Reverse mortgages have been available for more than two decades for older homeowners who have accrued a significant amount of equity in their homes. Now, the government is backing a program to help older homeowners purchase a home with the increasingly popular financing program.
The Federal Housing Administration, a component of the U.S. Department of Housing and Urban Development, insures the nation’s most popular reverse mortgage known as the Home Equity Conversion Mortgage, or HECM.
The Housing and Economic Recovery Act of 2008 recently approved the HECM-for-purchase program, allowing lenders to close the mortgages after Jan. 1, 2009. The move allows older homeowners to make a large down payment on a new home and then utilize the reverse mortgage as permanent financing.
The same law reduced the maximum loan fee on reverse mortgages to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of the home’s value or the county lending limit, whichever was lower.
A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free.
"The HECM for purchase will give seniors several more options," said Sarah Hulbert, president of Senior Financial Corp., a reverse mortgage lender. "I think one of the key aspects is that they can stay more liquid. They do not have to reinvest all of their funds into their new home before getting the reverse mortgage, freeing up more cash for other uses."
For example, if a 70-year-old homebuyer wanted to purchase a $300,000 home, he or she could put approximately $123,000 down and finance the balance of $177,000, plus closing costs, with a reverse mortgage. The buyer would make no monthly payments for as long as he or she maintained the home as a principal residence.
Interest and MIP (Mortgage Insurance Premium) accrue on the initial loan amount and become due when the borrower, or surviving spouse, dies, moves or sells the home. The current annual percentage (APR) for the monthly adjusted HECM 200 is 3.62 percent (including the government’s 0.5 percent annual mortgage insurance). When refinanced, the APR for the program has averaged approximately 6.5 percent for the past 15 years.
Eligible properties include:
- 1- to 4-unit single-family homes
- Manufactured homes, built after June 15, 1976, that meet HUD’s permanent foundation guidelines
- Condominiums
"I think you will see the typical purchaser for a HECM will be the move-down buyer — perhaps headed to the sunshine," said former Puget Sound resident Ken Keranen, who now originates reverse mortgages for Seniors Reverse Mortgage in Carlsbad, Calif.
Customers interested in the HECM for purchase must enroll in a HUD counseling class. Borrowers may not obtain a bridge loan (also known as "gap financing") or borrow against other assets for the down payment or closing costs. This restriction includes personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing.
Lenders will be required to verify the source of all funds prior to closing. A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts. If there is a large increase in an account or the account was opened recently, the lender must be able to obtain a credible explanation of the source of those funds.
To avoid cases of property flipping, lenders must take steps to ensure that: a) only current owners of record may sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) FHA will require additional documentation validating the property’s value for resale that occurs between 91 and 180 days where the new sales price exceeds 100 percent of the previous sales price.
More than 450,000 HECMs have been made since 1989, the year FHA launch its reverse mortgage pilot program. FHA insured approximately 112,000 HECMs in fiscal-year 2008, up from 107,367 HECMs in 2007 and 43,131 in 2005.
The only challenge seniors now face in this slow market is finding a willing buyer to purchase their present home so they can "move down" via a reverse mortgage. After all, you have to sell your primary residence before you can buy another one.
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