DO YOU FULLY UNDERSTAND YOUR OBLIGATIONS AS A BORROWER UNDER A REVERSE MORTGAGE LOAN?
Reverse mortgage borrowers are not required to make monthly loan payments to their lender, but must continue to meet certain obligations in order to stay current on the loan. Failure to meet these obligations may result in the loan becoming due and payable.
With a reverse mortgage, the home is the collateral on the loan which means that the lender has a vested interest in the safety and condition of the property, and that the property is free of superior liens.
For that reason, reverse mortgage borrowers must: live in the property for the majority of the calendar year; maintain the condition of the home; stay current on all property taxes, insurance, and any condominium fees or homeowner’s association fees; and comply with all other loan terms. Ask yourself:
Will you live in your home for the majority of the calendar year?
The mortgaged property must be the borrower’s principal residence. Every year, borrowers must verify that they continue to occupy and live in the home by signing an occupancy certificate and mailing it to the loan servicer.
Are you prepared to maintain the condition of your property?
As part of the application process, the property will be inspected and appraised. Homeowners are responsible for regular upkeep of the property and are required to maintain the home’s condition from the time the loan is made. Failure to maintain the home in a satisfactory condition can result in the loan becoming due and payable.
Will you be able to pay your property taxes, insurance, and homeowner fees?
Borrowers must pay all property taxes, homeowners and hazard insurance premiums, and any applicable condominium fees, planned unit development fees, homeowner’s association fees, and any other special assessments that may be required by local or state law.
Do you understand what will happen if you cannot pay your taxes, insurance, or homeowner fees?
If the borrower fails to make a tax or insurance payment, the loan servicer may advance the payment from the available loan proceeds. But, if there are not enough proceeds available to cover the payments, the loan servicer may elect to advance its own funds to make the payments. Once this happens, the loan will be considered to be in technical default and the loan servicer may call the loan due and payable or establish a repayment plan with the borrower. If the terms of the repayment plan cannot be met, the loan servicer will call the loan due and payable and could move to foreclose on the property.
Do you understand your personal finances will be reviewed?
To help determine if a reverse mortgage is a sustainable option for borrowers, a policy was put into effect in 2015 requiring lenders to conduct a financial assessment of every reverse mortgage applicant to ensure that the applicant possesses the ability and willingness to pay ongoing costs, such as property taxes, homeowner’s insurance, and other financial obligations, over the expected life of the loan. Lenders examine, in part, the borrower’s debt and sources of income, such as Social Security, pensions and investments.
If, based on the results of the financial assessment, there is an income shortfall or credit problems, the lender may set aside a certain amount of money from the loan’s principal limit to pay for property taxes and insurance premiums over the course of the loan. The "set aside" reduces the amount of loan proceeds available to the borrower.
A borrower may also elect to set aside a certain amount of funds to pay for property taxes and insurance premiums over the course of the loan. Once a "set aside" is established, it cannot be canceled or changed.
HOW DO YOU INTEND TO USE YOUR REVERSE MORTGAGE LOAN PROCEEDS?
One of the advantages of a reverse mortgage loan is that borrowers generally have the freedom to use their cash proceeds any way they choose. Eligible homeowners obtain reverse ortgages for many reasons including:
• Repairing or modifying the home to meet the physical needs of getting older
• Supplementing retirement income to meet expenses
• Managing the costs of in-home care
• Paying off an existing mortgage
• Paying bills
• Paying property taxes
• Delaying Social Security
• Providing a source of funds for living expenses in lieu of liquidating financial investments during times of market downturn or disruption
• Establishing a line of credit for use as a financial safety net
• Helping retirement savings last longer
• Purchasing a retirement home
Do you have a plan for making your reverse mortgage loan proceeds last?
Reverse mortgage loans are most successful when borrowers have a plan to ensure the money supports and sustains them for as long as they want to stay in their home. Additional consumer protections were put into place in 2013 to help borrowers preserve more of their home equity during the first year of the loan.
It is never recommended that reverse mortgage borrowers use their loan proceeds to speculate on real estate or securities, or to engage in risky investment schemes. You should be aware that loan originators are not permitted to require or encourage you to purchase other financial products such as an annuity or long term care insurance as a condition for getting a reverse mortgage.
A reverse mortgage is a loan that enables homeowners that are generally 62 years of age or older to use part of their homes’ equity to obtain cash proceeds that can be used in many ways. The loan does not have to be repaid until the last surviving borrower or remaining eligible non-borrowing spouse passes away or permanently leaves the home, or if the homeowners sell the home, or fail to meet the loan obligations, that include paying property taxes and insurance, and keeping their home maintained.
Nearly all reverse mortgage loans on the market today are federally insured Home Equity Conversion Mortgages (HECMs), though other types of reverse mortgage loans are offered by some states and private lenders. These questions are based on the features and requirements of HECM reverse mortgages, but may be helpful to consumers considering other types of reverse mortgage loans.
Reverse mortgages are a versatile financial tool that nearly a million homeowners have used to age-in-place, and for other reasons. However, like any financial product, reverse mortgages should be considered carefully before deciding whether to obtain one.
In this series, we will explore the 7 questions you should ask yourself before moving forward.
FHA has stopped insuring new HECM loans and will resume when the government reopens.
Applications can still be taken and underwritten. FHA insuring will happen at a later date.
Due to the recent Government shutdown, staffing is limited and the following services have been affected:
• No processing of tax transcripts (4506-T).
• Federal tax lien(s) verification and payoff/demand(s) cannot be obtained
• Credit Alert Verification Reporting System (CAIVRS) cannot be cleared or updated
• FHA Insurance Endorsements
• FEMA updates indicating disaster declarations.
• Case assignment corrections, cancellations, reinstatement requests and EAD updates are delayed due to limited staff availability.
Marc has 36 years in financial services and 6 years in teaching.
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