By Eileen Doherty
Many times the only asset that older adults have is their home. The value of the home has increased, the mortgage is paid off (or nearly), and the elder finds themselves in need of additional income to supplement their Social Security and/or small pension.
Using a reverse mortgage to access the equity in the home as an additional source of income either to manage the need for monthly income to supplement Social Security or pension income can be a useful tool. Reverse mortgages can also provide additional cash for emergencies such as home repairs or home care.
Reverse mortgages are structured so that older adults age 62 and over can take out a loan. The amount of the loan is dependent on the equity in the home.
There are 3 different types of payment options available for a reverse mortgage: a tenure option payment, in which the retiree receives a monthly payment for as long as they live in the home; a lump sum, in which the amount of the loan is distributed upfront; and a standby line of credit, in which the retiree borrows from a line of credit as they choose.
The benefit of a reverse mortgage is the loan is paid in a lump sum at the time when the property is sold or the last surviving spouse dies and title is transferred, rather than through monthly payments. The loan does not need to be repaid as long as the homeowner continues to live in the home. The loan is non-recourse, so the bank entering into the reverse mortgage only gets the value of the loan, not a windfall if the home value exceeds the loan.
Reverse mortgages have been a safe loan for older adults as they are insured by the Federal Home Association (FHA). Although the origination fees, mortgage insurance, and other fees can be $10,000 or more, the need for cash often out- weighs the cost of the loan.
FHA requires that older adults attend a counseling session explaining the terms of the loan, the process for withdrawing funds, and the repayment at the time of transfer of the title or the death of the last spouse.
Even with the protections, some elders were losing their homes as they were unable to afford the taxes and insurance, required as part of the terms of the loan.
To increase the protections for homeowners, starting April 2015, FHA has issued new rules focusing on ability to pay the taxes and insurance to reduce the danger of default and eventual foreclosure. Borrowers now have to demonstrate the ability to pay the taxes and insurance by undergoing a financial assessment. Lenders are required to look at income and credit history to determine the ability to pay the taxes and insurance. Borrowers who do not meet the requirements are required to set aside amount of the taxes and insurance.
The financial assessment includes a credit check, performing a cash flow/residual income analysis, and verification of income, assets and property charges such as home owner’s association fees. Loan officers are required to determine eligibility based on the analysis, determine if current income streams are enough to pay the financial obligations, and complete a financial assessment worksheet.
The lender is required to determine if there are any delinquent Federal debts, unpaid state or court-order judgments on the property, satisfactory payment history on credit cards and mortgages, and a timely history of paying property taxes and other charges.
In summary, some homeowners who could benefit from a reverse mortgage will be denied access to the equity in their home. Previously if the age requirements and the amount of equity in the home met the minimum requirements, the homeowner was approved for the loan.
For more information call 303-333-3482 to discuss eligibility, lenders who offer reverse mortgages, or agencies that provide reverse mortgage counseling.
~ Eileen Doherty, MS is the Executive Director of the Colorado Gerontological Society since 1982. She can be reached at doherty001@att.net.