Basic Steps for Completing a HECM REVERSE Mortgage Loan*
1) Meet with a Reverse Mortgage Planner (either in person or over the phone). We will conduct a brief financial interview and listen to your key objectives in securing a HECM.
2) We create a proposal for you.
3) You participate in a HUD Counseling session (over the phone or in person).
4) Together, we complete an application and obtain supporting documentation from you. (Step process 3 and 4 may be interchangeable)
5) An Appraisal of your property will be ordered.
6) We review, based on appraised value, what funds you have available (initial was an estimate).
7) After underwriting (the investor) is done reviewing your supporting documents and appraisal, if your loan application was approved, we verify the amount of funds (if available) you would like at closing.
8) Sign your closing documents. We will need more of your wonderful signatures!
9) Approximately 30-60 days after closing you will receiving a welcoming packet explaining your upcoming statements and how to request funds if available.
10) You will receive monthly statements showing your loan balance, and available line of credit - but again, NO mortgage payments are due! (Don't forget your taxes and insurance though and maintain your property condition!)
*Most, but not all, reverse mortgages today are federally insured through the Federal Housing Administrations, Home Equity Conversion Mortgage( HECM) Program. This adverstisement talks about HECM loans only.
Let's Address Some Questions You May Have...
What is the Principle Limit Factor?
With a HECM, in order to determine how much equity is available to use, we need to establish a Principle Limit Factor. This is calculated using interest rates and the age of the youngest borrower or spouse. This coupled with the appraised value of the home determines how much equity you have available to use. Unless using to pay off an existing mortgage, there is a first year 60% limit on use of available funds.
Why is there a Mortgage Insurance Premium?
The HECM is an FHA insured loan which requires mortgage insurance for the duration of the loan. There is an initial mortgage insurance premium (MIP) paid at closing, then a lesser amount on the unpaid balance monthly. This mortgage insurance premium allows for the HECM to be a non-recourse loan!
Am I giving my house to the Bank?
No. Your name stays on title! As long as all loan terms are met, the balance owed on your loan will not be due or payable until you are either become deceased or move from your home. You or your heirs determine what to do with the home at that point. You will never owe more than the home is worth and if the family chooses to keep the home, it can be purchased for the loan balance or 95% of the current appraised value if the loan balance exceeds the value of the home.
Can you explain how proceeds are tax-free?**
The funds you receive from the equity of your home are a loan...not income and not-taxable! This makes the reverse mortgage a great way to help manage your cash flow with greater efficiency.
What if my spouse is not qualified to be a borrower?
So, your spouse is not fortunate enough to be 62? Here is how it works...the younger spouse is considered a Non-Borrowing Spouse (NBS). This means that they are UNABLE to receive proceeds from the loan. HOWEVER, in most cases, the NBS can live in the home for the rest of their life without payment being due on the loan. (Again, maintain property and taxes, and insurance must be kept current). If the borrower pre-deceases the NBS, while still living in the home and all the loan terms have continued to be met, the loan will still not be due until the NBS permanently leaves the home. It is IMPORTANT that the NBS be named on the application and loan for them to be protected by this provision. Also, recall that the Principle Limit establishes the amount of funds available and is based (along with other factors) on the youngest spouse. For example, if you are 65 and your spouse is 59, the amount available will be based on the age of the 59 year old spouse. Once the Non Borrowing Spouse becomes 62, it is possible to refinance your HECM and get their name on the title - now you are both borrowers with full access to the available funds!
Is it a fixed interest loan or an adjustable rate mortgage (ARM)?
It can be either,although, only the ARM has the amazing line-of-credit option. Most people have found the line of credit to be the most desirable by far!
Why not just do a regular Home Equity Line of Credit?
Hmmm....do you really want a required monthly principle and interest payment? While the cost of a getting a HECM is greater (costs are usually part of your loan balance), any unused balance on the line-of credit has guaranteed growth. Click here for more information on the HECM Line of Credit. NOTE: With a reverse mortgage loan you are still required to pay property taxes an homeowner insurance (and homeowner association dues, if any), and maintain the home.
I really like the HECM (or Reverse) Line of Credit, can I still establish one if I use a Reverse to purchase a home?
YES. Putting a larger down payment than what is the minimum required*** would be the starting balance of your line of credit.
What if I would like to make a payment?
This is where the amazing flexibility of the HECM comes in. You are welcome to pay whatever amount you want, whenever you want. As with a regular FHA mortgage, your payments will be applied towards mortgage insurance and interest first. Also, any payments made in a given year, will generate a 1098 for interest paid during that year.
Can I sell the house after I purchase or refinance it with a Reverse Mortgage?
YES - It's no different than if you sold a home which had any other existing mortgage on it. Pay off the loan balance and the costsa of the sale, and the remaining equity, if any, is yours to do with as you please.
Can I buy more than one house simultaneously with a HECM for Purchase?
NO. Your reverse mortgage can only be used on your primary residence.
**This advertisement does not constitute tax and/or financial advice. Please consult a tax and/or financial advisor regarding your specific situation.
***The down payment on your new home required is determined on a number of factors, including your age, current interest rates, and the less of the homes's appraised value or purchase price.