Colder Winter May Fuel Reverse Mortgage Demand

For most of us, the bulk of our housing costs are relatively constant. Monthly mortgage payments may vary slightly as property taxes and insurance rate are updated annually. But one housing cost is often seasonal – Heating Ventilation and Air Conditioning (HVAC). It can make, or break, a budget.

One advantage of living in the south is the reduced cost of heating a home during the winter. The trade-off is the high cost of energy to cool the home in the summer. But this year, the U.S. Energy Department has forecast a significant increase in heating costs for the four primary fuels that heat America’s homes – natural gas, heating oil, electricity, and propane.

Some of these increases are due to price increases. However, according to the U.S. Energy Information Administration (EIA), weather plays a role as well.

“The latest outlook from NOAA expects winter temperatures east of the Rocky Mountains to be colder than last winter, with projected heating degree days in the Northeast, Midwest, and South about 16-18% higher.” www.EIA.gov

Colder Weather May Fuel Reverse Mortgage Demand

Here are the EIA’s projected cost increases per household this winter by fuel type:

  • Natural gas         + $116   (+ 22.4%) representing nearly 1/2 of U.S. households       
  • Heating oil          + $378   (+ 38.1%)            
  • Electricity            + $49     (+ 5.4%)
  • Propane (NE)      + $345   (+ 21.0%) in the Northeast
  • Propane (MW)    + $290   (+ 29.6%) in the Midwest

We never know what contingencies may arise that will disrupt the monthly budget. Things like inflation, low interest rates, a poor sequence of market returns, family emergencies, and health concerns can all impact a homeowner’s bottom line. For those on a fixed income, these increases in winter heating costs are significant.

Fortunately, most older homeowners have a home equity nest egg that can improve their retirement cash flow. The reverse mortgage line-of-credit (LOC) may be established early in retirement and used for unexpected expenses or emergencies. If monthly cash flow is needed, a reverse mortgage tenure or term payment may do the trick.

If you have read my previous blogs and/or my book, Understanding Reverse, you might remember that I discussed three primary uses for reverse mortgages – Need, Lifestyle, and Planning.

Understanding Reverse

Using a reverse mortgage to supplement retirement cash flow may allow the home itself to pay for increased heating costs. This can be done without disrupting traditional retirement planning. For this reason, a reverse mortgage may be used for all three of the primary uses mentioned above. Keeping the home at a comfortable temperature satisfies a need, improves lifestyle, and protects traditional retirement planning.

While the overwhelming majority of baby boomers wish to remain in their existing homes during retirement, homeownership can be expensive. I should know. I’m scheduled to replace two air conditioning units in the spring. But it may be wise for those who are at least age 62, and wish to age in place, to consider establishing a reverse mortgage line-of-credit today, and know that they can weather the winter storms as they come.

 

Others are warming up to the idea of using a reverse mortgage to enhance retirement. To learn more this financial tool, buy the book, Understanding Reverse, and subscribe to this blog.

As this is the last blog post of 2016, I want to thank those of you that have made Understanding Reverse the top-selling book on Home Equity Conversion over the last two years. Stay tuned for the release of the 2017 edition, and have a Merry Christmas and a Happy New Year.

Dan Hultquist

The Reverse Mortgage: Is it really that complicated?

Is the Reverse Mortgage as simple as some claim? Or is it a highly complex financial tool, as the Consumer Financial Protection Bureau describes it?

While it may appear that these views are mutually exclusive, they are not. However, the underlying concern is one that congress, regulators, financial planners, lenders, and consumers all need to better understand.

THE REVERSE MORTGAGE CONCEPT

The reverse mortgage concept is simple and can be explained in a sentence or two. In its most basic sense, a reverse mortgage is any loan program that defers the repayment obligation until a later date.

More specifically, it offers a homeowner the ability to use a portion of his/her home’s equity, it creates a lien, and it delays repayment until the home is no longer the primary residence of the last borrower. That is pretty basic and easy to understand. This holds true for all reverse mortgages, including the Federally Insured Home Equity Conversion Mortgage (HECM), single-purpose reverse mortgages offered by local government entities, and proprietary reverse mortgages.

THE HECM PRODUCT

However, the “concept” of a reverse mortgage and the “product” itself are quite different.

The Consumer Financial Protection Bureau (CFPB), which is charged with a degree of oversight of the mortgage world, believes the reverse mortgage is complex. In 2012, the CFPB commented on the complexity of the HECM product in their 231-page Report to Congress stating,

Reverse mortgages are inherently complicated products that are not easy for the average consumer to understand.

Looking back, it’s hard to imagine this was said in 2012. At the time, training and education on the product was relatively easy. All that was needed was to simply educate mortgage originators and clients on the program guidelines, the non-recourse feature, principal limit factors, product options, payout options, and costs.

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REGULATORY CHANGES

Only 15 months after the CFPB report was published, the program saw massive regulatory changes. These changes from 2013-2015 were intended to protect the HECM program, protect the consumer, and ensure the product was used as a sustainable solution for homeowners. Nevertheless, in a short period of time, the complexity of the reverse mortgage product doubled.

Does that mean the product is complicated? Not necessarily. The issue is not one of complexity, but rather a lack of familiarity. The HECM product is misunderstood simply because the terminology and concepts are somewhat unfamiliar.

As a result, industry training is quite different now, including the addition of the following concepts: initial disbursement limits, non-borrowing spouse, and financial assessment.

IS THE REVERSE WORLD MORE COMPLICATED THAN THE FORWARD?

I received what many believed was the best forward mortgage training available when I entered the industry. Completing it took me away from home for several weeks. Having a comprehensive understanding of the forward side DOES takes time. In fact, forward originators must now comply with TRID requirements which is not mandated for the reverse side… yet.

But, while various forward product options each have their own credit requirements and debt-to-income ratios, most consumers already understand the dominant product – the 30-year fixed conventional loan. By contrast, the dominant reverse product (The HECM) and the terminology that accompanies it are relatively unknown.

Once again, the primary issue for mortgage originators, financial service professionals, and consumers alike is becoming familiar with the HECM product.

Note: To be a licensed mortgage loan originator, the standardized testing (SAFE Exam) generally includes only one question on the topic of reverse mortgages.

DO NEW REVERSE MORTGAGE STRATEGIES INCREASE THE COMPLEXITY?

Yes. Wendy Peel, VP of Sales and Marketing at ReverseVision, notes that “much of the complexity lies within the varied strategic uses of the new reverse mortgage product.” Prior to 2013, reverse mortgage sales had little to do with financial planning and more to do with how much money the borrower could receive. In 2013, the program began limiting many borrowers to an initial disbursement of 60% for the first year. This, combined with an increased focus on sustainability, shifted the product back towards the financial planning uses for which it was originally intended.

Mathematically, research shows us the financial planning advantages are significant. Unfortunately, many loan originators, consumers, and most financial planners are still uncertain how to use reverse mortgages to open up retirement cash flow options and strategically manage portfolio draws in retirement.

IS IT WORTH EXPLORING?

Yes. Don’t let the unknown discourage you. The primary reason I wrote the book, Understanding Reverse, was to answer the most common questions, summarize the program guidelines, and document the regulatory sources. In fact, one of my greatest pleasures is receiving emails and letters from loan originators and consumers who thank me for clarification gleaned from the book.

The HECM product is the most under-utilized financial tool available to enhance the lives of older homeowners. We can easily solve the perceived complexity problem with proper education, not just offered to the loan originators, but also to financial service professionals, realtors, the media, and the clients themselves.

Yes, the concept is beautifully simple. Yet, the product appears complex because of a lack of familiarity with regulatory changes and appropriate financial planning uses. As we continue to develop new ways to explain this great program to a broader audience, I know we can build a better understanding of reverse mortgages.

 

I’d love more discussion on this topic. So, please let me know your thoughts? If you wish to attend my national broadcast on the Financial Assessment changes on October 3rd, please register by clicking this link:

Financial Assessment Review and Updated Compensating Factors

Dan Hultquist is the Director of Learning and Development at ReverseVision and authored the top-selling book on this topic, Understanding Reverse – 2016.

Getting Back to Reverse Mortgage Basics

With the regulatory overhaul over the last three years, and with more to come, the reverse mortgage program has gained positive attention in the national media and financial planning community. But, the basic concepts that every older homeowner should know have remained unchanged for the most of three decades. So, since other blog posts, including my own, discuss changes, this may be a good time to take a breather and review the core of the reverse mortgage program and what it offers.

The following is a summary of the top 10 most important concepts on my list:

  1. What is a reverse mortgage?

The most common product, known as a Home Equity Conversion Mortgage (HECM), is a federally insured loan product that allows homeowners 62 years and older to access a portion of their equity now in cash or monthly payments, or later from an established line-of-credit.

  1. What are the primary advantages?

Many clients like the freedom of having no required monthly principal or interest mortgage payments. However, they often miss the advantages gained by making periodic prepayments. Of course prepayments will reduce the loan balance. But when using the adjustable rate HECM, those payments will also boost the government-insured line of credit that is already growing.

  1. Who use Reverse Mortgages?

Older homeowners seeking reverse mortgages are a mix of those with a need for cash, those who wish to enhance their retirement lifestyle, and those with financial planning motives. However, since 2008, the reverse mortgage has also had the ability to assist those that wish to purchase a home.

  1. What are the borrower responsibilities?

It is the borrower’s responsibility to occupy and maintain the home. However, he/she is also required to pay the property charges including property taxes and homeowners insurance when due, unless the lender sets aside funds for those purposes.

  1. What is the most common misconception?

Clearly, the greatest misunderstanding is that the “bank gets your home.” This is not true, and the homeowner retains title and ownership of the home over the life of the loan, and the heirs have multiple options upon the death of the last borrower.

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  1. What do the proceeds potentially impact?

Proceeds are NOT taxed as income. While the HECM may be used to enhance basic Social Security and Medicare, the proceeds don’t adversely affect those government benefits. However, Supplemental Security Income or Medicaid are means-tested programs that may be impacted if caution is not taken.

  1. What is the “Principal Limit?”

The Principal Limit represents the maximum funds that can be offered at the time of closing. This amount is tied to the relevant ages, interest rates, and the home’s value, but may be restricted in some cases during the first year.

  1. What is the non-recourse feature?

The homeowners and their estates will never owe more than the value of their homes. This is a great consumer protection for the homeowners as well as their heirs, as there is no personal liability for a deficiency created by falling home prices or a loan balance that exceeds the value of the home.

  1. Why is counseling required?

HUD felt it was important for the homeowner to be counseled by someone other than the loan originator. Therefore, a reverse mortgage applicant will need to select a HUD-Approved counseling agency and obtain a counseling certificate.

  1. What are the Financial Planning strategies?

Many are using the HECM to delay Social Security filing. Others will draw tax free distributions from their home equity, allowing them to manage their adjusted gross incomes. This may reduce their tax liability as well as Medicare premiums. Still others will draw retirement cash flow from home equity during down markets to preserve their traditional retirement funds.

For more information on the reverse mortgage product and its recent changes, please purchase Understanding Reverse – 2016. For updates on the newest round of changes, stay tuned by subscribing to this blog.

Dan

Let’s Openly Discuss this Reverse Mortgage “Scam”

Reverse mortgage lenders have been fighting an uphill battle for years. And blogs and online debates likely won’t change the overall perception (or misperception) about reverse mortgages. There will always be those who can’t help but voice their opinions about a product they simply don’t understand. Nevertheless, as an advocate for proper home equity conversion for retirement cash flow, I’m often the recipient of these negative comments. So, let’s openly discuss the so-called reverse mortgage “scam.”

The media is generally pretty quick to jump on scam coverage. And yet, the national media has actually reacted favorably toward the product reforms of the last three years, and the coverage on the topic has been positive. In addition, publications like Forbes and the Wall Street Journal have touted the prudent aspects of reverse mortgages, adding academic research from respected retirement experts like Jamie Hopkins, Wade Pfau, and others. In this respect, the financial media, and the academic community are way ahead of the game, and offer credible arguments in support of reverse mortgages.

Financial AssessmentYet, any time such articles are published in the media touting the merits of reverse mortgages, there will be those who reply “It’s a SCAM!”, “Stay away!”, and “There is a sucker born every minute”. These comments continue to show how poorly the public understands the terms of the product, and I naturally feel compelled to reply.

These negative sentiments have persisted as a result of the unregulated products offered by financial service “professionals” since the 1960’s. The truth is, reverse mortgages have been highly-regulated and safe products since the Federal Housing Administration first insured the Home Equity Conversion Mortgage (HECM) product in 1989.

In fact, Ohio State University recently released a study showing that 83% of seniors were either “satisfied” or “very satisfied” with their decision to obtain a reverse mortgage. That’s extremely high for ANY financial product. Clearly, it is not a scam, a failed government program, or a bank trying to take a home.

One argument for the Home Equity Conversion is that it is insured by the U.S. government. Well, that’s probably a poor argument. Even though I believe the Reagan administration got this one right, we live in an age where distrust of the government is at an all-time high. So there may be more effective ways to debate its validity.

In fact, I have found that replying with a simple question is a great way to open up an honest conversation – “what about them makes you think it is a scam?

  • Is it because you believe the bank takes title of the home?
  • Is it because you believe the homeowner can owe more than the value of his/her home?
  • Is it because you believe these are similar to subprime loans?
  • Is it because you believe they are too expensive for what they provide?
  • Is it because you believe they stick the heirs with a bill upon the borrower’s death?
  • Is it because you believe those who get them generally regret their decision?

None of these are beliefs are true, and yet they account for many of the objections people have about the product. Asking about their objections opens the door to education, and learning the facts from a specialist should reduce fears.

The good news is that the Financial Planning community is beginning to understand the advantages, and many now base their recommendations on research from the academic community. Top-selling author, Jane Bryant Quinn, has a very good understanding of the product and now advocates for reverse mortgages in her recent book, How to Make Your Money Last. Sadly, Dave Ramsey is still misinformed and refuses to recognize the research of his peers, as well as published papers within the Journal of Financial Planning.

We’ll continue to see comments like “worst idea ever,” “people get screwed,” and “just give the home to the bank”, and I’ll still respond. But the media, academia, and the financial planning community are moving the perception needle from “scam” to “strategic use of home equity.”

Dan Hultquist

The Reverse Mortgage, Taxes, and Government Benefits

“Accessing a large sum of cash from home equity and placing it in a bank account might be a problem for certain benefits that are “means-tested.”

 Understanding Reverse

Will getting a reverse mortgage impact my government benefits and/or my income taxes? These are major concerns that come up frequently when speaking to homeowners, especially during the month of April. And, for disclosure purposes, my first response is always:

“Keep in mind, reverse mortgage professionals are not a tax planners or financial planners, and rules regarding these items are always subject to change.”

Nevertheless, I offer general guidelines in my book, and in presentations to consumers, regarding both government benefits and taxation.

WILL A REVERSE MORTGAGE ADVERSELY AFFECT MY GOVERNMENT BENEFITS?

Maybe. As stated above, accessing a large sum of cash might pose a problem for some “means-tested” benefits. A means-test is a way of determining whether someone has the “means” to do without the assistance. Therefore, it will all depend on the answers to these two questions:

  1. Is the government benefit affected by means-testing?
  2. Is the amount drawn in excess of the benefit’s limits?

SOCIAL SECURITY AND MEDICARE

Basic Social Security benefits are not currently means-tested, and only a portion of Medicare is adjusted based on a homeowner’s income (MAGI or Modified Adjusted Gross Income). Therefore, we can safely say that Social Security and Medicare are NOT adversely affected by Reverse Mortgage proceeds.

SUPPLEMENTAL SECURITY AND MEDICAID

However, Supplemental Security (SSI) and Medicaid have income and/or asset requirements. It will be important to know what amount, held in a bank account, could prevent one from receiving those forms of assistance. As a result, it may be best to leave all available reverse mortgage funds in a line-of-credit, and only access those funds for specific expenses (e.g. roof repair, stair lift, bathroom remodel, etc.). Furthermore, it is always a best practice for the homeowner to consult with a benefits administrator financial advisor to make sure they are not disqualifying themselves.

Will getting a reverse mortgage impact my government benefits?

CAN A REVERSE MORTGAGE IMPROVE MY GOVERNMENT BENEFITS?

Yes it can! Draws from Home Equity are not taxed as income. Therefore, showing a lower Adjusted Gross Income can reduce premiums surcharges for that portion of Medicare that is means-tested on income.

In addition, even small draws from a reverse mortgage may eliminate the need to file for Social Security benefits too early. Delaying social Security may have significant advantages until age 70, and even a one year delay can improve a homeowner’s retirement cash flow.

WILL A REVERSE MORTGAGE ADVERSELY AFFECT MY TAXES?

This is another major concern that comes up frequently when speaking to homeowners.  Draws from home equity are not considered a taxable event (Federal or State Income Tax) and therefore do not adversely impact income tax liability.

However, if funds are drawn and placed into a bank account, they become an asset where interest may be earned. Any interest received from a new, or higher, bank account may be taxable moving forward.

On the flip side, when a homeowner draws part of their monthly cash needs from home equity instead of a taxable retirement income source, they may have the opportunity to reduce their marginal tax rate, which, in turn, can reduce their overall tax liability.

In addition, there may be cases where accrued interest, paid on a reverse mortgage loan balance, may be deductible just as with traditional, forward, mortgages. Keep in mind, reverse mortgages do not require monthly principal and interest payments. So, interest will generally accrue, but is not “paid”, and there can be no potential deductions unless a borrower actually makes prepayments.

Dan Hultquist

To learn more about how reverse mortgages, and how they can be used in financial planning, subscribe to this blog in the right-hand margin and get a copy of the top-selling book on the topic – Understanding Reverse.

Marshmallows and the Reverse Mortgage Line of Credit Growth

Delayed gratification is the principle that resisting a SMALLER reward today may lead to a LARGER reward later. Yet how many people are really willing to wait for something better?

Consider the famous Stanford Marshmallow Experiments conducted in the early 1970s. Children were offered one marshmallow immediately, but two marshmallows if they waited only 15 minutes to consume it. According to Wikipedia, “In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures.”

The children ONLY had to wait 15 minutes for their reward to double. How much harder is it for many homeowners to wait approximately 10 years for their available reverse mortgage funds to double? But, research shows it is indeed worth the wait.

Line of Credit Growth

The growth associated with the federally insured reverse mortgage is one of the hidden gems of the Home Equity Conversion Mortgage (HECM) program. For those homeowners who obtain a reverse mortgage as soon as they are eligible (62), and leave the funds in the line of credit (LOC), their delayed gratification comes in the form of guaranteed growth.

Reverse Mortgage LOC Growth

The LOC grows at current interest rates, which means many homeowners should want their interest rates to rise. It is also very secure, as the Federal government guarantees that those funds will be available to homeowners as long as they occupy their homes and abide by program guidelines. The LOC will never be frozen, reduced, or even eliminated if home values decline. In other words, you can trust the one who distributes the marshmallows.

Social Security Delays

Delaying Social Security has a similar benefit. Imagine an 8% increase in monthly benefit each year delayed until age 70. Yet, according to data from the Social Security Administration only 1.1% of men and 1.7% of women are willing or able to wait until age 70 to draw file for their benefits.

If reverse mortgages are so great, why is nationwide use of the program down?

Again, it is built for delayed gratification. The reverse mortgage is a great planning tool, but it is no longer designed for reckless massive cash draws upfront. For example, until September of 2009, homeowners could access a percentage of their homes value that was roughly equivalent to their age. A homeowner, age 62, would qualify for 62.5% of his/her home value, and a 95 year old would qualify for 90%. How can any homeowner resist that kind of immediate gratification? Reverse mortgage advertising was unnecessary because homeowners willingly drew large sums, knowing they could never owe more than the home’s value.

In 2013, however, the updated “New Reverse Mortgage” installed restrictions on how much can be drawn upfront. A homeowner may have an initial principal limit of $200,000, but unless he/she is paying off a large loan balance, that homeowner will likely have access to only $120,000 (60%) in the first year. The additional $80,000 (40%) is generally kept in the growing line of credit. These regulatory changes became a form of forced delayed gratification.

The reverse mortgage has been refined over the years, and is very attractive for many types of retirement planning needs. Nevertheless, it is now unattractive as a massive cash-out refinance tool, as the product was once used.

Several years of research has shown that mathematically, it does not make sense to wait to obtain a reverse mortgage. It does, however, make sense to get one as early as possible, and not draw from the available funds until later… if you can resist.

Those children who resisted the marshmallows in 1972 will be eligible for a Home Equity Conversion in approximately 13 years. If I were a betting man, I would wager that they will have significant home equity, are more likely to delay social security, and will enjoy watching their reverse mortgage line of credit grow every month.

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

Social Security Optimization with a Reverse Mortgage

When discussing Social Security and Reverse Mortgages, most professionals have always responded that “distributions from a reverse mortgage do not adversely affect basic Social Security benefits.” That is true, as basic Social Security is not a “means tested’ program. But that is only half of the story. The Reverse Mortgage can actually be used to ENHANCE a homeowner’s Social Security benefits.

Social Security strategies are critical to retirement planning

Let’s back up, and discuss the current reliance on Social Security. According to the Social Security Administration:

  • 51% of the workforce has no private pension coverage, and
  • 34% of the workforce has no savings set aside specifically for retirement.

As a result, over 64% of aged beneficiaries currently receive at least half of their retirement income from Social Security.

Over 50 years ago, Congress changed Social Security to allow Americans to claim benefits at age 62. And almost ¾ of the American population will draw Social Security at that age. At that time, however, the benefits are reduced. Currently, age 70 is the age at which retirees can maximize their monthly benefits.Social Security Optimization with a Reverse Mortgage

Many retirees SHOULD delay Social Security, but don’t

Of course results may vary based on earnings history and cost of living increases, but Social Security benefits will generally increase 8% (of full retirement benefit) for each year that is delayed until age 70. The end result is higher monthly payouts at age 70.

Some seniors will continue to work during some, or all, of the years leading up to age 70. According to Falling Short: The Coming Retirement Crisis, “Individuals who delay receiving Social Security benefits from 62 to 70 increase their monthly benefits by a full 76%.”

However, according to Social Security expert, Cindy Lundquist, the 76% estimate may be a little misleading. That figure assumes that the individual continues to work beyond age 62. She states “If you are not working from 62 until age 70, the increase in benefits may be closer to 54% to 57%.”

So, how many people actually take advantage of this opportunity to delay until age 70? According to data from the Social Security Administration only 1.1% of men and 1.7% of women wait.

Most people do not know how long they will live. Baby Boomers, however, have longer expected life spans than the generation before them. This makes Social Security delays especially attractive. However, if a retiree is in poor health and anticipates a shorter lifespan, this may not be the right strategy. For them, it may make sense to opt in early.

The problem has always been that retirees are counting on that income at the moment they retire. They don’t want to wait. That is precisely why many in their 60’s are turning to the Reverse Mortgage to fill the gap in their retirement income during that time.

But what about all the money they won’t get from 62 to 70?

Social Security is not about accumulation, but rather sustainability. Opting in too early could cause poverty if you live longer. If you opt in too late, you simply risk not receiving your Social Security benefits if you die. As Jack Guttentag (aka The Mortgage Professor) so eloquently states,

“Avoiding poverty risk is more important than avoiding mortality risk. If I don’t avoid poverty risk, I may be forced to endure poverty in my old age. If I don’t avoid mortality risk, in contrast, I won’t be around to lament the money I didn’t draw.”

In a nutshell, retirees can defer Social Security benefits and supplement their retirement income with tax-free draws from a Reverse Mortgage if needed. The objective is to get to age 70 comfortably, at which point monthly Social Security benefits are maximized.

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

Dan Hultquist

This is not intended to be legal, tax, or financial planning advice, and Reverse Mortgage professionals (myself included) are not social security experts. For a recommendation on the use of home equity during retirement, please consult a Financial Advisor who understands the strategies for home equity conversion and retirement cash flow.

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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

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