Reverse Mortgages

A reverse mortgage (RM) is a special type of loan made to older homeowners. You must be 62 or older, owning your own home free and clear of debt or nearly so and free of tax liens. The home must be a single family dwelling or a two-to four unit property they own and occupy.  Townhouses, detached homes, units in condominiums and some manufactured homes are eligible.  The loan enables you to convert the equity in your home to cash to finance living expenses, home improvements, in-home health care, or other needs.  This may provide the option for you to remain in your own home instead of making a disruptive change in your living arrangements.

You may be eligible for a reverse mortgage even if you still owe some money on a first or second mortgage.  In fact, many seniors get a reverse mortgage to pay off a first mortgage. 

Because your home is such a valuable asset, you may want to consult with your family, attorney, or financial advisor before applying for an RM. Knowing your rights and responsibilities as a borrower may help to minimize your financial risks and avoid any threat of foreclosure or loss of your home.  As with any business transaction, ask questions until you thoroughly understand.  It is not recommended to use an estate planning service or any service that charges a fee just for referring a borrower to a lender.  HUD provides this information without cost and HUD approved housing counseling agencies are available for free, or at minimal cost, to provide information, counseling and free referral to a list of HUD-approved lenders.  Before you agree to pay a fee for a simple referral, call 1-800-569-4287.

RM loan advances are nontaxable and they do not affect your Social Security or Medicare benefits. If you receive Supplemental Security Income, RM advances do not affect your benefits as long as you spend them within the month you receive them. This is true in Oklahoma and in most states for Medicaid benefits also, if the funds received are used in the month in which they are received.  If the purchase of an annuity is part of a RM transaction, the interest portion of the payments received is considered as unearned income.  Unearned income is used to determine eligibility for, and the amount of, SSI payments and Medicaid. For example, loan proceeds that stay in a checking or savings account at the end of a calendar month are counted as assets by SSI and similar programs.  If your total assets exceed SSI limits (currently $2,000 for a single person, $3,000 for a couple), you can lose your eligibility.  So if this is an issue, limit your loan monthly proceeds to what you expect to spend in a given month. (Source:  Reverse Mortgages: A Lawyer’s Guide, American Bar Association, 1997, pp 35-36). When in doubt, check with a benefits specialist at your local area agency on aging or legal services office.

The RM is aptly named because the payment stream is “reversed.”  Instead of making monthly payments to a lender, as with a regular first mortgage or home equity loan, a lender makes payments to you.  While a reverse mortgage loan is outstanding, the borrower(s) continue to own the home and hold title to it.  

Borrowers may have a choice of receiving the proceeds from a RM in a lump sum, fixed monthly or annual payments (for up to life), or line of credit.  Flexible types of RM may allow fixed monthly payments to the borrower for a finite time period or a combination of monthly payments and line of credit.  The interest rate is usually an adjustable rate that changes monthly or yearly.

This type of mortgage isn’t repayable until the borrower no longer occupies the home as his or her principal residence usually for one year of absence, if taxes and insurance are kept current. In the case of married borrowers, it isn’t repayable until both of the partners no longer occupy the home usually for one year of absence, as long as the   taxes and insurance are current and you do not allow the property to deteriorate except for reasonable wear and tear.  

The lender does not take title to the home in the case of death, but heirs must pay off the loan by refinancing if eligible or by using proceeds from the sale of the home. None of the borrowers’ other assets will be affected by the RM.  The debt will never be passed along to the estate or heirs. If the home is sold and the sales proceeds exceed the amount owed on the RM, the excess money goes to the borrower or the estate.   If sales proceeds do not cover the amount owed and the interest accrued, the lender takes the loss.

The loan amount depends on the type of reverse mortgage, the borrower’s age, current interest rates, and the home’s property value.  The older the applicant, the larger the monthly advances or line of credit are.  Seniors do not have to meet income or credit requirements to qualify for a reverse mortgage.  Borrowers still remain liable for taxes, personal property insurance, repairs and maintenance.

RM’s are offered by banks, thrifts, mortgage banking firms, consumer finance firms and financial services corporations. In making your choice of lenders you should consider cost, origination services, loan servicing and a lender’s professional commitment to meeting your needs.  The level of service a lender provides is more difficult to judge than cost is, but service is just as important.  You want your loan officer to be knowledgeable, experienced and respectful.

The more you learn about RM, the more you will be better able to judge how well a lender knows RM.  How long a lender has been offering reverse mortgages and in how many places may be particularly important if your loan runs into any unexpected snags.  An experienced lender has already encountered most of the issues that can cause problems, and is most likely to have a good working relationship with the nearest HUD office.  You also want a loan officer who respects your knowledge and preferences and helps you reach your own decisions.  You don’t want to feel pressured by a loan officer.  You certainly don’t want a loan officer who is clearly more concerned about selling you a loan than meeting your needs.

Generally the only loan costs that lenders control are the origination fee and the servicing fee.  Ask the dollar amount that each lender would charge you for these fees.  Although third-party closing costs don’t change much from lender to lender, check these, too.  Check the interest rates, but these do not usually vary from one lender to another.  They may vary from week to week, however.  AARP offers a Model Specifications for Analyzing and Comparing RM at: URL: http://assets.aarp.org/www.aarp.org_/

At loan closing, most originating lenders transfer their loans to another office or company that specializes in servicing the loan.  Ask each lender, “Who will service my loan after it closes?”  and request a sample of the account statements the servicer would send you.  Make certain you fully understand all the information on these statements.  In particular, if you are considering a Home Equity Conversion Mortgage (HECM) which is by far the most frequently selected RM, find out how the servicer would keep you informed about the growing amount of cash that a HECM credit line provides.

The HECM loans are insured by the Federal Housing Administration (FHA).  The HECM program limits your loan costs and the FHA guarantees that lenders will meet their obligations. HECM loans generally provide the largest loan advances of any reverse mortgage.  HECM’s also give you the most choices in how you can have the cash paid to you.  The money you get from a HECM can be used for any purpose. 

In a matter as serious as making a loan on a house that is already paid for, it is always wise to consult with your financial advisors, bankers, tax consultants and family members.

Oklahoma Lenders Offering Reverse Mortgages

Lenders at the time of this publishing offering RM’s in Oklahoma include:

Financial Freedom, Sr. Funding Corp.
Toll Free 1-800-843-0480
405-360-5338

Griffin Financial
Toll free:  1-888-415-1955

Reverse Mortgages of Oklahoma
Division of Seattle Mortgage
Toll free:  1-866-329-3833

Wells Fargo Home Mortgage
1-800-336-7359 or 1-800-577-2404

Resources

National Reverse Mortgage Lenders Association
1400 16^th St, NW, Ste 420
Washington, DC 20036-2244
202-939-1760 or 1-866-264-4466
website

Excellent source of information on reverse mortgages, how they work, and lenders who handle them.  Information sources and product sponsors include:

HUD
451 7^th St., S.W.
Washington, DC 20410
Toll free: 1-800 569.4287

Fannie Mae
3900 Wisconsin Avenue,
N.W. Washington, DC 20016-2899
Toll Free 1-800-732-6643

National Center for Home Equity Conversion
521 Main St, Ste 480, San Francisco, CA 9410

ODC does not endorse any reverse mortgage lender or product.