Can you get a reverse mortgage? Should you? What are the pitfalls and benefits of this popular way to use your home for retirement income? Guest author Matt Allen answers these and more questions that will help you really understand what reverse mortgages are all about:
When is a homeowner eligible for a reverse mortgage?
In the past, a homeowner only needed to be 62 and have enough equity in their home to qualify. Today there are several other things that come in to play as far as being eligible for a reverse mortgage.
You need to pass the financial assessment. The whole purpose of the assessment is to look at your willingness and ability to pay your taxes and insurance. They look at your credit history, your mortgage / rent payment history and your property tax and insurance history for the last two years. You are also required to have a minimum disposable income based on household size and region you live in.
If you fail the financial assessment, you will be required to set up a LESA, lifetime escrow set aside. This is an escrow account that is set up to pay your taxes and insurance. The amount of funds required will be determined by your life expectancy. In other words, if your life expectancy is 15 years, you will be required to set aside 15 years of taxes and insurance in an escrow account. These funds can come out of the equity in the home. If there is not enough equity, you will need to fund the account with your own proceeds. If you do not have enough proceeds to fund the account, you will not qualify for the loan.
Other things that may keep you from qualifying are being less than two years out of bankruptcy, foreclosure, short sale or home loan modification. Unpaid tax liens will also need to be paid off before you will qualify.
What if a homeowner still owes on the home?
A homeowner can still get a reverse mortgage even if there is an existing mortgage. It is a common misunderstanding that a home must be owned free and clear in order to qualify for a reverse mortgage. All liens against the property must be paid off through the proceeds of the new loan. The amount of equity you will need in the home to qualify will depend on your age. At 62, you will need roughly 48% equity in the home. At 90, you will need roughly 28% equity.
If the names of two people are on the mortgage and one isn't old enough, can the other get a reverse mortgage?
The answer to this question is yes. However, there are two scenarios with this question.
The first scenario is that the two people are married. If they are married then they are required to have both spouses as part of the loan. The younger spouse is considered a non-borrowing spouse. The benefit to the younger spouse is that they can defer the sale of the home when the older spouse passes away. However, the younger spouse loses other benefits of the reverse mortgage. For example, let’s assume there was a line of credit available. The younger spouse no longer has access to that line of credit once the older spouse has passed away or is no longer living in the home.
The second scenario is that the two people are not married. The risk in this scenario is that the younger person will not be part of the transaction. When the older person passes away or no longer lives in the home, the mortgage note becomes due and payable. At this point, assuming the younger person is receiving the home, they will need to either purchase the home out of the estate or sell it. Based on their situation at the time, they may not qualify for a new loan or there may not be enough equity in the home for them to purchase a new home.
When should a reverse mortgage not be considered?
There are some really good reasons why a reverse mortgage may not be the right choice. Below are some of the most common reasons I would recommend someone not doing a reverse.
1. It is a short term solution – If you are planning on selling or moving within the next year or two, I would not recommend a reverse mortgage.
2. You need some quick cash – If you are having some cash flow issues, for example, you need a new roof or a new transmission in your car, there are less expensive options such as line of credit through your bank.
3. Poor money management – This is not necessarily a reason not to get a reverse mortgage, but I would highly recommend getting help with setting budgets and managing money before you get access to tens of thousands or even hundreds of thousands of dollars.
4. Investment purposes – The reality is that it is your equity and you can do whatever you want with it. However, if you are being pushed to get a reverse mortgage so that someone can “invest” those funds for you, don’t do it.
How do survivors (children or other beneficiaries of the estate) handle the sale of a home when the owner had a reverse mortgage?
When the last homeowner has passed away or has not lived in the home for 12 months or more, the mortgage will need to be satisfied. At this point, the estate / heirs can do one of several things.
1. Sell the home.
2. Purchase the home out of the estate.
3. Pay off the loan balance with cash.
4. Let the bank foreclose.
5. Sign a deed in lieu of foreclosure.
The first step is to contact the servicing company and let them know what your plans for the home are and how the loan is going to be paid off. You have three months initially to get the lien satisfied. However, you can get three month extensions for up to a year to get the home sold. It is critical to contact the servicing company on a monthly basis to keep them informed of the progress and actions that have been taken. You will need to request the extensions from the servicer.
It is critical for you to know that the estate / heirs are not personally responsible for the debt nor are they responsible for any losses associated with the loan. There can never be more owed on the home than what it is worth. The lender can never collect more than what they are owed.
Matt Allen MLO-254296 is a Sr. Reverse Mortgage Banker with Pacific Residential Mortgage in Oregon. 1555 E McAndrews Suite 301 Medford OR 97504. You can learn more about reverse mortgages by visiting his website http://oregonreversepro.com Credit on approval, terms subject to change without notice, not a commitment to lend. NMLS-1477/WA CL-1477 nmlsconsumeraccess.org This content was not approved by nor endorsed by HUD or FHA. Equal Housing Lender