What is a Reverse Mortgage?
A Home Equity Conversion Mortgage (HECM) is a federally insured loan that allows seniors – age 62 and up – to buy a new home and never have future mortgage payments as long as one borrower occupies the home as their primary residence.
Like a traditional mortgage, a reverse mortgage is a loan made by a lender to a homeowner using the home as security or collateral. With a traditional mortgage, the homeowner uses their income to pay down the debt over time. However, with a reverse mortgage the loan balance grows over time because the homeowner is not making monthly mortgage payments.
What is the purpose of the program?
The program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction. The program was also designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or to downsize to homes that meet their physical needs – i.e., handrails, one-level properties, ramps, wider doorways, etc.
Why is this important for Realtors?
Between 8,000 and 10,000 people turn age 65 each day in the US. That’s almost 300,000 new seniors each month. That trend will continue generating the largest growing market segment in the US.
Why does it matter for realtors? Your target market for reverse mortgages is growing daily. Many seniors are looking to downsize from their current property, and reverse mortgages make the process simple. Plus, there is a possible opportunity for two commissions: one on the home being sold (i.e. for downsizing) and one on the new home.
How does a Reverse Mortgage work?
A reverse mortgage loan typically does not require repayment until the last homeowner has passed away or has moved out of the property. Consequently, life expectancy is a huge part of the calculation in regards to how much money the borrower will receive. As a general rule of thumb: the older you are, the more equity you have in your home and the lower your mortgage loan balance; the more money you can expect from a reverse mortgage loan.
When the last borrower (or non-borrowing spouse) no longer lives at the home, the reverse mortgage becomes due. Options include paying off the reverse mortgage, selling the home and retaining the difference between the net proceeds and the loan balance or even refinancing with a traditional mortgage. The borrower and their heirs are not liable for any shortfall if the sale proceeds do not cover the loan as there is an FHA insurance pool in place to protect the lender in this situation. All borrowers pay mortgage insurance premiums.
Rules, Rules and More Rules
• The borrower must be 62 or older. A spouse who is not yet 62 when the loan is set up is designated as a non-borrowing spouse and has certain rights when the borrower no lives in the home.
• The borrower must meet FHA guidelines, including a review of income, and have the capacity to pay property taxes, homeowner’s insurance and installment debt (such as car payments and/or credit card debt).
• If there is an existing mortgage, the outstanding balance must be paid off. There must be a considerable amount of equity in the property acquired once closed (up to 48%)
• All Borrowers must also complete a one-hour long telephone session to obtain a Counseling Certificate. This process is designed and mandated to provide consumer protection.
• There are NO credit checks OR minimum income requirements, but the borrowers must have no delinquent federal debt.
• No Seller Assist is permitted.
Experts in Closing Reverse Mortgage Transactions
World Wide Land Transfer is a service-oriented title company with offices in Philadelphia, New York, and Washington, D.C. We work with realtors, lenders, REO providers, law firms, attorneys, and consumers. We have extensive experience closing everything from multimillion dollar commercial transactions to complex reverse mortgage transactions. To learn more, please visit our homepage today!
*World Wide Land Transfer does not provide legal or tax advice. Always consult with your attorney or tax adviser.