Reverse Mortgages in the Covid Era

FHA insured Home Equity Conversion Mortgage (HECM)

The most widely known reverse mortgage is the FHA insured Home Equity Conversion Mortgage (HECM). The HECM is for borrowers age 62 and up with sufficient equity to qualify. The maximum loan limit for the HECM in 2020 is $765,600, and the property must be the borrower’s primary residence.

There are some features that are unique to the HECM: A non-borrowing spouse (NBS) under the age of 62 may be added to the deed, assuring that the NBS may continue living in the home even if the borrower is no longer able to reside in the home. The loan amount is based on the youngest titleholder. Reverse mortgage counseling is mandatory, allowing borrowers to receive impartial information and answers from an independent HUD-approved housing counseling agency.

All reverse mortgages in today’s market are non-recourse loans. On settlement of the mortgage, if the loan balance is higher than what the home can be sold for, neither the borrower nor their estate owes the difference. If the home is sold for more than the loan balance, the equity belongs to the borrower.

HECM eligible properties are single family homes and townhomes as well as 2-4-unit residential properties. Also eligible are individual units within condominium communities which are FHA approved. Individual condominium units within many condominium communities which are not FHA approved may now be approved on a spot approval basis. For more information on spot approvals, talk with your reverse mortgage loan originator or HUD-approved housing counselor.

Financial Assessment

Credit and underwriting requirements are minimal providing there have been no serious derogatory credit issues such as bankruptcy or foreclosure within the last two years. There is no minimum FICO Score requirement. Additionally, all consumer debt should be timely paid. The income requirements are minimal and are meant to assure the homeowner(s) may live in the property so long as the property taxes, property insurance and HOA dues (where applicable) are paid. The homeowner is expected to maintain the property.

The costs of the HECM are comparable to other FHA insured loans. However, the loan origination fee is capped at a maximum of $6,000. Not all HECMs rise to the maximum origination fee. Typically, the only out-of-pocket expenses for the borrower are the appraisal and the housing counseling fees. In some situations, there may be a requirement for a second appraisal.

HECM Purchase Money Mortgage

A relatively new product is the HECM purchase money mortgage. Based on present FHA HECM mathematical calculations, an age 62 buyer can purchase a home with a down payment of about one-half of the purchase price and never have to make a regular monthly out-of-pocket mortgage payment again. And the down payment requirement decreases with age. Contact your reverse mortgage loan originator for current figures.

Private or Proprietary, Non-FHA Insured Reverse Mortgage

Another option is the private or proprietary, non-FHA insured reverse mortgage. The proprietary products are designed primarily for properties greater in value than the maximum FHA reverse mortgage. These products have upper loan limits which range from $4,000,000 upward. The proprietary products do not have a mortgage insurance premium requirement. There are also proprietary products which will lend on some non-FHA approved condominium units starting at about $500,000. Some of the proprietary reverse mortgages have a minimum age of 60. Proprietary mortgages do have minimum FICO Score requirements, which vary by product.

The proprietary reverse mortgage has a few things in common with the HECM, such as mandatory HUD-approved housing counseling and being non-recourse loans. And, as with any mortgage, the borrower is expected to pay the property taxes and insurance and HOA dues (where applicable) and maintain the property. One thing the proprietary loans do not have in common with the HECM is the treatment of the NBS. Again, talk with your lender or HUD-approved housing counselor so you are well informed.

With all reverse mortgages, one may make monthly principal and interest payments, however such direct monthly payments are not mandatory. Typically, the payments are made from the equity in the property. This is known as a negative amortization mortgage and the balance owed on the loan increases until the loan is settled.

Conclusion

Finally, how are reverse mortgages settled? When the last remaining borrower no longer lives in the home, the loan must be settled. The property may be sold, and the remaining equity belongs to the borrower. If the value of the property is less than the amount due on the mortgage, the borrower or estate may simply walk away from the property and owe nothing, even if the property sells for less than the amount due on the mortgage.

For more information on the HECM for purchase or refinance or on any of the proprietary products, contact a reverse mortgage loan originator or a HUD-approved housing counselor. While not for everyone, both the HECM and the proprietary reverse mortgages are excellent products and the best fit for the right situations.