You probably already know at least a bit about reverse mortgages. They're the ones that allow qualifying seniors to cash in their home equity without selling, moving or making monthly payments. Instead, the costs of the reverse mortgage are rolled into the loan balance, and repayment is not required until all borrowers have moved out or died.
Reverse mortgages come in three types -- FHA, proprietary (aka "jumbo"), and single purpose, which are funded by local governments and charities to help very low income seniors pay for property taxes, insurance premiums or repairs.
In the wake of the credit crunch, very few private lenders were willing to fund these loans without government support, and it became very difficult to find reverse mortgages that weren't administered by and guaranteed under the Federal Housing Administration's (FHA's) program of Home Equity Conversion Mortgages (HECMs, pronounced "heck 'ems"). It's only fairly recently that the private sector has re-entered the market, and companies have again begun to offer this form of borrowing free of HECM rules.
Jumbo Reverse Mortgages vs. HECMs
Although those rules probably satisfied the needs of most borrowers, they don't accommodate all would-be borrowers. In particular, the FHA currently caps the maximum value it lends against at $625,500, a figure many expect to fall once the recovery has gained more traction. So even if your home is worth $2 million, the agency treats it as though it were worth just $625,500. The additional equity goes untapped under the HECM guidelines. Now, some companies backed by private money are willing to lend against real estate with market values of up to $6 million.
Other FHA rules that private lenders may be willing to ignore concern:
- Borrowers' ages: HECM guidelines require the youngest borrower to be at least 62 years old.
- Federal debt: HECM mortgages are available even to people with bad credit because borrowers are not required to make payments. Unless, that is, the creditor you burned was the federal government -- for example an unpaid student loan or tax lien. That will kill your eligibility unless you establish and adhere to a repayment plan.
- Loan-to-value: HUD uses a proprietary formula to determine how much of your home's equity can be borrowed against -- depending on interest rates and your age. Private lenders may be willing to go higher.
- Equity sharing: HUD prohibits the practice of splitting increases to the home's value with the lender. Being able to do so can allow you to borrow against a higher percentage of your equity or get you a lower interest rate.
Going for Gold
All sorts of reverse mortgages are increasingly popular with seniors. You can see why. You can get your hands on money that was previously inaccessible because it was tied up in your home -- and you don't have to make monthly payments until you move. You can spend the cash on anything you want, and you can take your money in a wide variety of ways, including:
- A lump sum
- Equal monthly payments for as long as you remain in your home
- Equal monthly payments for a fixed term
- A line of credit that allows you to draw down money only as you need it
You can often combine these to tailor a loan that suits you perfectly. For example, you might take a line of credit plus monthly payments for as long as you remain in your home, which is known as "modified tenure."
Reverse with Care
Every reverse mortgage comes with some risks, but proprietary ones are less regulated than HECMs and may consequently pose more. This in itself shouldn't be a problem, providing borrowers are willing to invest sufficient time to understand the details of the loan agreement, and to take advice from independent qualified professionals.
Such advice is mandatory before committing to an HECM, but may not be in the case of proprietary products. However, there's nothing to stop any borrower consulting a counselor approved by the U.S. Department of Housing and Urban Development (HUD), and you can find a local one through the department's online register or by calling (800) 569-4287 toll-free. Unless your income is low enough to qualify you for a free consultation, expect to pay typically around $125.
In particular, it's important to fully grasp the fees and costs to which you may be about to commit, as these, unlike those for HECM loans, are unregulated. You should also ensure that yours is a "nonrecourse" loan like the HECM product. This means that, should the loan's balance increase to the point that it outstrips the home's value, you will not be required to repay more than the amount for which the property sells -- whether in an estate sale, a short sale or a foreclosure sale.
Common Reverse Mortgage Pitfalls
So how can you have catastrophic problems with a loan when you don't have to make monthly payments? Well, one of the most common difficulties arises when borrowers fall behind with their property taxes, homeowners insurance premiums, HOA does or maintenance. Reverse mortgages oblige them to stay current with these, and a continuing failure to do so can result in default and ultimately foreclosure.
This situation can occur when seniors skip their other home-related obligations, either due to forgetfulness, lack of money management skills, or cash flow problems. New HECM reverse mortgage guidelines require lenders to analyze borrowers' credit and income, and hold back amounts for taking care of these items if it appears the homeowner may need help meeting these payments. If you have a proprietary reverse mortgage, those safety nets may not be in place.
Other serious problems can occur when a younger spouse is taken off the home's title in order to make the home eligible for a reverse mortgage, or to make the older spouse eligible to borrow more money. If the elder spouse dies first, the younger will have to pay off the reverse loan or vacate the property.
Explore Your Options
Although there are all too many stories of reverse mortgages going bad, it seems safe to assume that the vast majority of people who borrow in this way are happy -- an AARP survey found that 90 percent of seniors were happy that they took out their reverse mortgages, in fact. While it's important to comparison shop extensively to find your perfect product, and take care before signing any agreement, you could find that a jumbo reverse mortgage transforms your retirement.