Is outdated info keeping you from considering a Reverse Mortgage?
By Bob Moyer, Mortgage Consultant OVM Financial
Because many people think Reverse Mortgages are only used to get equity out of a house, most forget to consider a reverse mortgage as an option when they are purchasing a primary residence. Let’s start by saying reverse mortgages are not for everyone. That said, there are a number of people who would benefit from this option.
Let’s look at the potential pros and cons of a Reverse Mortgage:
- Can be used for financing a primary residence
- Funds can be accessed from the primary residence towards purchasing a second home
- Credit and income requirements can be less stringent than many other loans
- They require no monthly mortgage payments
- The borrower must attend HUD approved counseling, making reverse mortgage customers more educated about their loan and borrowing in general
- Borrower can keep more of their assets liquid
- Allows borrower to increase their price range, if they wish
- “Non-recourse” loan means the lender cannot take other assets to settle your debt
- Only available to those 62 or older
- Requires a substantial down payment (25% through about 48% of market value depending on age of borrower and amount of loan)
- Buyer must pay all closing costs and receive no seller assistance at all. Borrower must be able to pay annual property taxes and insurance
Acceptable sources of funds to close
- Sale of prior home
- Sale of homebuyer’s other assets
- Homebuyer’s savings or other accounts
- Gift money from parties not involved in the transaction
Not acceptable sources of funds to close
- Seller financing and concessions – Buyer must pay all closing costs on a purchase
- Credit card advances
- Bridge loans
- Subordinate financing (2nd mortgages)
- Down Payment Assistance
- Gifts from anyone involved in the process
Example of a Perfect Fit for a Reverse Mortgage
Fred and Karen are married. Both are over the age of 62. They have lived in the Mid-Atlantic states most of their adults lives. They are retiring from their jobs and plan to buy a home in Southeastern NC.
They have a nice nest egg and could pay up to $225,000 cash for their new home. However, the homes that appeal to them are priced around $375,000.
To purchase the home with a traditional loan, they’ll need to apply for a $150,000 mortgage. They’d rather not do that because their dream is to travel. With their retirement income, it will be difficult to pay a mortgage and have money left for travel expenses.
Instead, they put down $225,000 on the house and use a reverse mortgage for the balance. The reverse mortgage requires no payments until both Fred and Karen die, sell or move out of the house.
At that time, they or their heirs will sell the house, pay off the mortgage and keep the remainder of the money. In the unlikely event they or their heirs find the house is now worth less than it was when purchased, they can turn the house over to the lender with no further consequence. That’s because reverse mortgages are non-recourse loans, meaning the lender cannot come after any assets other than the house. An additional feature for the family is that if the loan balance is over the current value of the home, the family could pay 95% of the current appraised value to pay off the FHA reverse mortgage rather than the higher amount owed.
The most misunderstood loan is a Reverse Mortgage
When you mention reverse mortgages to someone, odds are you will hear some broadly held misconceptions. Here are some of the most common myths:
MYTH: The bank owns the home.
FACT: Just like other mortgages, the owner remains on title at all times
MYTH: A Reverse Mortgages is expensive.
FACT: The costs can be similar to all FHA loans, yet the borrower doesn’t have to make mortgage payments which makes reverse mortgages more affordable!
MYTH: You can end up owing more than your home is worth.
FACT: Despite the real estate crash in 2008, it’s highly unlikely your home would lose value, but if it did, FHA mortgage insurance would cover any deficiency. This is a non-recourse loan
which means your other assets are not at risk.
MYTH: Borrowers have to pay cash for the home and then get a reverse mortgage.
FACT: A Reverse Mortgage can be used to purchase a home so a buyer doesn’t have to fund fully with cash in order to have no payment.
MYTH: When the borrower dies, the bank will foreclose on the home.
FACT: The borrower’s heirs have six months to sell or pay off the mortgage. There are even further extensions available and remember, the bank’s goal is not to foreclose.
If you have other questions about which type of financing will best serve your unique situation, call Just For Buyers Realty at 910-202-4813. We’ll connect you with knowledgeable and ethical lenders who can show you all of your options, including low-cost conventional 30-year fixed loans. (Keep in mind, JFBR receives no compensation from any lender. Our recommendations are based on the lender’s performance record with other clients who had needs similar to yours.)