Upfront disclaimer: The loans must be repaid after death or a move-out and are not a “government benefit” or “risk free.”
Prepared by: Sandra Robinson and Denise Johnson, Realtors®
All HECM borrowers must undergo a financial assessment administered by the counselor to determine the borrower’s willingness and ability to maintain the requirements of the loan. Many questions arise around this product, let us see if we can address some of those questions, we consider most critical in making the decision to take advantage of this unique product that can benefit the senior.
1. Is this a mortgage?
Absolutely, this is a mortgage that many think is a free government program because you do not make an out-of-pocket monthly mortgage payment. But the reality is that the payment is deferred until the sale of the property by the buyer(s) or after the last senior buyer is deceased.
2. Is the HECM a recourse or non-recourse loan and what does that mean?
The HECM Lifestyle Mortgage is a non-recourse mortgage loan. This means that when the single lump sum payment (FHA up-front insurance payment) is made, the owner can live in the house until the last surviving borrower vacates the property permanently. If there is no equity left in the home, neither the buyer nor their estate or family members are liable for any loan deficiency. The deficiency would be absorbed by the lender and FHA, not the home owner. Additionally, FHA insurance guarantees the borrower will receive his or her loan proceeds as agreed upon under the terms of the loan, even in the event the lender goes out of business.
3. Are the closing costs for a HECM mortgage in line with other home loans.
First, the closing costs for the HECM mortgage are allowed to be rolled into the loan by the majority of HECM mortgagers. This means the total out-of-pocket monies to close the loan is reduced by those costs, however the allowable home purchase level is reduced at the same time.
The cost on the HECM mortgage on average is greater than the normal FHA mortgage. The one-time upfront mortgage insurance premium MIP payment is high, reflecting the higher risk factor for the loan (non-recourse aspect). In addition, there is the annual mortgage insurance premium like a normal FHA loan. The mortgage origination fees are set but can be higher than the average mortgage loan as well. The remainder loan costs are representative of the normal closing costs for a mortgage.
4. Can the heirs have the home transferred into their name?
Borrowers and their heirs need to understand that a HECM mortgage is not a multi-generational loan. If the heirs wish to keep the home, they must refinance or pay cash to pay off the loan as it was a special loan for the benefit of the senior buyer(s) only. If they cannot obtain a loan, then the home must be sold to pay the loan off.
5. What is the primary downside of a reverse mortgage?
The primary downside of a reverse mortgage is the loan balance increasing over time by the monthly unpaid interest accrual. With an increasing mortgage loan balance, the equity position of the property is changing and therefore reducing the potential inheritance for your heir. The potential offset to this scenario is that the home should be appreciating in value over time. Most homes have equity at the end of the process.
6. What other costs or payments are required to maintain the loan?
As in any mortgage loan, the borrower(s) have several obligations outside the interest payment on the mortgage. Failure to adhere to any of these HECM requirements will result in the loan becoming due and payable. These include property taxes, home insurance, flood insurance (if required), home association fees and home maintenance. We strongly suggest including a set aside for property taxes and insurances in the closing funds as a part of the loan closing. If not available at the time of closing, the buyer may be able to have the taxes and insurance paid if the funds are available as time passes, but do not expect this to happen. Save for these costs to be able to pay when due.
7. What other home cost are involved outside of taxes and insurances?
Other costs are the homeowner’s association fees and the overall maintenance on the property. Again, failure to pay homeowners association fees and failure to maintain the upkeep on the home according to FHA standards, places the HECM loan in jeopardy of foreclosure. This is also why we strongly suggest a savings account specifically set aside for the home upkeep and the use of an annual home warranty plan.
8. This is my home, can I rent it out?
This loan is for a primary residence and must be occupied by at least one of the borrowers. As a matter of fact, the senior occupant must complete an annual occupancy agreement and can be considered in default on the loan if not completed. The borrower can rent out space in the home. The buyer can leave their home for vacations, etc., However, there are limits in the number of months that can be absent from the home.
9. Can the spouse who is not on the loan, remain in the home after the other spouse dies?
If the spouse is on the loan, no issue with living in the home if one of the partners die. Spouses who are not listed on the loan document can generally remain in the home if they keep paying the home costs required according to loan terms, but they are not eligible for loss mitigation if they fall behind in their payments. We urge our clients to set up a set aside program as a part of their home purchase loan at closing that cover taxes and insurance.
10. What are some home retention options??
Become fully aware of home retention options (Homeowners Assistant Funds, at-risk extensions, and repayment plans) that are available in writing during the counseling process.
These questions/answers are our best understanding of the issues. Please discuss during your counseling session
REMEMBER:
You cannot outlive a reverse mortgage loan. A reverse mortgage borrower cannot have their loan called due and payable simply because the loan balance exceeds the value of the home. If the borrower continues to live in the home as their primary residence while maintaining the taxes, insurances, association fees and upkeep of the home, the loan remains in good standing.
A reverse mortgage could be a real lifeline in some cases. It can allow a person/couple to remain in their home when financial struggles might have driven them out. One should note that we are living longer and most seniors want to age in place. We also see that 70% of Americans will need long-term care and only 2% have long-term care insurance. The HECM supports these issues we face and is a positive assist with our financial stability.