Yearly Archives: 2015

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WAITING SIMPLY DOESN’T PAY when getting a Reverse Mortgage

When making big decisions, procrastination is only natural. I fight this battle every morning when I have to sort out which projects are IMPORTANT, and which projects are just EASY. Unfortunately, making estate planning decisions based on an understanding of Tax Law, Social Security strategies, Medicare guidelines, market conditions, and interest rate projections, is not easy. After 13 years in financial services, I only know a few individuals who have a comprehensive understanding of these topics. So, unless you happen upon a good Financial Advisor, these decisions can be difficult to make.

Therefore, when a Financial Planner tells a homeowner that their funds will run out at age “X”, the EASIEST solution is to say:

“If I live to age ‘X’, I will consider a Reverse Mortgage then. Otherwise, I will crack open the home equity nest egg by selling the home. I’ll then move into a retirement home or move in with family members.”

The easy solution, however, is rarely the best. Some of the brightest researchers in the financial planning community have been publishing guidance in the Journal of Financial Planning, stating that waiting and using the Reverse Mortgage as a “last resort” simply doesn’t pay. Waiting significantly reduces the amount of funds that could have been available to a homeowner who obtained one early in retirement, when interest rates were lower.

WHY DO WE FIND INACCURATE ADVICE IN THE MEDIA?

Unfortunately, few publications understand the factors that contribute to the financial planning advantages of the Reverse Mortgage program.

If you only have a BASIC understanding of Reverse Mortgages, then waiting appears to be the right advice. After all, older borrowers get more money, right? If I wait 5 more years, not only will I be older, but my home will be worth more, and I will have paid down my forward mortgage. These may seem like logical reasons to wait… to the novice.

In fact, while writing this blog, TIME.com published an article stating, “The older you are, the more you can get, so it benefits you to wait.” In the same article, the author references a Certified Financial Planner stating that if your retirement income covers your living costs, “There’s no reason to take out a reverse mortgage now. If you run short of money later on, you could take out a reverse mortgage then.”

HERE ARE A FEW REASONS WHY THEY ARE WRONG:

  1. Reverse Mortgage proceeds are based on interest rates

Why is this important? Because rates are low right now, allowing homeowners to maximize their proceeds. If a homeowner waits, and rates go up, HUD’s principal limit factor tables require the homeowner to get LESS with a Reverse Mortgage – in many cases, a lot less. The FED recently announced a rate hike, and their plan for more over the coming years. While there is no way to know future rates, most analysts believe they should, and will, go up. This could dramatically reduce the proceeds for future applicants.

WAITING SIMPLY DOESN’T PAY when getting Reverse Mortgage

WAITING SIMPLY DOESN’T PAY when getting Reverse Mortgage

  1. Waiting sacrifices compounding line-of-credit (LOC) growth

The available LOC grows at current interest rates. If a homeowner gets a Reverse Mortgage now, the available line-of-credit (LOC) will grow faster as interest rates go up. In fact, the LOC is often projected to exceed the home’s value if held long enough. Unfortunately, homeowners who wait will sacrifice this compounding LOC growth that could have been working in their favor as interest rates go up.

  1. There is no guarantee one will qualify in the future

The Reverse Mortgage program changes periodically. While some changes can be advantageous, others may eliminate the program as an option.

Consider that many homeowners still believe that credit history and income do not matter. Even some outdated websites still state “no credit or income requirements.” Unfortunately, some of those who decided to wait until a Reverse Mortgage was desperately needed, found that they no longer qualify under the new financial assessment guidelines.

While we don’t want to create an unmerited sense of urgency, our clients need to be aware that research shows that waiting for a Reverse Mortgage generally isn’t optimal and that NOW may be the best time to obtain one.

For more information on the strategic uses for Reverse Mortgages, please subscribe to this blog and purchase my book, Understanding Reverse.

Dan Hultquist

What is a HECM to HECM Refinance?

A HECM, or Home Equity Conversion Mortgage, is the technical term for the federally-insured reverse mortgage. Therefore a HECM to HECM refinance (also known as a H2H Refi), occurs when the borrower is paying off an existing HECM with a new HECM.

These reverse mortgages are a little different from traditional HECMs that pay off existing forward liens. In fact, the National Reverse Mortgage Lenders Association (NRMLA) just issued updated guidelines to prevent “loan flipping” or “churning”, a practice where a loan originator repeatedly refinances an existing HECM borrower with no bona fide advantage to the borrower.

Why would someone refinance their HECM anyway?

The HECMs with Adjustable Rate Mortgages (HECM ARMs) have a built-in disincentive to refinance – the borrower’s net principal limit (how much they can borrow) continues to grow over time. This means that homeowners who have not borrowed all of their available funds have a growing line-of-credit that often makes refinancing unnecessary.

However, there are many reasons why a current reverse mortgage client may want to refinance into a new one. Here are just a few:

  • A homeowner who is recently married may want his/her new spouse added to title and be listed on the note. With a H2H Refi, the new spouse would have additional protection that the reverse mortgage offers.
  • Property values may have increased, offering the homeowner additional funds.
  • A H2H Refi may be needed if the homeowner wishes to change loan programs (Fixed Rate or ARM), or if they wish to reduce their interest rate.

One additional reason for a H2H Refi is that prior to 2008, many homes were capped by FHA county lending limits that reduced the amount of funds available for higher-priced homes.   In 2008, the Housing and Economic Recovery Act (HERA) established a higher national lending limit ($417,000), and then it raised again in 2009 ($625,500). For this reason, homeowners with higher-valued homes who obtained their HECMs more than 6 years ago, might find the program even more attractive today.

What is the IMIP Credit?

One nice advantage is that the borrower may get credit for the amount of Initial Mortgage Insurance Premium (IMIP) they paid on their last transaction. This happens regardless of how long it has been since their previous closing.

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What are the updated guidelines?

The following are recent guidelines/restrictions that are designed to prevent “loan flipping” or “churning” of reverse mortgages:

  1. The 18 Month SEASONING REQUIREMENT is easy… the new FHA case number shall be no sooner than 18 months from the date of the prior closing.

Even after 18 months, there must be a “bona fide advantage” to the consumer. This means that the refinance will need to originate from a written request to add a family member to the loan, OR the following 2 tests must be passed:

  1. The CLOSING COST TEST is a little more complex. The increase in principal limit must be at least 5X the costs of the transaction.

For example, a loan with $5,000 in closing costs must produce an increase in principal limit of at least $25,000.

  1. THE LOAN PROCEEDS TEST is the newest guideline. The available benefit amount from the refinance must be at least 5% of the borrower’s principal limit.

For example, a borrower with a $200,000 NEW Principal Limit must have at least $10,000 in funds generated by the refinance. These available funds, also known as “Net Principal Limit”, may be drawn at closing, held in a Line-of-Credit, or distributed over time in the form of monthly payments.

How do I proceed with a H2H Refi?

The borrower will need to obtain a “HECM Servicer Refi Worksheet.” This document from their current servicer will show their original Maximum Claim Amount (MCA), how much they paid in Initial Mortgage Insurance (IMIP), and the date of their last transaction. Keep in mind, prior to 2009 there were county lending limits in place. Therefore, their appraised value may have been much higher than their MCA.

For assistance with refinancing an existing HECM reach out to me, and I should be able help or find a qualified reverse mortgage professional that can assist you in your state.

Dan Hultquist

Reverse Mortgage 2015 Review and Thanksgiving

November is a month where days seem to be moving a little faster, closing in on the holidays, and allowing less time for research, writing, and blogging. In addition, November is a month where we are reminded to give thanks, reflect on the year, and begin planning for next year.

With this in mind, I’d like to offer this summary of reverse mortgages in 2015, and highlight updates for which I am personally thankful. Simply click on the sub-title for more information on the corresponding topic.

REGULATORY CHANGES HAVE WORKED!

Recently, over 500 of my industry colleagues gathered for the National Reverse Mortgage Lenders Association (NRMLA) Annual Meeting held in San Francisco. There it was reported that the regulatory changes have accomplished what they were intended to do – improve the health of the Mutual Mortgage Insurance Fund (MMIF) while making sure the program is only offered as a sustainable solution for the right borrowers.

While in San Francisco, I also had the honor of sharing the stage with Jim Brodsky, Daniel Mooney, and Jim Milano as we discussed federal law and the 2015 regulatory changes.

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NON-BORROWING SPOUSES ARE PROTECTED

I’m thankful that an “eligible non-borrowing spouse” (NBS) may now be eligible for additional rights as a “homeowner” following the death of the borrowing spouse. This is a significant change that will give peace of mind to homeowners who are married to individuals under the required age of 62.

FINANCIAL ADVISORS NOW GET IT!

I’m thankful that the Financial Planning community is recognizing that the reverse mortgage can be used to manage a homeowner’s adjusted gross income, social security timing, portfolio management, longevity risk, and health care needs. Tax and financial planning experts like Dr. Barry Sacks, Dr. Wade Phau, and Dr. Tom Davison continue to explore the many advantages reverse mortgage hold for those that establish a growing line of credit early in retirement.

NRMLA EDUCATION COMMITTEE IS FORMED

I wrote the book, Understanding Reverse, because of the widespread misunderstanding of the product. Our trade association (NRMLA) has also recognized this issue and formed the NRMLA Education Committee, and I consider it an honor to co-chair this committee with Jim Cory of Live Well Financial. Our mission is “To create a better understanding of the reverse mortgage product by building quality educational resources and making them available to industry members, affiliates, and consumers.”

WE SURVIVED FINANCIAL ASSESSMENT

This regulatory change was rolled out in April as a way to make sure that every Reverse Mortgage borrower had the capacity to pay their property charges, either by themselves or through a portion of their equity that is set aside to pay those property charges each year. While most reverse mortgage lenders saw a significant decrease in loan volume, we believe the reverse mortgage should only be considered when it is a sustainable solution for all parties involved.

REVERSE MORTGAGE FOR PURCHASE IS GAINING TRACTION

This is slowly being understood by a handful of Realtors in a couple key retirement states. Those professional are finally recognizing that the Home Equity Conversion Mortgage (HECM) product can be used by older homeowners to RELOCATE to be closer to family members, DOWNSIZE to a more manageable home, or even UPSIZE to a retirement dream home on the beach, golf course, or active adult community.

”UNDERSTANDING REVERSE” IS ONE YEAR OLD

The book, Understanding Reverse, (as well as this blog) is now 1 year old. I want to personally thank Harlan Accola of Fairway Independent Mortgage Corp. and Ed O’Connor of FirstBank for recognizing that the book works very well as a training resource for other mortgage lenders.

There are many more personal reasons to be thankful this holiday season, which I will gladly post using other social media. However, 2016, is looking good as we assist older homeowners with a sustainable plan for aging in place.

Happy Thanksgiving,

Dan Hultquist

Honestly, is a Reverse Mortgage a Good Deal?

The book, Understanding Reverse, was designed to answer the top questions I received as a loan originator and educator. Now that I often find myself speaking to financial planners and realtors, however, I receive questions like:

  • “How can home equity be used strategically to fund retirement?
  • “How can a home be purchased with a reverse mortgage?

In addition, regulatory changes have altered the conversations. People want to know about non-borrowing spouses, financial assessment guidelines, and life expectancy set asides for property charges. But, the most common question I receive is still:

Is the Reverse Mortgage REALLY a good deal?

With a slight tilt of their heads, they skeptically ask this question. The question itself stems from confusion about how the product works and long-standing misconceptions. So, to clear up some of the confusion, I’ll mention the common misconceptions I have addressed in my other blogs and articles:

  • No, the bank does not get your home when you get a reverse mortgage.
  • No, the reverse mortgage is not just for the desperate and needy.
  • No, you can’t owe more than the value of your home.
  • No, it is not a government benefit. Funds you borrow become a mortgage lien.

BUT IS IT A GOOD DEAL?

That depends on how you use it. Is a gym membership a good deal? I don’t know. Nobody knows what the future holds. But generally speaking, if you use a gym membership properly, your strength and conditioning will improve. You then have to ask yourself how important this is to you.

One way to tell if a reverse mortgage is a good deal, is to ask those who know the product best if they would get one. It was for this purpose that I wrote the 2014 article titled, “I WANT a Reverse Mortgage When I Turn 62.”

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YOU ARE NOT REQUIRED TO BORROW

What most people don’t understand about the prudent use of reverse mortgages is that the homeowners aren’t required to borrow all of their available funds. Unused funds are available in the form of a growing Line-of-Credit (LOC).

In fact, this compounding LOC is one of its greatest financial planning advantages! For this reason, we expect 62 year old homeowners to hold these loans for longer terms. The growing LOC may also be converted to monthly payments later in retirement, which can be used to pay for long-term care if needed.

For example, a financial planning client recently borrowed nothing at closing. The loan balance after closing the loan was the minimum, $100. In his case, the annual cost for this borrower is only $4.00 per year. Then why did he get the reverse mortgage? Because he now has a secure $250,000 LOC that is growing at current interest rates. The LOC will be there in the borrower’s later years, and will grow faster as rates go up.

YOU HAVE THE OPTION TO MAKE PAYMENTS

Many reverse mortgage borrowers “set-it, and forget it.” They assume that the primary benefit is that they no longer need to pay monthly principal and interest payments.

Yes. Monthly principal and interest payments are NOT required. However, this mindset is not always the best financial planning strategy. Making no payments may help from a cash flow standpoint, but the reverse mortgage has a built-in incentive to make periodic prepayments if possible. Here is what happens if you do make payments:

  1. The loan balance will drop (just LIKE a forward mortgage).
  2. The LOC will increase (UNLIKE a forward mortgage) with each payment.

For example, I recently advised a client who just turned 62 and is struggling to make his monthly forward mortgage that may be paid off in three years. Using conservative estimates for interest rate changes, I demonstrated that he could:

  1. Make a slightly reduced payment on a reverse mortgage, and
  2. Pay down the mortgage in the same time period (3 years), and
  3. Have the option to skip any payments if needed, and
  4. Double his LOC in three years because of the LOC growth.

As long as he doesn’t pay below the minimum required loan balance ($100), his LOC keeps growing long into his retirement years! At that point, the LOC will cost him a few dollars per year in interest, but will create a massive emergency fund that is not dependent on the value of the home.

Yes. The reverse mortgage CAN be a REALLY good deal. But it will require the assistance of an informed reverse mortgage professional and ideally, a good Financial Advisor.

I am helping to spearhead an effort to educate the industry and the public on a better understanding of reverse mortgages. That will include the strategic uses of reverse mortgages during retirement. With the help of the National Reverse Mortgage Lender’s Association (NRMLA) and a committee of like-minded experts, we hope the perception of this wonderful product will improve.

If you want to learn more about the strategic use of home equity in retirement, please subscribe to my blog and purchase my book, Understanding Reverse.

Dan Hultquist

Legitimate Concerns about Reverse Mortgages

The press has been favorable to recent reverse mortgage reforms, yet there is still no shortage of articles that offer warnings. I believe those warnings are misplaced, and that other, more legitimate, concerns about reverse mortgages need addressed. The issues we read about are either misunderstood, or have already been addressed by industry reforms.

The media has focused on two primary issues – reverse mortgage costs, and widows losing their homes. Yet, when meeting with professionals who understand the strategic uses of home equity, I find that we share a different set of concerns. But let’s address the media’s concerns before we cover the real issues.

COSTS are not the ISSUE

A media personality once argued that “a borrower could pay as much as $10,000 in fees to get $100,000 in cash. That’s a 10% hit right off the bat.” Yes, that is expensive when the reverse mortgage is only viewed as a request for cash. However, cost becomes a minor issue when the future benefits are properly explained.

Imagine what that journalist would think if I told her “it might make sense to pay the reverse mortgage fees, but NEVER draw another penny.” It sounds ridiculous, until you view the security gained by the transaction. You could pay many times that amount in long-term care insurance that wouldn’t be needed if the reverse mortgage were structured properly.

Is a reverse mortgage expensive if it allows your financial planner to extend your retirement funds several years?

Is a reverse mortgage expensive if your tax planner can manage your adjusted gross income and save you even more in federal income taxes?

It’s getting harder to make a case that reverse mortgages are expensive. The costs are commensurate with traditional mortgage fees, and when used properly, the financial planning advantages are huge. The interest rates are favorable, reducing the long-term costs, and the non-recourse feature protects the homeowner from ever owing more than the value of the home.Financial Assessment

WIDOWS are also not the ISSUE

The reverse mortgage program is now very favorable to non-borrowing spouses who wish to remain in the home after the last borrower dies. Yet, even before recent reforms, this issue was misunderstood. There is a big difference between “occupying” a home and “owning” a home. When someone is facing “foreclosure”, it is important to know whether they are actually on title. In the media-highlighted cases, the widows were not actually owners of their homes. Therefore, the phrase “widows faced foreclosure on their homes” is misleading.

However, additional consumer protections for non-borrowing spouses became effective August 2014, allowing eligible non-owner widows and widowers to remain in their homes following the death of their spouse. The guidelines were revised again this year to give lenders additional options for handling non-borrowing spouses. As a result, it has become unlikely that these occupants would be displaced.

REAL CONCERNS

The concerns financial planners and loan originators have about reverse mortgages are not about the product itself. The concerns are about the people who have access to the funds – the homeowner and their “trusted” advisors.

  1. Financial planning concern

Respectable loan originators and financial planners want the homeowner’s funds to last. Homeowners generally have access to 60% of their principal limit within the first year, minus closing costs and lien payoffs. This is called their “initial disbursement limit.” After the first year, homeowners may then access the additional 40% plus growth.

The limits placed on first year disbursements have helped this issue. However, there is a growing bucket of money to draw from, and many homeowners are consuming the funds too quickly. The homeowner must set boundaries if the reverse mortgage is to be used for emergencies, insurance, and/or future retirement income.

  1. Elder financial abuse concern

As reverse mortgage professionals, we convert home equity into accessible funds. However, we have little control over “trusted” advisors who are not so trustworthy. Their influence over the homeowner can quickly turn into elder financial abuse.

According to the National Committee for the Prevention of Elder Abuse (NCPEA), the perpetrators of elder financial abuse are often “family members, including sons, daughters, grandchildren, or spouses.” Some of them have “substance abuse, gambling, or financial problems.”

Heirs also frequently feel a sense of entitlement – that their parents “owe” them an inheritance. They rationalize that it’s not “stealing” funds when they feel the funds are rightfully theirs.

Yes, there are costs. And reforms to the program were needed, adding security for non-borrowing spouses. However, the sad truth is that reverse mortgage funds are not always used properly. That is the real concern.

If a homeowner has a monthly cash flow issue, then establishing monthly payouts from the reverse mortgage can cover monthly cash short-falls. If a homeowner is using a growing line of credit for financial planning purposes, then consulting a financial advisor that has a fiduciary responsibility to act in the best interest of the homeowner would help.

When the real issues are fully understood and communicated, the reverse mortgage will be what it was designed to be – a prudent and sustainable solution for older homeowners to remain in their homes.

If you want to learn more about the strategic use of home equity in retirement, subscribe to my blog and purchase my book, Understanding Reverse.

Dan Hultquist

The Reverse Mortgage is NOT an ATM machine

Earlier in the year, I was asked to write an article for a large national publication. My primary message was that the reverse mortgage is NOT the financial product you thought you knew. With recent regulatory changes and a renewed focus on financial planning, the FHA-insured mortgage is now being used by the affluent as a form of retirement planning, longevity insurance, tax planning, and long-term care funding.

While flattered that a monthly magazine wanted to publish what I had to say, it was clear the editor didn’t understand my message. By the time it ended up in mailboxes, the headline was changed, the content was edited, and the selected image gave the reader the wrong impression that it was simply an ATM machine – the magazine literally inserted a giant ATM machine in the shape of a house!

WHAT IS THE COMMON PERCEPTION?

Unfortunately, the reverse mortgage is still seen by most as an act of desperation for borrowers in need of cash. Television, radio, internet, and magazine coverage has generally reinforced this narrow view of home equity conversion.

Consequently, this is how reverse mortgages have historically been perceived:

“I need some cash. I found a tool that will pay off my mortgage. It may even give me more cash than I need. Now I don’t have to pay monthly principal and interest mortgage payments ever again. Sure, my loan balance will rise. But FHA guarantees that I’ll never owe more than the value of my home.”

While every assumption listed above is technically correct, this type of homeowner is becoming a smaller portion of the reverse mortgage pie.

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WHAT IS THE CORRECT PERCEPTION?

People have always criticized the hammer for being a poor screwdriver. Likewise, the reverse mortgage suffers from a misunderstanding of its proper function. The new reverse mortgage is slowly being recognized as a powerful financial planning solution. But it has always been a fourth pillar of retirement income that included social security, pensions/annuities, retirement savings, and home equity.

The primary financial planning advantage is the available line-of-credit that grows and can be accessed at a later date. It may be converted to tax-free monthly income whenever needed. It can be used to delay social security, manage taxable income, and more. And because of the compounding growth, it makes sense to opt in as early as possible.

Consequently, the following is how reverse mortgages SHOULD be perceived:

“I need greater assurance that my funds will last through retirement. I have found a tool that offers a secure line-of-credit (LOC) that will be available if I need it. The available LOC grows over time, so it makes sense to obtain one at age 62. As rates go up, my available funds grow even faster. I have the option to make prepayments that reduce my loan balance and increase my line of credit. The longer I live, the more funds I have available, which may allow my home to pay for my long-term care needs.”

There were many economic factors that led to older homeowners using a reverse mortgage as an ATM machine. However, the program should be a sustainable solution for older homeowners, and a tool that those age 62 or older should consider using in their retirement portfolios.

Unfortunately, the magazine destroyed my intended message, and served to reinforce the wrong perception of how this tool should be used. But if you want to learn more about the strategic use of home equity in retirement, subscribe to my blog and purchase my book, Understanding Reverse. You will find it is likely not the reverse mortgage you thought you knew.

Dan Hultquist

Same-Sex Marriage and the Reverse Mortgage

My blogs have been, and always will be, politically neutral. And when changes to government regulations affect what I do, I simply do my best to explain how those changes impact homeowners and my role as a reverse mortgage professional. So, let me be the first to explain how the Supreme Court ruling on marriage may impact reverse mortgages.

I’ll preface by explaining that federally-insured reverse mortgages, often called Home Equity Conversion Mortgages (HECMs), have ALWAYS allowed multiple unrelated occupants to take advantage of, and receive, reverse mortgage proceeds. That has not changed. However, if an older homeowner is now getting married as a result of the court’s decision, then he/she may now have additional advantages and options with a reverse mortgage.

NON-BORROWING SPOUSE PROTECTION

If one spouse has not yet met the qualifying age (62) for a reverse mortgage, that spouse may now have additional protection as a “homeowner” under the non-borrowing spouse guidelines. This protection for spouses began in August of 2014 when guidelines changed, allowing a spouse of a HECM borrower to continue living in the home following the death of the spouse listed on the mortgage. In essence, the loan is not due and payable, and repayment may be deferred. The couple will need to show that they are married at the time of application, continue to be married over the life of the loan, and that both spouses occupy the home.

Until now, non-borrowing spouse protection was limited to a “spouse” as defined by the laws of the state where they reside or the state of their celebration.

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HECM TO HECM REFINANCE

If a homeowner already has a reverse mortgage, and is adding someone to title, they can take advantage of the HECM to HECM refinance option. This is where a new reverse mortgage is obtained to pay off an older reverse mortgage. This can be done to increase proceeds, to improve the terms of a mortgage, or in this case, to add a new person to title. As long as one original reverse mortgage borrower is still on title, a spouse can be added with reduced closing costs.

This option already existed for unrelated occupants, but if two individuals are getting married as a result of the recent changes, it is preferable to have BOTH spouses listed on title and on the reverse mortgage. The primary advantage is that either spouse will have access to reverse mortgage funds if the other dies. In addition, reverse mortgages are generally not “due and payable” until the last reverse mortgage borrower dies or permanently vacates the home.

EXPANDED TAX AND TITLE OPTIONS

Reverse mortgage borrowers are sometimes eligible for a mortgage interest deduction on their taxes, if the loan is partially (or fully) paid pack. Same-sex couples have historically had to split up their mortgage interest deduction onto two tax returns. Unfortunately, itemized deductions that get split are often not large enough to exceed the standard deduction. So, for those homeowners where a tax deduction is an option, marriage now allows same-sex couples to file taxes jointly and take the full deduction.

Same-sex marriage will also allow a couple more flexibility in the way they hold title to their home. For example, “tenancy by the entirety” which is available to married couples in some states, is a stronger form of joint ownership. When a spouse dies, property ownership automatically moves to the surviving spouse without having to go through probate. However, it also has added protections against creditors that other forms of ownership do not have.

Keep in mind, this post was not intended to provide tax advice or legal advice. So, please consult a professional for clarification on those issues. However, if you are looking for updated guidance on reverse mortgages, please subscribe to this blog and purchase the book, Understanding Reverse.

Dan Hultquist

No. The Bank Doesn’t Get Your Home with a Reverse Mortgage

As it turns out, Ben Franklin didn’t really discover electricity. While many still believe he did, it’s simply not true. Just like this common fallacy, the complex reverse mortgage program is highly misunderstood. This was the primary reason I wrote the book, Understanding Reverse. It’s also why many reverse mortgage providers feature top reverse mortgage myths on their websites.

If I were to walk downtown and ask strangers why they wouldn’t consider a reverse mortgage at age 62, the most common response would be that “the bank would get their home.” So let’s address that misconception first.

MYTH: The bank gets your home after you die
TRUTH:
The Federally-Insured reverse mortgage program has been around for 27 years, and homeowners never relinquish title or ownership of their homes at closing or after they die. The homeowner holds title throughout the life of the loan, and can sell it at any time with no pre-payment penalty.

So, why does this continue to be a top misconception? Historically, homeowners have used reverse mortgages to draw large amounts of home equity upfront. If there is no equity left after the last homeowner’s death, the heirs have no financial incentive in selling it. They will often sign the deed over to the lender at that time.

Is the product too complex? Do poor explanations of the product leave homeowners to make simplistic assumptions on their own? Has the improper use of reverse mortgages in the past tainted the perception of the program? These are all possible reasons for continued misperceptions.

It didn’t help when the popular sitcom, Modern Family, aired an episode where one older homeowner explains to another that with the reverse mortgage “essentially, the bank buys your home.” No! That is only reinforcing the most common misconception.

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All we can do at this point is continue to promote an accurate understanding. So, the following is a list of other common myths that seem to persist:

MYTH: You can owe more than the value of the home
TRUTH:
Many people ASSUME the estate will be “underwater” when they sell it, or when they die. Fortunately, reverse mortgages include a “non-recourse feature” ensuring that the homeowner will never owe more than the value of the home at the time it is sold.

MYTH: The heirs get stuck with a bill
TRUTH: In fact, the heirs are protected by the non-recourse feature, just like the homeowner. Of course they can sell the home or refinance in their own name. But, the home is ultimately responsible to pay back the loan balance, and any residual equity would be theirs as an inheritance.

MYTH: You might outlive a reverse mortgage
TRUTH: Even though the note lists the maturity date as the youngest borrower’s 150th birthday, if someone were to actually live that long I believe FHA would still service the loan at that point. I don’t think we need to lose any sleep over that one.

MYTH: Reverse mortgages are expensive
TRUTH: They can be expensive if used as a short-term cash-out refinance. When used properly, however, for a homeowner who wants to stay in their home, they can be very inexpensive.

MYTH: They are just for the desperate and needy
TRUTH: Sure, reverse mortgages can often help those who are house rich and cash poor. However, there are multiple financial planning options for the affluent.

MYTH: They increase your risk for foreclosure
TRUTH: Reverse mortgages do not require monthly principal and interest payments. Therefore, the primary risk for default is failure to pay property taxes. The reverse mortgage, if used properly, should reduce the likelihood of that occurring.

I was surprised to also learn that Thomas Edison didn’t invent the lightbulb – another popular misconception. While Franklin and Edison contributed significantly to the world of science, maybe the truth behind their accomplishments was just too complex for us to learn in elementary school. And as a result, that caused us to have a poor understanding of the facts.

If you want to know the facts about reverse mortgages, please subscribe to this blog and purchase the book, Understanding Reverse.

Dan Hultquist

Reverse Mortgage Financial Assessment in Plain English

Consider a doctor explaining that A blood vessel wall was damaged, causing a series of reactions to take place which stimulated platelets, resulting in coagulation in your body. You have thrombophlebitis in your lower leg, a condition we call deep vein thrombosis.

The doctor may be technically correct. But it may be more appropriate to say, You have a small blood clot, and we’ll give you medicine to dissolve it.

When you get a traditional loan, the loan officer doesn’t explain all the technical intricacies of residential mortgage underwriting. You simply want to know the rate, the terms, and when you can close.

With reverse mortgages, however, there are additional complex regulations and guidelines that must be covered, including Financial Assessment. Just like the medical profession, there is a big difference between reciting complex industry terminology and a simple explanation of the facts. As someone who generally offers the technical diagnosis, let me try to simplify this time.

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Financial Assessment is intended to make sure the reverse mortgage is a sustainable solution for you. The tests aren’t aimed at disqualifying you from a reverse mortgage. They are designed to ensure that, after closing a reverse mortgage, you are likely to have the financial ability to stay in your home.

Financial Assessment Test #1

Lenders are now required to look at your credit history and your property charge payment history. Underwriters call it a “WILLINGNESS” test, but it has little to do with your “desire” to pay bills. Poor payment history simply indicates the need to set aside some funds to make sure critical property charges are paid in the future.

Financial Assessment Test #2

Lenders are also required to look at your monthly residual income. Underwriters call it a “CAPACITY” test. It is designed to ensure that the reverse mortgage product will likely leave you and other household members with the ability to pay your bills now and in the future.

Setting Aside Funds

Each reverse mortgage has a calculated amount called a “Principal Limit”. This is the maximum amount the lender is able to offer a homeowner at the time of closing. The results of Test #1 and Test #2 are used to determine whether a portion of these funds should be set-aside to pay property charges like property taxes and property insurance. The technical name for this is “Life Expectancy Set-Aside” or LESA.

These LESA funds represent a portion of your equity to which you will not have direct access over the life of the loan. However, any unused LESA funds are still part of your equity.

Fortunately, you are not charged interest on the amount that is set aside. When the lender pays your property tax bill, however, your loan balance will rise by that amount.

After spending an hour with a potential client last week, I realized that I didn’t once use technical jargon to describe financial assessment. I was tempted to say something like “based on three 30-day late installment payments in the prior 24 months and a monthly residual income shortfall for a two member household in your geographic region, we need to fully-fund a Life Expectancy Set-aside that will reduce your available net principal limit.”

I would have been technically correct. But when she disclosed information that confirmed that a set-aside would likely be required. I simply said, “Would it give you peace of mind knowing that a portion of your home equity will be set-aside so that the lender can pay your property tax and homeowners insurance each year?

She and I both agreed it would.

Dan Hultquist

They Still Misunderstand Reverse Mortgages

The money experts on TV and radio have never fully understood Home Equity Conversion Mortgages (HECMs) and the proper use of these reverse mortgages. From Dave Ramsey to Suze Orman, they have not taken the time to listen to researchers within their own financial planning community who regularly publish papers on the advantages of this financial tool. While Clark Howard has recently reconsidered his position on them, he and others still don’t tout the financial planning advantages this program offers to older homeowners.

Meanwhile, the homeowners themselves have been very happy with their reverse mortgages. The client satisfaction ratings are much higher than with the alternatives. Maybe we have not explained the basics properly to the financial media. CC000605So, let’s clarify a few items that are commonly misunderstood:

  1. You keep title and ownership of your home

That’s true. The bank does not take your home now or when you die. However, this is still the most common misconception. This may have been true for some reverse mortgages prior to 1989, but the government-insured reverse mortgage has never allowed the lender to hold title. Homeowners retain ownership of their homes throughout the life of the loan, and can choose to sell the home at any time without prepayment penalty.

However, it is possible for ANYONE who owns a home to lose it. If you stop paying your property taxes, you risk losing your home. That is true whether you have a reverse mortgage, forward mortgage, or no mortgage at all. The reverse mortgage should actually REDUCE the fear that this will happen, as periodic draws from home equity should INCREASE a homeowner’s ability to pay property charges.

  1. You will not owe more than the value of your home

One of the first items addressed in nearly every basic training on reverse mortgages is that the FHA insures against this happening. The FHA guarantees that homeowners and their heirs will NEVER be responsible for reverse mortgage debt that exceeds the value of their homes. This is called the “non-recourse” clause, and is a primary consumer protection for homeowners and their heirs.

  1. Reverse mortgages are not expensive when used properly

There are fees just like any financial transaction, and reverse mortgage fees are not only federally regulated, they are also common to mortgage transactions in general. In fact, there may be cases where the lender will pay some of those costs. If using the reverse mortgage for short-term cash, it may indeed be expensive. But that is not the intended purpose. When used over a longer term, to continue occupying the home, the upfront fees are minor when compared to the long-term benefits of a line of credit that grows tax free that may be converted later into tax-free cash.

  1. Reverse mortgages are more than a way to access cash

There is still a perception that this is a “LAST RESORT” loan. This is not the case at all. We can show that using a reverse mortgage as part of your retirement plan can extend your assets beyond what traditional retirement plans offer. Although some seniors may have a greater need than others, many simply prefer to be free of monthly mortgage payments.  Without a monthly mortgage payment, many homeowners find they can retire, maintain their existing quality of life, and enjoy their retiring years.

The reverse mortgage is also being used to purchase a home. Whether you need to relocate to be closer to family, downsize to a more manageable home, or upsize to a retirement dream home, the reverse mortgage can help keep more money in your pocket.

If you want to know more than the money experts do about the strategic uses for reverse mortgages, please subscribe to this blog and purchase my book, Understanding Reverse.

Dan Hultquist

Understanding Reverse Mortgage Financial Planning

“Financial planners, advisors, CPA’s, estate planners, and other finance professionals are realizing that obtaining a Reverse Mortgage EARLY opens up potential income later in retirement. The basic premise is that the growing line of credit (LOC) is not taxed on its growth, and is a secure collection of funds that can act as a second source of retirement reserves when needed.”

– Understanding Reverse

By now, everyone knows that homeowners, age 62 and older, can access home equity at low interest rates through the government insured reverse mortgage program. Most don’t realize, however, that a dire need for cash shouldn’t be the primary purpose of the home equity conversion.

When you hear that wealthy doctors, lawyers, and even executives in the mortgage industry are getting reverse mortgages for themselves and their family members, you can be pretty sure they aren’t trying to prevent foreclosure. They choose the reverse mortgage because there are inherent advantages for retirement planning. Unfortunately, most finance professionals don’t understand how working with a reverse mortgage professional can help their clients achieve greater financial stability during their retirement years.

Research in the Journal of Financial Planning suggests that financial planners should recommend reverse mortgages for many clients, including ones who do not have an immediate need for them. Why? In part, because many baby boomer homeowners have disproportionate amounts of their retirement savings held in real estate. 10,000 boomers are turning 62 every day, and unlike the generation before them, their retirement savings are in their homes, not in defined benefit plans like pensions. Drawing part of their monthly retirement income, tax-free, from their home equity nest eggs will help their other, more traditional, retirement funds last much longer.Couple

LOC Growth – The basis of reverse mortgage financial planning

The primary financial planning advantage is the line-of-credit (LOC). The LOC experiences compounded growth, and many homeowners will opt-in to reverse mortgages as early as possible (age 62), and wait to draw their increased funds until later as a form of tax-free retirement income. Homeowners only accrue interest on the amounts they borrow. So, this option allows them to have emergency funds that grow (again tax-free) at current interest rates. The funds are then easily converted to monthly income when traditional retirement savings are depleted. The following highlights some features of the LOC:

  • The LOC grows tax-free at current rates
  • The LOC can be converted to cash at any time
  • The LOC draws are not considered income, and therefore are tax free
  • The LOC is secure, as it is not frozen or reduced if property values drop
  • The LOC can be an effective emergency fund
  • The LOC can be used as a form of insurance
  • The LOC diversifies your home equity investment
  • The LOC increases when making prepayments

The increased use of reverse mortgages for financial planning purposes is further explained by looking at the other traditional income sources during retirement. Social Security is not sufficient to provide the income necessary to sustain an individual during retirement years. Employers have moved away from defined-benefit pension plans, and instead have opted for employer-sponsored tax-advantaged accounts. Traditional retirement savings are subject to volatile market conditions, and employment during the retirement years is often not practical, or even possible.

Indeed, financial planners, advisors, CPA’s, estate planners, and other finance professionals are now realizing that obtaining a reverse mortgage EARLY, with a line of credit option, opens up potential income later in retirement.

For more information on the strategic uses for reverse mortgages, please subscribe to this blog and purchase my book, Understanding Reverse.

Dan Hultquist

Understanding the Reverse Mortgage Non-Borrowing Spouse

“When a spouse is not included in a HECM (Reverse Mortgage) transaction, they are referred to as a non-borrowing spouse (NBS). This is often due to the spouse not meeting the age requirement.”

– Understanding Reverse

I recently had a conference call with a borrower and another reverse mortgage lender. The borrower wanted me to clarify guidelines for the competing loan officer – which I was willing to do. The loan officer’s confusion revolved around non-borrowing spouse guidelines.

In a simple sense, a non-borrowing spouse (NBS) is the spouse of a reverse mortgage borrower that will not be on the loan. But the guidelines are actually not that simple, and are commonly misunderstood. Let’s see if I can explain the rules, and why they were created.

The problem:

Some spouses are not included in the reverse mortgage. In most cases this is because they are not old enough (Age 62). However, there are other reasons – homeowners with pre-nup agreements, or homeowners who have been remarried and want biological children to inherit the estate, homeowners who don’t intend to stay married, etc. Some states and lenders may have additional guidelines called “overlays” that may also come into play here.

Regardless, these non-borrowing spouses have historically NOT been protected after the death of the last borrower. If the last borrower died, the loan became due and payable…. even if a surviving spouse was still living in the home. This is no longer the case.NonBorowingSpousePhoto

The Solution – ML 2014-07:

FHA changed the guidelines with Mortgagee Letter 2014-07 so that “Qualified Non-Borrowing Spouses” may continue living in their home following the death of the last borrower. The “due and payable” status of the mortgage could be deferred if the spouse is “Qualified”, meaning that:

  1. The Non-Borrowing Spouse is married at the time of application and continues to be married to the borrower over the life of the loan, and
  2. The Non-Borrowing Spouse occupies the home and continues to occupy the home for the life of the loan.

This created another issue: Having an NBS generally meant the borrower would have access to less funds. This was because the borrower’s available funds became based on the youngest age, which was likely the non-borrowing spouse’s age. This was true whether the NBS was qualified for the deferment or not.

The Clarification – ML 2015-02:

Some lenders argued that if an NBS is “NOT qualified”, they shouldn’t be required to use the age of the NBS in the calculation of the borrower’s Principal Limit. As a result, FHA issued Mortgagee Letter 2015-02 to create new designations – Ineligible and Eligible Non-Borrowing Spouses.

  An INELIGIBLE Non-Borrowing Spouse:

  • Does not occupy the home,
  • Is not protected by the NBS “due and payable” deferral provisions, and
  • Does not have their age included in the calculation of the borrower’s principal limit

  An ELIGIBLE Non-Borrowing Spouse:

  • Occupies the home
  • May be protected by the NBS “due and payable” deferral provisions, and
  • Has their age included in the calculation of the borrower’s principal limit

It is important to know that an NBS has limited protection under the reverse mortgage program. Therefore, we would prefer to have both parties involved, and not have an NBS. If they are under 62, we have no choice. However, FHA does NOT prohibit removing an older spouse from the loan and making them an ELIGIBLE NBS when a homeowner has a viable reason. The guidelines do, however, prohibit making the NBS ineligible so that the borrower qualifies for higher principal limits.

Rapid changes to improve the reverse mortgage program left many homeowners and some lenders confused about guidelines. I don’t mind fielding these questions, because the answers ultimately end up in my blogs, articles, and training documents. As a result, we will all have a better understanding of this great program.

For more information on reverse mortgage guidelines, please purchase the book Understanding Reverse, and subscribe to my blog in the upper right corner of this page.

Dan Hultquist

Financial Assessment Clock Ticking for Reverse Mortgages

The mortgagee (lender) must evaluate the mortgagor’s (borrower’s) willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.”

– Mortgagee Letter 2014-21

The federally insured reverse mortgage program is modified more regularly than other financial tools. And once again, we have another major change on the horizon called “Financial Assessment” that makes it imperative for many older homeowners to apply before the changes become effective.

The implementation of Financial Assessment was delayed to April 27, 2015. With this change, reverse mortgage lenders will, for the first time, be required to assess each borrower’s credit history and monthly residual income. This is a dramatic change for an industry where historically the focus has been on the value of the home.

Why the change?

The first question many will ask is, “why does a homeowner’s payment history matter for a loan that doesn’t require monthly payments?” After all, the value of the home and the age of the borrower are the primary factors in qualifying.

The answer is that these loans should not be viewed as an emergency, short-term access-to-cash program. Home equity conversion should accomplish more than that. It should always leave the borrower with the ability to pay their property taxes, property insurance, and monthly bills. Therefore, we need to document that ability with this assessment. The reverse mortgage MUST be a sustainable solution for each homeowner.

ClockImage

According to HUD Mortgagee Letter 2014-21, “The mortgagee (that is us, the lender) must evaluate the mortgagor’s (that is the borrower’s) willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.”

The critical borrower obligations and mortgage requirements are as follows:

  • Upkeep of the home in good condition
  • Payment of property taxes
  • Payment of homeowners insurance
  • Payment of other property charges (flood insurance, HOA dues, condo dues, etc.)

These are FHA requirements, and we need to document every borrower’s ability to meet these obligations. The results of Financial Assessment are simply used to determine whether a life expectancy set-aside is needed or not.

What are the results of Financial Assessment?

The lender’s underwriter will perform two tests, a credit (payment) history test and a residual income test. If the underwriter determines that one or both of the financial assessment tests have failed, a Life Expectancy Set-Aside (or LESA) will be required. These are funds that are removed from the borrower’s principal limit and set-aside for the purpose of paying property charges over a calculated time period.

Financial Assessment is NOT necessarily a “yes or no” qualification of the borrower. But if homeowners do not have sufficient equity to set-aside for those property charges, they may not qualify for the program. Unfortunately, the result is less homeowners will qualify for reverse mortgages after April 27. The clock is ticking.

For more information on other changes designed to strengthen Home Equity Conversion Mortgages, make sure you purchase the book, Understanding Reverse, and subscribe to my blog in the right-hand margin.

Dan Hultquist

Look Who’s Getting the New Reverse Mortgage!

Since 2013, the federally-insured reverse mortgage program has gone through so many dramatic changes that it’s no longer the reverse mortgage everyone thought it was. Some of the changes added consumer protections, while others radically altered the way reverse mortgages are obtained.

Unfortunately, many perfect candidates will continue to believe that the reverse mortgage is ONLY for the desperate homeowner with plenty of equity and no cash. I don’t fault them for this – the most common reverse mortgage, the Home Equity Conversion Mortgage (HECM), has been marketed that way. However, recent modifications by the Federal Housing Administration (FHA) have highlighted the financial planning advantages for the affluent. So, let me describe the three categories of homeowners who now come to me for reverse mortgages.

Chart_Need.Lifestyle.PlanCOLOR

  1. Reverse Mortgage for immediate NEED

Generally, these traditional HECM borrowers are house rich and cash poor. And they need money now. In many cases, we can help them. A good example might be a homeowner who needs in-home care. Monthly payments generated by home equity conversion can help when they, or their heirs, are unable or unwilling to pay for these expenses.

Many people assume that the need for money is the ONLY reason to get a reverse mortgage. Yet, this traditional type of homeowner is a smaller piece of the pie now.

  1. Reverse Mortgage to enhance LIFESTYLE

Because reverse mortgages do not require monthly principal and interest mortgage payments, obtaining one can help with cash flow. Yet, there are many other lifestyle advantages. Tenure payments are a form of monthly draw. Tenure means permanent, and these monthly payments will continue as long as the homeowner occupies the home. This is a great way to improve the quality of life of someone on a fixed income.

Others enhance their lifestyles by accessing home equity to pay for home upgrades, travel, or new vehicles.

  1. Reverse Mortgage as part of a comprehensive financial PLAN

Financial planners are now recommending reverse mortgages for clients who do not have an immediate need for them. Why? In part, because many homeowners have disproportionate amounts of their retirement savings held in real estate. Drawing part of their monthly income (tax-free) from their home equity nest eggs will help their traditional retirement funds last much longer.

The primary financial planning advantage, however, is the line-of-credit (LOC). This option allows homeowners to have an emergency fund that grows (again tax-free) at current interest rates. The funds are easily converted to monthly income later in retirement. Because the LOC experiences compounding growth, many homeowners will opt-in as early as possible, and draw their increased funds at a later date as a form of tax-free retirement income.

The HECM is still used by homeowners in need. However, research in the Journal of Financial Planning advocates that homeowners, age 62 or older, use this same program as part of a comprehensive retirement plan. Take a closer look. It’s likely not the reverse mortgage you thought you knew.

Dan Hultquist

Reverse Mortgages Really Aren’t That Funny

Most successful blogs are infused with a little humor. Parenting blogs are funny. Kids say the darndest things. Other blogs are designed to enrage you. Sometimes I don’t know if I should laugh or cry at the political ones. However, other blogs are designed to educate, inform, and explain. Mine would fall into that category. If you read my book, or read my blog on a weekly basis, you know that any sense of humor I might possess is lost in my writing.

Those who have heard me speak will know that I will occasionally try to add humor to my presentations. There was one (a broker, a borrower, and a compliance officer walk into a bar) that was pretty funny to those in my field.  And then another (a borrower and a loan officer met with a palm reader to determine product suitability) that got a few laughs.

LaughingCoupleI’ve learned, however, that home equity conversion is really not that funny. Here are a few reasons why:

What we do is misunderstood

My daughter has a great sense of humor and likes to mimic me in a deep voice, saying “I give you money, you give me house.” Of course she knows better, and just to be clear, I give people a LOT of money, and they get to KEEP title to their home. It is a common misconception, however, that somehow the bank gets the home now, or when the homeowners die. This is not the case, and of course, it’s no laughing matter.

What we do is somewhat complicated

After having spent several years counseling, originating, and training, I spent much of 2014 reviewing the Code of Federal Regulations, multiple HUD handbooks, and every FHA letter. This was done not only to make sure I understand one of the most highly-regulated financial tools well enough to write a book called “Understanding Reverse,” but also to better assist loan officers and older homeowners with a better understanding of the product. Once again, no chuckles.

What we do is serious

Some older homeowners are faced with losing their homes. This can be tragic, and as a counselor I’ve cried with many of them. I have been able to prevent this by using reverse mortgages to pay off delinquent forward mortgages, tax liens, delinquent property taxes, and judgments that affect title to their homes. I recently closed a loan that paid all four of these items in time to avert a pending foreclosure. Because of negotiated payoffs, the homeowner now has an additional $100k in equity and no monthly payment. Without it, they would have lost their home. That’s serious.

To reverse mortgage professionals, the premise of a broker and a borrower walking into a bar with a compliance officer is funny enough without a punchline, and has probably never happened before. For those of you who want to know about the palm reader? She saw a love line, a long life line, and a large line of credit in the borrower’s future. However, she informed the loan officer, with outstretched palms, that because of federal regulations she was also required to look at the ARMs.

See… Not that funny 🙂

Dan Hultquist

Why did I get a 1098 with my Reverse Mortgage?

Building a personal collection of rare items can be quite entertaining. Some of the most commonly collected items are pocket knives, comic books, sports cards, and postage stamps. While I have a small, but growing collection of coins, I may have the most obscure collection of all – reverse mortgage questions.

I do collect them, and occasionally I receive questions that are not addressed in my book, Understanding Reverse, because I would not consider them to be “top questions” material. The following is a recent addition to my collection that is important to know during tax season:

Why would a borrower get an IRS Form 1098 on a Reverse Mortgage? Does this mean they owe taxes?

This does create some confusion for reverse mortgage borrowers every January, and it needs to be addressed. Most reverse mortgage borrowers, however, won’t get a 1098 simply because most of them don’t make payments. Some will. In fact, we described some advantages in a previous post – Wait, Make Payments?

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While I am not a tax professional, I can state that IRS Form 1098 is a form that lists items that were paid by the borrower. This is for tax and accounting purposes, and does not increase their tax liability. The Form 1098 is used to report potential deductions, and therefore may REDUCE their tax liability. For our purposes though, it means that the borrower made prepayments during the previous year that were applied to either their accrued mortgage insurance or their accrued mortgage interest.

The IRS deduction for Mortgage INSURANCE (itemized on line 4) was renewed by congress for tax year 2014. However, this deduction is very limited (see IRS Publication 936 [2014]). Therefore, the borrower may not be able to write-off that amount. Mortgage INTEREST (itemized on line 1), however, is more likely to be deducted. Of course it will depend on other factors that you should discuss with your tax professional. Nevertheless, the loan servicer is required to notify the borrower with a 1098 when payments exceed $600.

So, in summary, a reverse mortgage borrower may get a 1098 in January after making prepayments in the previous year and should consult their tax preparer. The borrower may, or may not, have a deductible item on the form, but it does not indicate the need to pay more taxes.

I have been collecting reverse mortgage questions for several years, and I’m aware that many in my collection hold limited value. Nevertheless, the answers to the most common questions asked about reverse mortgages were the basis for writing the book, Understanding Reverse, which has been helpful to many industry professionals and older homeowners.

If you would like to add to my collection, and possibly have your question anonymously addressed in my blog, please don’t hesitate to click the “CONTACT US” tab in the upper right corner.

Dan Hultquist

What is Reverse Mortgage Financial Assessment?

The mortgagee must evaluate the mortgagor’s willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.”

– Mortgagee Letter 2014-21

If you have not already heard, the federally insured reverse mortgage program is going through another major change effective March 2, 2015 called Financial Assessment. For the first time, reverse mortgage lenders will be required to assess each borrower’s credit history and monthly residual income. This is a dramatic change for an industry where the focus has been primarily on the value of the home.

Why Financial Assessment?

The first question many will ask is, “why do these things matter when originating a loan that doesn’t require monthly repayment obligations?” After all, the value of the home and the age of the borrower are the primary factors in qualifying. So, why are residual income and credit now included in the underwriting of these loans?

The answer is that these loans should not be viewed as an emergency, short-term access-to-cash, program. Home equity conversion should accomplish more than that. It should always leave the borrower with the ability to pay their property charges and monthly bills. Therefore, we need to document that ability with this assessment. The reverse mortgage MUST be a sustainable solution for the homeowner.

According to Mortgagee Letter 2014-21, “The mortgagee (that is us, the lender) must evaluate the mortgagor’s (that is the borrower’s) willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.”

The critical borrower obligations and mortgage requirements are as follows:

  • Upkeep of the home in good condition
  • Payment of property taxes
  • Payment of homeowners insurance
  • Payment of other property charges (flood insurance, HOA dues, condo dues, etc.)

These are FHA requirements, and we need to document every borrower’s ability to meet these obligations. It is important to note, however, that Financial Assessment is NOT necessarily a “yes or no” qualification of the borrower. The results of Financial Assessment are generally used to determine whether a life expectancy set-aside is needed or not.Financial Assessment

What is a Life Expectancy Set-Aside (LESA)?

When the underwriter determines that one or more of the financial assessment tests have failed, a Life Expectancy Set-Aside (or LESA) will be required. These are funds that are removed from the borrower’s principal limit and set-aside for the purpose of paying property charges over a calculated time period. The two types of LESAs that may be required are described here:

FULLY-FUNDED LESA – The lender uses funds set-aside from the borrower’s principal limit to pay three critical property charges; property taxes, homeowners insurance, and flood insurance (if needed). The lender pays these charges directly when the bills are due, in the same way a traditional escrow account functions.

PARTIALLY-FUNDED LESA – The lender uses funds set-aside from the borrower’s principal limit to supplement the borrower’s income. This is done to fund a homeowner’s gap in residual income. The lender releases necessary funds to the borrower semi-annually. The borrower, however, will be responsible to pay their own property charges.

For more information on consumer protections and other changes designed to strengthen Home Equity Conversion Mortgages, make sure you purchase the book, Understanding Reverse, and subscribe to my blog in the right-hand margin.

Dan Hultquist

Do You Believe in Reverse Mortgages?

“Being able to recognize the alternate uses of home equity in retirement requires one to take a long-term financial-planning view. Remember, the program was not initially designed as a short-term, quick fix. It was designed for two purposes – a monthly stream of income or a line of credit for future use.”     

– Understanding Reverse

What an odd question to ask. I believe in miracles, but I don’t necessarily believe in karma. I believe in an NCAA football playoff system, but I don’t believe the NCAA acts in the best interest of student athletes. I believe Roger Federer is the greatest tennis player of all time, period. But asking if I believe in Reverse Mortgages is like asking an English teacher if he/she believes in grammar. They both exist, but they are not properly understood by most people, and therefore misused.

This question, however, has been posed to me many times recently.  I generally don’t mind, because it offers me the opportunity to respond. I wrote the book Understanding Reverse to help educate people and to change perceptions. But I find that the question behind the question is often, “Do you believe Reverse Mortgages are good financial tools?” And the questioner has already formed an opinion.

The best way to respond is to ask what they currently know about Reverse Mortgages. That way I can assess their knowledge. I also find that most people can be classified into three different perspectives: the “Misinformed”, the “Last Resorters”, or the “Strategists”. Let me describe each:

Level #1: The “Misinformed”

A friend recently posted on social media, “Only a fool would get a Reverse Mortgage. It’s a scam.” That is terribly offensive to Certified Reverse Mortgage Professionals (CRMPs) who re-commit themselves, in writing each year, to act in the best interest of older homeowners. These comments, however, also reflect a level-1 understanding of the product. Their perception, or misperception, is generally tainted by the following THREE COMMON MISCONCEPTIONS:

  • The bank gets the home now, or when I die
  • I may end up owing more than the value of my home
  • My estate will get stuck with a bill for loan balance deficiencies

Of course, we know that the homeowner holds title to the home for the life of the loan, and that the heirs generally have at least four options when the loan matures. In addition, the non-recourse feature states that the homeowner and their heirs will not owe more than the value of the home. They are not stuck with a bill. The FHA insures Reverse Mortgages and offers many generous consumer protections.

Level #2: The “Last Resorters”

A friend of mine was happy to report to me that their financial planner was open to Reverse Mortgages. The planner conceded that “there are times when a Reverse Mortgage may be an appropriate solution.” According to him, the ideal candidate is a homeowner who is house rich, cash poor, with no heirs, and is using it as a “last resort” to stay in their home. My response was “Congratulations. You have a financial planner who is willing to allow a desperate homeowner access to their own money”. That is a very short-sighted view of Home Equity Conversion, and unfortunately, that financial planner is missing the most critical financial planning aspects of the program.

Unfortunately “Last Resorters” have a limited understanding of the product and are influenced by the following THREE ERRONEOUS ASSUMPTIONS:

  • Reverse Mortgages are very expensive
  • Interest rates are very high
  • Reverse Mortgages inherently cause home equity to decrease

Of course we know that the product can be very INEXPENSIVE for homeowners who stay in their homes for longer periods. Interest rates have been extremely LOW on Reverse Mortgages for quite some time. Finally, since initial disbursement limits were implemented, the majority of amortization schedules that I view show the homeowner’s equity INCREASING for many years. This is because interest accrual is projected to be small compared to home value appreciation.AA015287

Level #3: The “Strategists”

Individuals with a level-3 understanding of Reverse Mortgages are rare, but are becoming more common with the help of financial planning researchers and their published papers in the Journal of Financial Planning.

“Strategists” believe that the strategic use of home equity in retirement should be considered by all older homeowners as a form of insurance and/or retirement planning. They believe it strongly enough that they obtain Reverse Mortgages for themselves, and recommend them for their friends and their family members as early as they can.

Those with this higher-level understanding of Reverse Mortgages are influenced by the following SIX RELATIVELY UNKNOWN TRUTHS:

  • The compounding line-of-credit growth is a powerful retirement planning tool
  • Rising interest rates offer future advantages for homeowners using the product wisely
  • Making payments toward Reverse Mortgage balances may have positive financial planning implications
  • Reverse Mortgages can be used to delay Social Security, thereby increasing your monthly retirement benefit
  • Reverse Mortgages can act as a hedge against property value declines
  • The “Standby Reverse Mortgage” can extend a retirees assets, making them less likely to run out of money

Yes. I do believe the proper use of Reverse Mortgages should be considered as a part of every older homeowner’s retirement plan. To better understand the strategic uses for reverse mortgages, please subscribe to my blog in the right hand margin.

Dan Hultquist

How Are Reverse Mortgage Principal Limits Calculated?

“Historically, the principal limit has been a measure of what HUD says a borrower with certain factors is able to borrow at closing. After the September 2013 changes to the program, however, that definition is not quite accurate. Homeowners may be restricted in the amounts they can borrow up-front. Fortunately, with the adjustable rate products, the remaining net principal limit will be accessible after that first year.”

Understanding Reverse

One of the most common questions I get from borrowers is “What is the most I can borrow?” While borrowing it all up-front may not be the optimal strategy, it is important to know the amount of funds homeowners have available to them. It is also significant to note that this number increases with time. Therefore, technically what they really want to know is, “What is my initial principal limit?

Initial principal limits vary from homeowner to homeowner and are based on AGE, RATES, and the HOME’S VALUE. Reverse Mortgage calculators will generate principal limits that are consistent from lender to lender. But let’s discuss how they are determined:

  1. Begin with the Relevant AGE

Older borrowers generally qualify for higher principal limits. While all borrowers must be 62 or older, non-borrowing spouses may be much younger. Therefore, HUD publishes tables that reference every age from 18 to 99. Keep in mind the relevant age will be the youngest borrower, co-borrower, or non-borrowing spouse. I often refer to this as the “Age of Youngest Participant.”

  1. Identify the Relevant RATE

For fixed-rate reverse mortgages, we will use the interest rate. With adjustable rate loans, however, FHA requires us to project what the rate for a particular reverse mortgage may be in the future. This number has been between 4% and 6% for quite some time, and is referred to as the “Expected Interest Rate.”

Using these two items (age and rate), we can look up the homeowner’s Principal Limit Factor (PLF) from HUD’s factor table.

Chart_PrincipalLimitFactors

 

In the chart below, you will see a small sample of selected ages and selected expected rates and the corresponding PLF% from the 2014 table.

Chart_PLFsForSelectedAgesAndRates

  1. Multiply the Homeowner’s PLF by the Home’s Value

When the PLF is multiplied by the home value we get the initial principal limit in dollars. Bear in mind that higher home values will be capped at $625,500 (for calendar year 2015) for the purpose of this calculation.

Let’s look at an example.  Linda is 74 years old, and she is younger than her spouse. Therefore, she is the youngest participant. She has an expected rate of 5.00%. Using these two pieces of information, we can look up a PLF of 60.6%.

60.6% of Linda’s home value of $200,000 will give her an initial principal limit of $121,200. This principal limit will increase for Linda every month that she remains in the home, regardless of future home values. She could borrow it if needed, or let it continue to grow. Eventually, her available funds my even grow to exceed the value of her home.

For those homeowners that use the product for financial planning purposes, this increasing principal limit can offer a secure collection of funds to be accessed later in retirement if needed. The compounding is working in the homeowner’s favor, and is a good reason to consider getting a reverse mortgage early in retirement.

To learn more about reverse mortgage guidelines and the advantages they offer older homeowners who use them properly, please purchase a copy of my book, Understanding Reverse.