First, two EDITORIAL NOTES about reverse mortgages:
Item 1: They are not as complex as some would have you believe, but there are a lot of details and they are not to be taken on lightly. Ninety-five percent of all reverse mortgages are HECMs (Home Equity Conversion Mortgages) - that is, insured by the FHA under regulations of the U.S. Department of Housing and Urban Development (HUD).
Jumbo reverse mortgages, sometimes made by private lenders, are not insured by the FHA or regulated by HUD. These would be reverse mortgages for amounts larger than $625,500, which is the lending limit of a HECM.
Personally, I would consider no other kind and HECMs are the only ones about which I am writing in this series. I cannot answer questions about any other sort of reverse mortgage.
Item 2: You may have seen a short piece about reverse mortgages in the current Time magazine written by Stephen Gandel. Nearly every sentence contains false or misinformation and half-truths including this:
“[A reverse mortgage] gives the homeowner the value of their house minus the cost of the loan in exchange for the right to sell the property when the person or persons die or move out.”
No, you do not get the full value of your home, only a percentage of it, and the bank does not have the right to sell the property when the owner dies or leaves.
You or your heirs have the right to pay back the mortgage and retain ownership if you or they choose to do so - a sort of first refusal before the bank may sell the property. If the bank sale nets more than the mortgage, that amount it returned to the owner or heirs.
So only the part about “minus the cost of the loan” is correct.
AN EXCELLENT RESOURCE
If you are seriously considering a reverse mortgage for yourself, I recommend you download an informative and easy-to-understand booklet recommended to me by Dr. Barbara Stucki, vice president of home equity initiatives at the National Council on Aging.
Researched and produced by the MetLife Mature Market Institute with the National Council on Aging and titled The Essentials: Reverse Mortgages [pdf], the Q&A format clearly answers almost any question about HECMs you can imagine.
QUALIFYING FOR A REVERSE MORTGAGE
There are only two criteria to qualify for a reverse mortgage: you (and all other borrowers who are co-owners) must be at least 62 years old and you must live in your home as your principal residence for at least six months of the year. That's it. There are no employment, credit, income or other requirements common to traditional “forward” mortgages.
Eligible properties include single family homes, town homes, certain condominiums (condominia?) and some mobile homes.
Any existing traditional mortgages and lines of credit must be paid off at closing with funds from the reverse mortgage. So, obviously, if existing liens are larger than the allowed reverse mortgage amount, you will not be eligible for a HECM.
The maximum allowed HECM mortgage is $625,500. The amount is based on a formula of age, current interest rates, value of your home and the type of reverse mortgage you select. You can get a general idea of the amount from several anonymous reverse mortgage calculators on the web. Here are a few:
The results may vary slightly from one to another, but are good for a ballpark figure.
WARNING: There are many online reverse mortgage calculators, most from mortgage lenders. Do not use a calculator that requires your name, address, phone number, email, etc. unless you look forward to being spammed from reverse mortgage companies and whomever they sell their lists to for the rest of your life.
FINDING A LENDER
One of my first questions was, how do I find a reputable HECM lender? (Are there disreputable HECM lenders?) Do I just walk into banks and ask about a HECM loan? How do I find banks that makes these loans?
It's the one question none of the reverse mortgage informational websites directly address.
Fortunately, the HUD website maintains a list of HUD-approved reverse mortgage lenders in every state which eliminates the reputation question leaving only competency to be determined on your own.
Fill in the form and you'll get a page with lenders in your area. A couple of clues to make it easier:
Uncheck “title 1” to reduce the number of returns
Be sure to check the HECM box
Ignore the 203k box; it doesn't apply
I limited my search to those in the suburban town where I live. HUD came up with eleven matches each of which included company name and address, date it was approved to handle HECM mortgages, telephone number and email address – the last sometimes a person and sometimes a generic email box.
Last Monday evening, I sent this query note, including my name, email address and telephone number:
I obtained your email address from the HECM-approved lender list at the HUD website. I live in Lake Oswego and am looking into the possibility of a reverse mortgage. I am 69, own my home outright and am interested in what you can offer. May we speak on the telephone sometime this week?”
Of the eleven email messages, three were immediately returned as undeliverable due to this or that technical problem. Of the remaining eight, three contacted me within 24 hours. As of today (Thursday afternoon), I have not heard from the other five and am now as disinterested in them as they apparently are in my business.
A lesson from this is that if, in searching for a lender, you want more choices than three, enlarge the search area on the HUD website from, for example, your town to your state. Until or unless a reason appears to talk with more lenders, I am sticking with these three.
They are all friendly, well informed about HECMs and two in particular (let's call them A and B) had as much enthusiasm for helping elders improve their lives via reverse mortgages as I have for the topic of aging in general. All three have years of experience as reverse mortgage originators; they know the issues and facts, and have the answers.
A and B skillfully talked me through the information they needed to help me make choices about a reverse mortgage and on a couple of points, both were perceptive enough to ask questions that gave me valuable, new insight to my notions about money at this stage of my life. This is not to say that C did not ask the right questions, only that the conversation was more superficial than with A and B.
Soon after our conversations, all three emailed me estimates of the mortgage terms with costs spelled out for several types of funds disbursement such as:
- a lump sum
- a line of credit
- monthly payments to me
- several combinations of two or three of those options
Of course, the numbers are only estimates until my home has been appraised by the FHA. When I have selected a lender to work with, I will try to get a sample “estimate page” to show you online.
All three lenders asked to see me in person to go over the choices, costs, possibilities and to answer all my questions and concerns. I have appointments with each for next week and will report back to you.
The FHA requires all HECM applicants to undergo counseling with an FHA-trained expert in reverse mortgages. The price is $125 which can be paid up front or added onto the loan. After I have met with all three lenders next week, I'll schedule the counseling and when that is finished, I will make my choice about whether to go ahead with a reverse mortgage and if so, with which lender.
Please leave any questions in the comments.
Reverse Mortgage Series
Part 1: One Reason For a Reverse Mortgage
Part 2: The Basics
Part 4: Do Not Fear HECMs
Part 5: The Mandatory Counseling Session
Part 6: The Home Appraisal
Part 7: Lender Conditions
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