By William E. Kelly | Senior Matters
Baby boomers, those born between 1946-1964, collided with the great recession of the late 2000s. Millions saw their retirement investments and savings greatly and suddenly diminished.
For many, the bulk of those assets is the equity they have in their homes, for which values fell dramatically. In short, they became the victims of unforeseen circumstances just as they were retiring and the social safety nets designed to supplement responsible and reasonable senior living standards are not currently sufficient to support this rapidly growing senior population.
In the matter of housing, studies consistently confirm that “aging in place” is more affordable and preferable to moving into senior communities away from their neighborhoods, familiar surroundings, friends and loved ones. Government regulated reverse mortgages provide a path for homeowners to stay put. But for those who have no or too little home equity, a lack of affordable housing has created a true crisis not adequately addressed.
This article will explore the heavily regulated U.S. Department of Housing and Urban Development (HUD)-approved standards of protection for the borrowers and lenders of reverse mortgage instruments.
My husband and I did our due diligence and are satisfied laws were enacted to fully protect seniors through a very rigorous HUD-approved process, that protects seniors and if married, their spouses, for as long as they are able to meet simple requirements. We consulted a financial advisor and learned all we could about reverse mortgages before interviewing a few HUD-approved companies and selecting one.
The process began in early June and was completed in September.
We chose CalPacific, a division of Bay Equity Home Loans, and Ian Wright was our senior loan officer. He and his staff walked us through the pros and cons of who would benefit from a reverse mortgage, the application and qualification processes, and they coordinated easily understood answers as quickly as we posed questions.
What we discovered was that a reverse mortgage protected us both.
It allows us to age in place as long as at least one of us is able to live there, keep our condo in good condition, pay the HOA fees and real estate taxes, and not move out or stay away from the condo for more than 12 consecutive months.
Relieved we had found our answer, I wanted to share a synopsis describing the reverse mortgage process, so I interviewed Ian.
What is a reverse mortgage and who would qualify?
A reverse mortgage or home equity conversion mortgage (HECM) is for homeowners ages 62 and up who currently own a home with sufficient equity or are looking to purchase a home.
An HECM allows you to convert a portion of your home’s equity into tax-free cash using a line of credit, fixed monthly payments, or a lump sum payment, while eliminating mortgage payments for the remainder of your life!
The most common form is the adjustable line of credit option, due to greater flexibility and the annual growth rate on the unused portion of the line.
These loans allow borrowers 62 and older to live more comfortably, provide themselves financial flexibility and live the lifestyle they desire.
The home must be an existing or future primary residence only. The property types allowed are: single family homes; two-four unit homes with one unit occupied by the borrower; FHA/HUD approved condos; and those manufactured homes built after 1990.
The most common reverse product (HECM) is federally insured by HUD.
Under what scenarios are these mortgages a favorable solution?
Most often it is used to pay off and eliminate existing monthly mortgage payments and simultaneously gain access to a line of credit in order to supplement their retirement income. It’s ideal for folks who want to stay in their home rather than moving into a retirement facility, but may no longer feel comfortable making their mortgage payments.
Borrowers are able to enjoy retirement by applying the benefits to things such as traveling; paying for in-home care services; paying off debt; medical expenses and health insurance; avoiding stock sales at the wrong time; making upgrades to the home; purchasing another investment property; paying for professional driver or transportation services such as Uber for appointments and social activities; delaying social security benefits until they are maxed out; and most importantly, living with a greater piece of mind.
A brief description of the process:
- Fill out a loan application online, in person, or over the phone.
- A loan officer will be assigned and will take time to understand your goals, objectives and concerns before generating an estimated proposal for you to discuss.
- If you decide to move forward, the loan officer will send the initial loan disclosures for you to sign.
- Schedule a required HUD counseling session over the phone and provide certification.
- Provide all income and asset documentation to the loan officer.
- An appraisal will be ordered eight days after the HUD counseling session, per guidelines.
- Once the file is complete and the appraisal is in, the loan is then submitted to an underwriter for review.
- Any conditions requested by the underwriter are then satisfied.
- Paperwork is resubmitted for final approval and clearance to order loan docs, which are then signed with a mobile notary.
- After docs are signed and all other conditions are met, the lender funds the loan.
Can a reverse mortgage be used to buy another more- or less-expensive home and leave cash left over with no payments?
Yes, it’s an alternative to paying all cash for a property and still having cash left in their account. A senior could put 50 percent down for the new home using existing assets, 401k, gift funds and/or the sale proceeds of their current home.
They would then do a reverse mortgage on the remaining 50 percent, completed in a single transaction. See the cheat sheet on this page, showing what that might look like if purchasing a $500,000 home.
Therefore, they would be retaining that other 50 percent, allowing their cash investments to continue growing, with no mortgage payments for the rest of their lives.
Just to clarify, on a reverse purchase transaction, the borrower does not receive monthly cash payments or draws as they would on a reverse line of credit or fixed refinance option. Interest accrues on the reverse loan itself since the borrower retained 50 percent of their assets. That is the true benefit.
Also, no repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold (on a purchase or refinance).
If your heirs inherit the property, the great news is they will never be responsible for paying the difference if the home is now worth less than the amount owed on the loan and they can keep the proceeds if the value is greater than the loan balance.
This is truly a great tool for seniors who think they may not qualify based on low fixed income; could benefit from keeping that extra 50 percent as a security blanket; or simply would like to use the additional funds to make upgrades, have that new kitchen they’ve always dreamed of, or even just want to move closer to family.
Many real estate agents and lenders will advise this type of buyer to pay all cash, but in reality they may not have to.
Those interested in considering a reverse mortgage should do their due diligence as we did, because not all reverse mortgage companies are the same. To learn more about the history of reverse mortgages, visit reversemortgagealert.org/history.
—Bill Kelly is a longtime local activist who currently focuses on LGBT senior issues and moderates the Caring for our LGBT Seniors in San Diego Facebook page. Access to the group is free to all seniors, their advocates, families, friends and caregivers. Reach Bill at firstname.lastname@example.org.