This is a great option for the certain people. It most commonly uses property equity to make your house payments. Therefore, you no longer have a payment due each month. You still pay insurance and taxes for the property, as well as any HOA dues; and you can still pay interest or principle reduction at your discretion. With the variable-rate ARM option, you can have a line of credit that builds and can be used at your discretion in the future. The HECM reverse product allows you to still own your home, then gives your estate a year to settle by selling the house or refinancing it, in the event there is leftover equity.
Reverse mortgages allow those aged 62 or older to maintain the title and ownership of their home without paying a monthly mortgage payment for principle and interest. The most common and best overall option is usually a Home Equity Conversion Mortgage (HECM). These loans require no monthly payment, can use the equity to make you a monthly payment in certain cases, and can provide a line of credit. In a forward traditional mortgage, a borrower makes a payment each month. With a reverse mortgage, instead of making a payment, the interest is added each month to the balance. In certain cases, borrower(s) can have a payment made to them each month from their equity; and this is a set monthly amount that is added to the balance. When using the line of credit feature, anything available that isn’t used grows at a rate of 5%, available each year. For example, if you had a $10,000 line of credit available that wasn’t used for a year, the following year, your line of credit available would increase to $10,500. Additionally, if you set your loan up with a line of credit and make payments to reduce principle or cover your interest, this adds to your line of credit availability.
Any interest paid into a reverse mortgage is still a tax write-off. It follows the same guidelines as a traditional forward mortgage. Consult your CPA for exact law guidelines and application to your situation.
Reverse mortgage loans are easier to qualify for because you only have to make your insurance and tax payments going forward and those are what you need to qualify for so your debt to income ratio can be much higher than on a traditional forward mortgage. In cases where there is enough equity these can be escrowed in what is knows as a LESA or Loan Escrow Setback Account. This account then pays your insurance and taxes as they come due.
Credit qualifying is much more flexible with a reverse mortgage as well because no minimum payment is due and in many cases credit scores can be as low as in the 550 range, even lower when using the LESA option as described above.
The loan to value calculation, how much someone can borrow, is determined in a computer system that follows a formula based on age and house value. We can determine this for you without running your credit initially. At this time, it is usually about 20% below a person’s age as a general rule of thumb and goes off of the youngest borrower. In cases where there are two borrower(s) it goes off of the age of the youngest. For example, two borrowers are doing the loan together and one is 81 and the other is 85. If both parties want to be on the loan then the loan to value would be around 61% meaning you can borrower 61% of what the home is worth for a refinance or what the purchase price is on a purchase deal.
As long as both are 62 then the loan isn’t due until the last borrower has passed away. With the HECM product the estate is given 12 months from when the last party on the loan passes away to settle the loan. In that period the interest is still added to the loan just like it is during when the parties are alive. Because of this it is usually in the estates best interest to refinance, payoff, or sell the home as quickly as possible but it isn’t required since there is a one year grace period to take care of this. Because there are no required mortgage payments, and interest is added to the loan balance each month, the loan balance can potentially exceed the value of the home. This is especially the case in markets where house prices have declined or the homes condition hasn’t been kept up. The estate isn’t required to pay the excess beyond the value of the home unless they want to keep the home. Most reverse mortgages do have mortgage insurance costs to cover the ones that go upside down. Because the house is still owned by the borrower(s), in the event that both parties pass away ahead of the average estimated time of death, the estate or heirs would still benefit from selling the property and benefit from the equity. Again, the estate has up to 1 year to take care of this and the loan just accrues interest monthly until the loan is paid off from a refinance or property sale. The estate can always contact a realtor in the area or someone with our company to help determine the best course of action at that time.
There is a proprietary reverse mortgage that allows for much higher loan amounts than the HECM options do. These loans are not federally insured and thus typically have stricter credit and lower loan to value guidelines. This option typically doesn’t have required mortgage insurance which is one of the benefits. Skyridge Lending LLC does these loan types on a case by case basis, depending on what is best for the borrower(s).
A reverse mortgage has many options at setup for closing costs. At Skyridge Lending we work with each customer to determine the best loan option and lowest closing cost option for your situation so contact us today if you would like to know more or have a no cost assessment done. Click here to compare options.
HECM mortgage certification for reverse mortgage counseling.