Reverse Mortgages Explained


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This is a copy of the PowerPoint presentation I use when teaching about Reverse Mortgages. If you are interested in learning more about a Revers Mortgage please contact me.

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Reverse Mortgages Explained

  1. 1. Reverse Mortgages Explained The FHA Home Equity Conversion Mortgage (HECM)
  2. 2. Reverse Mortgages <ul><li>What is a reverse mortgage? </li></ul><ul><li>A Reverse Mortgage is a unique loan product that enables senior homeowners to convert part of the equity in their homes into income without having to sell the home, give up the title, or take on new monthly mortgage payments. </li></ul>
  3. 3. Who Needs One? <ul><li>Who needs a reverse mortgage? </li></ul><ul><ul><li>Seniors between 65 and 69 </li></ul></ul><ul><ul><li>1 out of 10 live below poverty level </li></ul></ul><ul><ul><li>80% own homes </li></ul></ul><ul><ul><li>Net worth with equity $114,000 </li></ul></ul><ul><ul><li>Net worth without equity $27,588 </li></ul></ul><ul><ul><li>Majority of income goes to housing, food, and health care </li></ul></ul>
  4. 4. Basic Concept <ul><li>Loan proceeds available to the borrower are based on three main factors: </li></ul><ul><ul><li>Age of homeowner(s) </li></ul></ul><ul><ul><li>Value and location of the home </li></ul></ul><ul><ul><li>Current interest rates </li></ul></ul><ul><li>Loan is repaid at permanent move out, and repayment never exceeds value of home </li></ul><ul><li>Amount repaid is principle, accrued interest, and servicing fees </li></ul>
  5. 5. When Are They Used? <ul><li>21+ million senior home owners </li></ul><ul><li>65% are between 65 and 70 years old </li></ul><ul><li>85% want to stay in their home </li></ul><ul><li>Fannie Mae shows 90%+ satisfaction rate </li></ul>
  6. 6. Typical Retirement Assets
  7. 7. Typical Retirement Income
  8. 8. Typical Retirement Income with a Reverse Mortgage
  9. 9. Common Misconceptions <ul><li>Reverse mortgages are only for desperate seniors, or for the “house rich, cash poor.” </li></ul><ul><li>“ I can be thrown out of my house” </li></ul><ul><li>Your home must be debt-free to qualify for a reverse mortgage. </li></ul><ul><li>“ I can owe more than my home is worth” </li></ul><ul><li>The bank owns the home after you get a reverse mortgage. </li></ul><ul><li>“ My kids will be against it” </li></ul><ul><li>When a reverse mortgage comes due, the bank sells the home. </li></ul><ul><li>A confused mind always says “No” </li></ul>
  10. 10. The Basics of Reverse Mortgages <ul><li>The terminology </li></ul>HECM Tenure advances Acceleration clause Adjustable rate Annuity Expected interest rate FHA Leftover equity Initial interest rate Lump sum Margin Index Non recourse loan Right of recession Term advances
  11. 11. The Basics of Reverse Mortgages <ul><li>Programs </li></ul><ul><ul><li>HECM </li></ul></ul><ul><ul><ul><li>Adjustable </li></ul></ul></ul><ul><ul><ul><li>Fixed </li></ul></ul></ul><ul><ul><ul><li>Purchase </li></ul></ul></ul><ul><ul><li>Fannie Mae Home Keeper/Cash Keeper </li></ul></ul>
  12. 12. Reverse Mortgage -vs- Conventional Mortgage <ul><li>Does not require repayment until: </li></ul><ul><ul><li>Borrower(s) move out </li></ul></ul><ul><ul><li>Borrower(s) sell the home </li></ul></ul><ul><ul><li>Borrower(s) pass away </li></ul></ul><ul><li>No income or minimal credit qualifications </li></ul><ul><li>No monthly mortgage payments </li></ul><ul><li>The difference between a reverse mortgage and a HELOC </li></ul>
  13. 13. Payout Options <ul><li>Line of credit </li></ul><ul><li>Term </li></ul><ul><li>Tenure </li></ul><ul><li>Modified Term </li></ul><ul><li>Modified Tenure </li></ul>
  14. 14. How They Spend The Money
  15. 15. How Safe is a Reverse Mortgage <ul><li>95% of all reverse mortgages are HECM programs through the Federal Housing Administration. FHA guarantees that borrowers receive their requested loan advances if the lender defaults </li></ul><ul><li>They are non-recourse loans. The borrowers or their heirs will never owe more than the home is worth </li></ul><ul><li>No such thing as a “foreclosure” on a reverse mortgage. </li></ul>
  16. 16. How Much Equity is Required <ul><li>Loan amount is calculated by: </li></ul><ul><ul><li>Appraised value of home or maximum lending limit (whichever is less) </li></ul></ul><ul><ul><li>The age of the youngest borrower </li></ul></ul><ul><ul><li>Current interest rate - interest rate is based the Libor or the US treasury securities adjusted to a constant maturity of one year plus a margin </li></ul></ul>
  17. 17. Borrower Eligibility <ul><li>All individuals on title must be 62 years or older </li></ul><ul><li>Based on the age of the youngest borrower </li></ul><ul><li>Reverse Mortgage must be in 1 st lien position </li></ul><ul><li>Must attend mandatory counseling </li></ul>
  18. 18. Property Eligibility <ul><li>Most condominiums and PUDs are OK </li></ul><ul><li>Property must be a 1 -4 unit residence </li></ul><ul><li>Manufactured Homes are ok with proper foundation and other guidelines </li></ul><ul><li>Must be borrowers primary residence </li></ul><ul><li>Must have certificate of occupancy on new construction prior to approval </li></ul><ul><li>Borrowers must maintain the property </li></ul>
  19. 19. Appraisal Process <ul><li>Must have received Counseling Certificate prior to ordering </li></ul><ul><li>Home must meet FHA guidelines </li></ul><ul><li>Termite report may be required </li></ul><ul><li>Most home repairs can be funded through the loan </li></ul><ul><li>In some instances, well and septic tank test may be required </li></ul><ul><li>For fixed program must have three comparables sold with last 90 days within 1.5 miles of subject property </li></ul>
  20. 20. Up-Front & Financed Costs <ul><li>All closing costs may be funded through the loan </li></ul><ul><li>Typical loan costs include: </li></ul><ul><ul><li>Appraisal </li></ul></ul><ul><ul><li>Title Insurance </li></ul></ul><ul><ul><li>Origination Fee </li></ul></ul><ul><ul><li>FHA Upfront mortgage insurance </li></ul></ul><ul><ul><li>Recording fees </li></ul></ul><ul><ul><li>Endorsement fees </li></ul></ul><ul><ul><li>Other typical and customary closing costs </li></ul></ul>
  21. 21. Borrower’s Responsibility <ul><li>Keep property taxes current </li></ul><ul><li>Maintain homeowners insurance </li></ul><ul><li>Maintain property in good condition </li></ul><ul><li>Utilize home as primary residence </li></ul>
  22. 22. Repaying The Loan <ul><li>No repayment necessary until the borrower(s) move, sell or pass away </li></ul><ul><li>No penalty for early repayment </li></ul><ul><li>Non-recourse loan </li></ul>
  23. 23. Required Disclosures <ul><li>Initial disclosure package is large. It contains all of the same forms that the borrower will sign at closing </li></ul><ul><li>The same as any FHA loan plus more. </li></ul><ul><li>No income documentation is required </li></ul><ul><li>Assets documentation is required if borrowers are bring funds to close </li></ul><ul><li>Must pull credit on borrowers to prove 1 st lien position and check for bankruptcies. </li></ul><ul><li>State specific forms </li></ul>
  24. 24. Counseling <ul><li>Can get a list of your local counselors from </li></ul><ul><li>Counseling required on all loans prior to appraisal or title work </li></ul>
  25. 25. Refinance Transactions <ul><li>Subordinate liens </li></ul><ul><li>HECM to HECM transactions </li></ul><ul><li>3x 5x rules - must really benefit the borrowers </li></ul>
  26. 26. Unique Situations <ul><li>Living trusts </li></ul><ul><li>Power of Attorneys </li></ul><ul><li>Illness/death of a borrower </li></ul>
  27. 27. The Process <ul><li>Meet with the borrower </li></ul><ul><li>Discuss and review the calculator results and options </li></ul><ul><li>Set up an appointment with a HUD approved housing counselor </li></ul><ul><li>Prepare disclosures and have the signed by customer </li></ul><ul><li>Order Title </li></ul><ul><li>Order a FHA appraisal </li></ul><ul><li>Submit for underwriting </li></ul><ul><li>Draw closing docs </li></ul><ul><li>Three days </li></ul><ul><li>Loan funds, records, and money disbursed </li></ul>
  28. 28. Summary <ul><li>Seniors will never have to leave their home </li></ul><ul><li>No income qualifications </li></ul><ul><li>No monthly mortgage payments required </li></ul><ul><li>No repayment of the loan until the last borrower moves out permanently or passes away </li></ul><ul><li>Loan proceeds are tax-fee and may be tax-deductible upon loan repayment* </li></ul><ul><li>Proceeds paid in lump sum, monthly payments, line of credit or any combination of the above** </li></ul><ul><li>* Consult your financial advisor </li></ul><ul><li>** Not all products and options are available </li></ul>