An Overview of Reverse Mortgages
A reverse mortgage is a loan product for homeowners over the age of 62. A homeowner can access a portion of the equity they have in their primary residence. Unlike other types of mortgages, there is no income or credit qualifying and no monthly mortgage payments. The reverse mortgage must be in first lien position at closing. The borrower retains full ownership of the property. Repayment is required when the last remaining borrower no longer resides in the home as their principal residence or defaults on the terms of the loan.

Types of Reverse Mortgages
There are only two distinct types of reverse mortgages at this time:
HUD/FHA Home Equity Conversion Mortgage (HECM)
Proprietary Products

Borrower Eligibility
All borrowers on loan must be 62 years of age or older. If a deeded owner of the property is not eligible due to age, they would need to be removed from the title. This is a very serious decision and it may involve serious consequences for the younger borrower. It should first be discussed with their legal or financial advisor. Removing them from the deed could result in them having to vacate the home when the older borrower dies or has to vacate the premises, perhaps to go to a nursing home. Never advise someone to do this as it is unfair to the removed occupant unless they fully understand the consequences.

Just as it is true for all FHA mortgages, U.S citizenship is not required for eligibility. For those borrowers with lawful permanent resident alien status, the mortgage is available under the same terms and conditions as U.S. citizens. Evidence of permanent residency in the form of documentation issued by the Bureau of Citizenship and Immigration Services must be provided.

Reverse mortgages may also be available to non-permanent resident aliens provided they have a valid social security number. Non-U.S. citizens with no lawful residency status in the U.S. are not eligible. The rules are the same as for forward FHA mortgages.

Some of the most frequently used websites are listed below.

RESOURCES
This is a list of websites and other helpful information about the reverse mortgage industry.
HUD Links
HUD Keywords (provides short summaries of various HUD policies) http://www.hud.gov/offices/hsg/keywords.cfm
HUD Mortgagee Letters (all Mortgagee Letters issued by year) http://www.hud.gov/offices/hsg/mltrmenu.cfm
HUD Email Notification (to be added to the list) - Jerry Mayer jerrold_h._mayer@hud.gov
FHA Home Equity Conversion Mortgage 4235.1 Manual http://www.hudclips.org/sub_nonhud/cge/hbks.cgi?hbks (search 4235.1 under guidebooks)
CAIVRS FAQ and Assistance (help for a CAIVRS hit) http://www.hud.gov/offices/hsg/sfh/lender/sfhcaive.cfm
HUD HECM Manual http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4235.1/index.cfm

Income Tax and Social Security Impact
The funds received through a reverse mortgage are not considered to be income, and are not subject to income tax. Social Security and Medicare benefits should not be affected, however borrowers are always to be encouraged to seek their own legal advice from advisors, attorneys, or SSI benefits specialists for guidance as it pertains to their own unique situation. Never give advice regarding taxes or welfare benefits.

Repayment
The loan is not due until the last remaining borrower either does not own or occupy the home as their principal residence or they default on the terms of the loan. A reverse mortgage is a non-recourse loan, meaning if the home is sold, the borrower or the estate will not owe more than the fair market value of the home at the time the loan is repaid.

A recent clarification from HUD has reiterated that it is a non recourse loan, but if the estate or borrower chooses to pay off or purchase the home, they will have to pay the full amount of the loan balance to do so. Any sales must be arm’s length transactions.

Borrowers may make repayments during the life of the loan without penalty. All payments go to principal

Partial prepayments are permitted at any time and the borrower will not be able to redraw the money that they prepay.

FROM AARP’S HOMEMADE MONEY BOOK*

Definition
A "reverse" mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in several ways:

* all at once, in a single lump sum of cash;
* as a regular monthly cash advance;
* as a "credit line" account that lets you decide when and how much available cash is paid to you; or
* as a combination of these payment methods.

No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older.

How Do Reverse Mortgages Compare With Other Home Loans?
To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don't have to make monthly repayments. So you don't need a minimum amount of income to qualify for a reverse mortgage. You could have no income and still be able to get a reverse mortgage.

With most home loans, you could lose your home if you don't make your monthly payments. But with a reverse mortgage, there aren't any monthly repayments to make. So you can't lose your home by not making them. Most reverse mortgages require no repayment for as long as you — or any co-owner(s) — live in the home. So they differ from other home loans in these important ways:
* you don't need an income to qualify for a reverse mortgage; and
* you don't have to make monthly repayments on a reverse mortgage.

Forward vs. Reverse Mortgages
You can see how a reverse mortgage works by comparing it to a "forward" mortgage — the kind you use to buy a home. Both types of mortgages create debt against your home. And both affect how much equity or ownership value you have in your home. But they do so in opposite ways.

"Debt" is the amount of money you owe a lender. It includes cash advances made to you or for your benefit, plus interest. "Home equity" means the value of your home (what it would sell for) minus any debt against it. For example, if your home is worth $150,000 and you still owe $30,000 on your mortgage; your home equity is $120,000.

Falling Debt, Rising Equity
When you purchased your home, you probably made a small down payment and borrowed the rest of the money you needed to buy it. Then you paid back your traditional "forward" mortgage loan every month over many years. During that time:

* your debt decreased; and
* your home equity increased.

As you made each repayment, the amount you owed (your debt or "loan balance") grew smaller. But your ownership value (your "equity") grew larger. If you eventually made a final mortgage payment, you then owed nothing, and your home equity equaled the value of your home. In short, your forward mortgage was a "falling debt, rising equity" type of deal.

Rising Debt, Falling Equity
Reverse mortgages have a different purpose than forward mortgages do. With a forward mortgage, you use your income to repay debt, and this builds up equity in your home. But with a reverse mortgage, you are taking the equity out in cash. So with a reverse mortgage:
* your debt increases; and
* your home equity decreases.

It's just the opposite, or reverse, of a forward mortgage. With a reverse mortgage, the lender sends you cash, and you make no repayments. So the amount you owe (your debt) gets larger as you get more and more cash and more interest is added to your loan balance. As your debt grows, your equity shrinks, unless your home's value is growing at a high rate.

When a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small. If you have the loan for a long time, or if your home's value decreases, there may not be any equity left at the end of the loan.

In short, a reverse mortgage is a "rising debt, falling equity" type of deal. But that is exactly what informed reverse mortgage borrowers want: to "spend down" their home equity while they live in their homes, without having to make monthly loan repayments.

Exception
Reverse mortgages don't always have rising debt and falling equity. If a home's value grows rapidly, your equity could increase over time. Or, if you only get one loan advance and no interest is charged on it, your debt would never change. So your equity would grow as your home's value increases. But most home values don't grow at consistently high rates, and interest is charged on most mortgages. So the majority of reverse mortgages end up being "rising debt, falling equity" loans.

*What is a Reverse Mortgage copied from AARP’s Homemade Money ©2005

What is a Reverse Mortgage?

A reverse mortgage is a loan for senior homeowners (over age 62) that allows the senior to use their home's equity as the collateral. There are no credit or income qualifications. The loan amount is a percentage of the home's value as determined by the age of the youngest homeowner and the value of the home as determined by an FHA appraisal.

The loan is not repaid until the last surviving homeowner permanently moves out of the home or passes away. When that happens, the borrower's estate has twelve months to pay the balance of the reverse mortgage or sell the home to satisfy the loan. The remaining equity is inherited by the heirs to the estate. The heirs are never liable if the home sells for less than the balance of the reverse mortgage.

Who is eligible for a Home Equity Conversion Mortgage (HECM)?
To be eligible for a HECM reverse mortgage, FHA requires that all borrowers be 62 or older. The balance on the existing loan can be paid off at closing but it must be an amount that the reverse loan can pay off entirely. That means that you must either own your home free and clear or have from a balance that is equal to 30-40% of the appraised value or less depending on the age of the youngest borrower. If there is a current mortgage and you have enough equity you can pay off the balance of the mortgage with the proceeds of the reverse mortgage. Because there are no income or credit requirements for a reverse mortgage, all you really need is a home that has a loan balance at or below the amount eligible in your equity.

What types of homes are eligible?

Most home types are eligible, including 1-4 family homes, manufactured homes, mobile homes, modular homes, coops and condos. Requirements are that the home must be on land that you own or a leasehold approved by FHA, on a permanent foundation and it must pass an FHA appraisal.

What is the difference between a reverse mortgage and a home equity loan?

Home equity loans, second mortgages and home equity lines of credit have requirements for income and creditworthiness. With other types of traditional forward loans a monthly payment is required. A reverse mortgage has no income or credit requirements and instead of making monthly payments, you can receive payments.

A reverse mortgage amount is determined by a calculation from FHA that takes into consideration the age of the borrower and co-borrower(s), the current interest rate, and the appraised value of your home. The older you are, the more money is available. The more valuable your home (up to $417,000), the higher the loan amount will be. Traditional forward mortgages require a monthly payment, with traditional loans you are still required to make monthly payments, but with a reverse mortgage the loan is not due as long as you or one of the other borrowers remain in the home. A reverse mortgage cannot be foreclosed upon as long as you or any other co borrower continues to occupy the home, pay taxes and maintain the property in sound condition.

Can I outlive my reverse mortgage?

No, as long as at least one homeowner lives in the home and maintains the home, keeping taxes and insurance current there is no repayment due. In addition to that, you will never owe more than your home's value (a reverse mortgage cannot ever become "upside down"). No debt is ever left to the heirs.

What happens when I die or vacate the home?
In the event of your death or in the event that you and your co borrowers no longer use the home as your primary residence, your estate can choose to refinance the reverse mortgage balance into a traditional forward mortgage to keep the house or they can sell the home to pay the balance (the cash borrowed, interest, and fees).

If the remaining equity in your home is more than the amount you owe to the lender, the remaining balance would belong to your heirs. If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA. Your estate would never be liable for any debt over and above the loan balance.

How much can I borrow?

The amount available will depend on three factors: age of youngest borrower, current interest rate, and appraised value of the home.

How do I get my payments or money from a reverse mortgage?

There are several ways to receive payment from a reverse mortgage. You may take it in any of the following ways or you can mix them and receive it as needed. Payment type can be changed at will for a sum of usually about $20.

Line of Credit - you can pull out money from line of credit as needed
Lump sum - a lump sum of cash at closing.
Tenure - equal monthly payments as long as you live in the home.
Term - equal monthly payments for a fixed number of years.
Line of Credit - take any amount you please at any time until the line of credit is exhausted.

You Paid For Your Home - Now Let Your Home Pay You!

You have spent years paying for your home only to find that in your senior years you are struggling to make ends meet financially. A recent poll by the federal government determined that over five million seniors go to bed hungry every day. That is a terrible but all too true statistic. Senior citizens are going to bed hungry in homes that are paid for or almost paid for. Sitting on millions of dollars in equity while struggling to buy food and medicine is wrong!

A reverse mortgage can change the life of a senior. A reverse mortgage can free up the equity and allow the senior to enjoy a life more comfortable and rewarding. No payment is ever due until the senior vacates the home. Over 7900 people turn age 62 every day for the next 17 years. Every one of those seniors may be able to gain access to the equity in their home by obtaining a reverse mortgage.

A reverse mortgage is available to all seniors over the age of 62 regardless of credit or income. It could be the answer for someone you love or for yourself. The Home Equity Conversion Mortgage (HECM) loan could be the answer for a senior you know. The HECM Mortgage is guaranteed by the Federal government and insured by the Federal Housing Adminstration (FHA), the senior still maintains ownership of the home as long as one of the people on the deed is in residence.

For more information regarding a Reverse Mortgage, email swiley@alliedhomenet.com. I will send you a booklet written by Fannie Mae that will tell you everything you need to know about Reverse Mortgages.