Yearly Archives: 2018

What is a Proprietary Reverse Mortgage?

On Friday, December 14th, we saw The U.S. Department of Housing and Urban Development (HUD) raise the 2019 limits for FHA’s reverse mortgage product – the Home Equity Conversion Mortgage (HECM). This means that homes valued above $726,525 are capped at that figure when calculating principal limits.

This is an increase of nearly $47,000 from 2018 and comes at a time when more non-government “proprietary” jumbo reverse mortgage products are making the opposite move – appeal to more lower value homes.

The end result is that more consumers are finding more options for accessing their housing wealth as part of a comprehensive retirement plan. Because of this shift, I have updated my book for 2019 to include the new HECM lending limits as well as a new chapter titled, “What are Proprietary Reverse Mortgages.” The following is a preview of the new chapter:

HECM or Proprietary Reverse Mortgage?

The federally insured HECM has been the dominant reverse mortgage product for the last three decades. That’s changing, however, as innovative mortgage lenders have found that certain restrictive HECM guidelines have opened the door for non-agency reverse mortgage products.

These “proprietary” reverse mortgage options still maintain many of the consumer protections of the HECM program. Reverse mortgages, FHA-insured or not, must be non-recourse loans. But, of course, these proprietary products do not charge the initial MIP (2%) or annual MIP (0.5%). So, while the rates may be slightly higher, you might find the up-front charges to be significantly reduced.

NOT JUST A JUMBO OPTION ANYMORE

For the last few years, the phrase “jumbo reverse mortgage” was used to describe these options, as lenders were able to better serve borrowers who owned higher-priced homes.

However, these new products solve other problems that HECMs currently do not. Here are a few:

  • HECMs require condominium complexes to be FHA approved before units can be eligible for HECM financing. Proprietary products may finance units within non-approved condo projects.
  • HECMs have initial disbursement limits that often prevent borrowers from accessing more than 60% of their principal limit within the first year. Proprietary products have no such restrictions.
  • HECMs require all existing liens to be paid off a closing. One proprietary product now allows the reverse mortgage to be in second lien position.
  • HECMs do not currently allow the payoff of unsecured debt at closing. Proprietary products may allow the payoff of personal debt and other items at closing.
  • HECMs require most liens to be seasoned for 12 months before closing. Proprietary products often have no seasoning requirement.
  • HECMs require all borrowers to be age 62 or older. One proprietary product offers financing for borrowers as young as age 60.

Some are offered as first liens. Some are structured with a growing line of credit that mimics the HECM ARM. Still, others allow the loan to remain in a second-lien position in cases where the first mortgage has an attractive low rate.

For more information on all forms of reverse mortgage product offerings, subscribe to this blog and consider buying the reverse mortgage resource consumers and finance professionals use – Understanding Reverse.

If a Spouse is Under 62, Know the HECM Non-Borrowing Spouse Rules

When a spouse is not a borrower in a HECM transaction, he or she is referred to as a non-borrowing spouse (NBS). This is often due to the spouse not meeting the age requirement of 62.  Understanding Reverse – 2020 – Page 51

The Basics

A Non-Borrowing Spouse (NBS) is the spouse of a reverse mortgage borrower who will not be a borrower on the loan. But the guidelines, as well as the rationale for this designation, are more complex, and are commonly misunderstood.

Many spouses are not included in reverse mortgages because they are not old enough (age 62). However, there are other reasons for an NBS, including pre-nuptial agreements, homeowners who have been remarried and want biological children to inherit the estate, legal liability, and homeowners who don’t intend to stay married, etc.

Until 2014, all reverse mortgage loans automatically became due and payable when the last borrower died, even if a surviving spouse was still living in the home. This is no longer the case. HUD changed the guidelines so that “Qualified Non-Borrowing Spouses” may continue living in their homes following the death of the last borrower. In essence, 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.

Having an NBS, however, now meant the borrower would have access to less funds. This was because the funds became based on the age of the youngest spouse, which was likely the NBS.

The Designations

Lenders argued that if an NBS does not occupy the home, and is therefore not qualified for the deferral, his or her age shouldn’t be used in the calculation of the borrower’s principal limit. As a result, HUD issued new designations – Ineligible and Eligible Non-Borrowing Spouses:

  • INELIGIBLE Non-Borrowing Spouses do not occupy the home, are not protected by the NBS “due and payable” deferral provisions, and do not have their age included in the calculation of the borrower’s principal limit.
  • ELIGIBLE Non-Borrowing Spouses occupy the home, are protected by the NBS “due and payable” deferral provisions, and have their age included in the calculation of the borrower’s principal limit.

It is important to know that because an NBS has only limited protection under the reverse mortgage program, we would prefer to have both spouses on the loan if possible.

The Due and Payable Deferral Period

If the last borrower passes away, it will be imperative that the NBS “obtain ownership of the property or other legal right to remain in the property” within 90 days.

Fortunately, HUD made additional regulatory changes in 2017 that allow an NBS to remain on title as a mortgagor. While they are still not borrowers, this does eliminate the 90 day hurdle, making it easier to qualify for the deferral.

At that point, the NBS will need to make sure to keep up with all of the obligations of the HECM, including the payment of property charges, to ensure the loan does not become due and payable for other reasons.

Warnings!

  1. Because the NBS is not a borrower, or party to the loan in any way, no disbursements can be made during the deferral period other than repairs charges paid through a repair set-aside. This means that the line-of-credit and monthly payments will cease payouts, including a Life Expectancy Set-Aside (LESA) used to pay property charges.
  2. The due and payable deferral is only available upon the death of the last borrower. Therefore, if the loan matures for any other reason, the NBS is not eligible for the deferral. The primary concern is that 12 consecutive months of non-occupancy for mental or physical incapacity (e.g. nursing home/assisted living) is a maturity event that is ineligible for the due and payable deferral.
  3. These protections only apply to HECM loans with FHA Case numbers assigned on, or after, August 4, 2014. For loans originated prior to that date, the lender has the option, but not the obligation, to assign the loan to HUD, which may offer similar protection to the NBS.

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

Reasons NOT to Consider a Reverse Mortgage

Reverse Mortgage Professionals find themselves constantly touting, defending, and pitching the numerous advantages of the federally insured Home Equity Conversion Mortgage (HECM). The primary reason they put in so much effort is not to make a sale. It is because the public is still confused and largely unaware of the lifestyle and financial planning advantages of the product. After 30 years, many older homeowners still think they lose title and ownership of their homes with this financial tool.

However, most eligible candidates are ALSO unaware of the many reasons NOT to get one. The fact is, there are individuals for whom this is not a good fit. It would be best to identify them upfront before they spend the time, energy, and money it required to complete the mandatory HECM counseling. So, let’s highlight a few conditions that could mean that a reverse mortgage might not be a good option:

  1. If the home does not fit the homeowner’s long-term needs

If the homeowner has the intention of selling the home within the short-term, or if the home does not meet their long-term physical needs, a reverse mortgage may not be a good fit. While they can certainly sell the home at any time, the program was designed to meet the needs of older Americans who wish to age in place. If you want to stay, and are physically able to stay, you have passed my first test.

  1. If the Reverse Mortgage does not provide a tangible benefit

It not only has to make sense right now, but also needs to provide a sustainable solution throughout retirement. If the reverse mortgage offers little current or future advantage to a borrower, then the homeowner should look for other options.

And using a reverse mortgage to eliminate monthly mortgage payments does not always guarantee that a homeowner will have positive monthly cash flow. New regulations, however, were implemented to ensure that monthly residual income is considered in underwriting the loan.Door

  1. If the homeowner does not adequately understand the product

A HECM borrower or their trusted advisor must be comfortable paying property charges, maintaining the home, and managing finances. Unfortunately, many are not accustomed to handling these items. In addition, some may have competency issues that prevent them from fully understanding the complex loan product for which they are applying. Consequently, HECM Counseling is required to make sure all parties understand not only the product, but also other options that may be available to them.

  1. If the homeowner wishes to protect a legacy

I reluctantly include this item on the list. Many experts don’t consider inheritance a reason NOT to get a reverse mortgage. This is because homeowners who obtain a growing HECM line-of-credit early in retirement are better equipped to decide how future expenses are paid – by the homeowner, by the heirs, or by the home.

Some homeowners, however, wish to protect their home’s equity as a legacy for their heirs and would never consider accessing home equity in an emergency. That’s a very nice gesture, and I can understand wanting to leave this world giving an inheritance to those you love. The debate becomes whether an inheritance is a right of the heirs or a gift from the parents. That will be a blog for another day.

If the homeowner wants to stay in the home, and understands the advantages for themselves and their heirs, come explore the strategic uses of home equity in retirement. For more information, subscribe to this blog and purchase the book, Understanding Reverse.

Dan Hultquist

Home Purchase with a Reverse Mortgage

HECM for Purchase began with the passage of the Housing and Economic Recovery Act of 2008. Prior to this legislation, if a homeowner in retirement wanted to relocate, qualifying for the new home often proved difficult. They would have to be eligible to purchase a home though traditional means, establish their residency in the home, and then refinance with a HECM if desired.    Understanding Reverse

Some baby boomers continue to reside in homes that are no longer ideal. Unfortunately, they are unaware of a home financing option that was built specifically for them – The Home Equity Conversion Mortgage for Purchase, or HECM for Purchase.

Older homeowners often find themselves wanting (or needing) 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.

I often receive phone calls that highlight the need for this program, such as:

  • “My grandmother wants to move south to be closer to her kids and grandkids.”
  • “With my knee and hip problems, I need a single-story home, preferably one that requires little maintenance.”
  • “I want to live near my friends in a 55 and over community on a golf course.”

When physical limitations become a reality, or when individuals desire a closer connection to family, a move may become necessary. The reverse mortgage can help them move AND keep more money in their pockets.

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But how does it work?

With a traditional reverse mortgage, the lender offers a homeowner a percentage of the home’s value that can be used as needed. With a HECM for Purchase, however, those reverse mortgage funds are applied to a new home’s sales price. Depending on the age of the youngest participant, the lender is generally able to contribute 40% to 65% of the purchase price.

As always, no monthly principal and interest payments are required, and the homeowner gets to retain title and ownership of the home.

Most ideal purchase candidates are selling their current homes and relocating. If they use the HECM for Purchase to finance a large portion of the sales price, the homeowners can retain more cash reserves. This is a great opportunity to supplement retirement savings.

What’s in the fine print?

Reverse Mortgages are offered for “PRINCIPAL” residences only. This means that the homeowner must occupy the home, and the HECM for Purchase cannot be used for 2nd homes or investment properties. In fact, the borrower must occupy the home within 60 days of closing.

Because this loan product is federally insured, the HECM for Purchase will always require upfront, and ongoing, Mortgage Insurance Premiums (MIP).

Lastly, please be aware that sometimes mistakes are made when a Realtor writes a sales contract for a HECM. HUD still restricts most forms of seller-paid closing costs for HECMs. So it’s important that the Realtor works with an experienced reverse mortgage professional who can guide everyone through the process.

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

Dan Hultquist