October 2021 Newsletter
From The Certified Elder Law Attorney's Desk:
William W. “Bill” Erhart
Types, Regulations, Benefits, and Drawbacks
A reverse mortgage is an option for individuals 62 years or older who need cash and may not be able to get a standard loan or line of credit. A reverse mortgage allows a person to use the equity in his or her home and receive loan payments on a specified schedule. The borrower does not have to repay the loan as long as he or she remains in the home and is able to maintain it. However, as soon as the house is sold, the borrower dies, or leaves the home for an extended period of time, the loan balance is due. Throughout the duration the borrower is receiving payments from the lender, he or she keeps the title to the home.
The law is constantly changing in this area, especially as it pertains to spouses of the borrower. Previously, if one spouse was under the age of 62, he or she could not be named on the loan. Further, once the borrower passed away or had to be removed to a health care facility, the remaining spouse had to either pay the balance on the loan or get evicted. In 2014, the law changed to allow a spouse under the age of 62 to be listed as a “non-borrower” on the loan. Upon the death or removal of the borrower spouse from the home, the non-borrower spouse could stay in the home as long as he or she could establish a “right” to live in the home. The non-borrower spouse could show a court order, lease, or some other type of ownership document to stay in the home. However, the amendment to the law only applied to reverse mortgages taken out after the law went into effect.
Types of Reverse Mortgages
There are three types of reverse mortgages: (1) single purpose, (2) proprietary, and (3) Home Equity Conversion Mortgages. Single purpose mortgages are the least expensive option out of the three mentioned. This reverse mortgage type is offered by some state and local governments as well as some non-profit organizations. However, it is not available everywhere, and the loan can be used only for the purpose specified by the lender. The proprietary reverse mortgage is more expensive and is based on the appraisal value of the borrower’s home. This type of reverse mortgage is offered only by private lenders. Home Equity Conversion Mortgages (HECMs) HECMs are the most common type of reverse mortgages. It is federally insured and backed by the Department of Housing and Urban Development. This option is only available through a Federal Housing Authority (FHA) approved lender. HECMs can be used for any purpose. Before a borrower obtains loan proceeds, he or she must meet with a counselor from an independent government-approved housing counselling agency. The counselor will go over all possible alternatives to ensure the borrower makes an informed decision. There is no income requirement for HECMs, but the lender will conduct a financial assessment to determine whether to approve the loan. The amount in which one is able to borrow is based on a number of factors. First, the amount one can borrow is dependent upon the age of both spouses. Even if the younger spouse is not the borrower, his or her age will be used to determine how much can be borrowed. The older the younger spouse is, the higher the loan proceeds. Second, the FHA will look at the mortgage rate. The lower the current mortgage rate, the more the borrower is able to borrow. Third, the FHA will look at the appraisal rate. The higher the appraisal rate of the home, the more the borrower is eligible to borrow. Finally, the FHA will look at the mortgage financial assessment. The stronger the assessment, the more the borrower can borrow and the more proceeds the borrower will see. With a strong financial assessment, the lender won’t hold part of the proceeds to pay items such as property taxes and homeowners' insurance on the borrower’s behalf. It is important to note that even with all of these factors leaning in the borrower’s favor, he or she cannot borrow 100% of the equity in the home.
New FHA Regulations.
The FHA implemented new regulations affording non-borrowing spouses more protection. The new regulations now protect all non-borrowing spouses including non-borrowing spouses who lived in a healthcare facility for 12 months or more and those who were not married when the loan was initiated, provided they become married before the death of the borrower. Moreover, if the borrowing spouse is still alive but needs to be transferred to a facility, the non-borrowing spouse is allowed to remain in the home. Furthermore, the non-borrowing spouse is no longer required to show proof to remain in the home, and he or she is able to receive the remaining balance of the borrower’s reverse mortgage.
There are a few benefits of a reverse mortgage, and specifically a HECM, that are worth mentioning. First, with HECMs and all reverse mortgages, the borrower is turning the equity in his or her home into cash. This is a way to access the equity in one’s home without having to sell the home. Second, the borrower will not have to make a payment as long as he or she is in the home. Third, the borrower keeps the title to the home and has the ability to sell the home if preferred. However, the borrower must keep in mind that once the house is sold, the payments for the reverse mortgage loan will become due. Fourth, with HECMs, the proceeds from the loan are not taxable. While the proceeds may appear as income to the borrower, the IRS classifies this money as a loan advance. Fifth, with HECMs, the borrower is not required to have good credit. Finally, the borrower is able to keep living in the home as long as he or she is able to maintain the home.
There are a few drawbacks that a borrower must consider before obtaining a reverse mortgage. First, reverse mortgages can be expensive. With private reverse mortgages there are different fees such as origination fees, closing costs, and servicing fees, which could add up and become very expensive. For HECMs, there are mortgage insurance premiums that could be expensive for the borrower as well. Second, the amount owed can grow and change over time. The interest is added to the balance the borrower owes each month. As a result, the amount on the loan grows over time. Third, it is important to remember that the borrower is still responsible for paying the other costs related to the home. For example, the borrower has to pay for the property taxes, insurance, utilities, and home maintenance. A fourth drawback is the fact that the heir of the borrower will have to pay more than the actual value of the home in the event the heir wants to pay off the reverse mortgage loan and keep the home; that is one of the reasons why the home ends up being sold for its proceeds as opposed to someone in the family of the borrower paying off the loan. Finally, the equity is being used up in the home (albeit not completely used). This is not an exhaustive list, and it is important for a borrower to be fully informed of his or her specific circumstances before making a decision to obtain a reverse mortgage loan.
A reverse mortgage can be a saving grace for a borrower who needs funds to survive. It can also become more trouble than it is worth to a borrower who is pressured or rushed into making a decision to obtain a reverse mortgage without the proper information. Only the borrower can decide whether a reverse mortgage is best for his or her current situation.