FHA loan limit varies from a low of $154,896 (for rural areas) to a high of $280,749 (for high-cost metropolitan areas). Therefore, the 2 percent origination fee generally ranges between $3,098 and $5,615. In Chicagoland, the lending limit is $237,500, and the corresponding maximum fee is $4750.
The entire amount of the origination fee may be financed as part of the mortgage.
What is the appraisal fee?
An appraiser is responsible for assigning a current market value to each home that's used as collateral for a reverse mortgage. Appraisal fees generally range between $300-$400. In addition to placing a value on the home, an appraiser must also make sure there are no major structural defects, such as a bad foundation, leaky roof, or termite damage. Federal regulations mandate that a senior's home be structurally sound, and comply with all home safety codes, in order for the reverse mortgage to be made. If the appraiser uncovers property defects that require repair, the borrower must hire a contractor to complete the repairs. Once the repairs are done, the same appraiser is paid for a second visit to make sure the repairs have been completed. The cost of the repairs may be financed in the loan and completed after the reverse mortgage is made. Appraisers generally charge $50-$100 dollars for the follow-up examination.
What is the servicing set-aside?
The servicing set-aside is an amount of money deducted from the available loan limit at closing to cover the projected costs of servicing the borrower's reverse mortgage account. Federal regulations allow the loan servicer (which may or may not be the same company as the originating lender) to charge a monthly fee that ranges between $30-$35. The amount of money set-aside is largely determined by the borrower's age and life expectancy. Generally, the set-aside can amount to several thousand dollars. (Note: The servicing set aside is just a calculation and not a charge. The only amount added to your loan balance is the monthly servicing fee, which ranges from $30-$35).
What if I own a condominium, not a
single-family home?
You can still qualify for HUD's reverse mortgage program. An eligible property must be your principal residence, but can be a single-family residence; a one- to four-unit dwelling with one unit occupied by the borrower; a manufactured home (mobile home); a unit in FHA-approved condominiums; and Planned Unit Developments. Your property must meet FHA minimum property standards, but you can fund repairs from your reverse mortgage.
What can I do with the proceeds from a
reverse mortgage?
The proceeds from a reverse mortgage can be used for anything, such as paying off of existing debts; paying your daily living expenses; performing home repairs and home improvements; paying for medical bills and prescription drugs; travel; long-term health care; retirement- and estate-tax planning; and other needs you may have.
How do I receive payments?
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Tenure - equal monthly payments as long as at least one
borrower lives and continues to occupy the property as a principal residence.
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Term - equal monthly payments for a fixed period of months
selected.
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Line of Credit - unscheduled payments or in installments, at
times and in amounts of borrower's choosing until the line of credit is
exhausted.
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Modified Tenure - combination of line of credit with monthly
payments for as long as the borrower remains in the home.
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Modified Term - combination of line of credit with monthly
payments for a fixed period of months selected by the borrower.
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Will my reverse mortgage make me better
off regarding interest rates?
As of 8/04, the monthly interest rate for the FHA Home Equity Conversion Mortgage was 3.49%. By paying off your existing mortgage, you immediately reduce your "cost of capital", or interest-related costs, on borrowed money.
Am I eligible if my spouse is under 62?
If so, what do I have to do?
Your spouse must be taken off the title. This is accomplished by a "quit claim" deed. Although the process is quick and straightforward, we strongly recommend that this is performed by a competent attorney. In most cases, this is a good time for the homeowners to prepare a will and a trust to ensure proper transfer of the property and to avoid probate expenses.
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