Seniors with a huge down payment can now buy a home and make no monthly mortgage payments!
I was just barely getting my head around regular reverse mortgages when my neighbor Sean Thomas, who is an Arizona reverse mortgage specialist at Well Fargo Home Mortgage, told me that some laws were changed in February and now seniors could use reverse mortgages when purchasing a home!
First my head exploded but then it slowly started to make sense to me.
If you make a huge down payment when you buy an Arizona home, which is very common for Arizona seniors, why should you have to make monthly mortgage payments? If I understand this right, your home equity goes down each month but you don’t make any monthly payments. Nice.
This is a great option for seniors to have!
Normally, seniors would simply put less money down when buying an Arizona home. That way they preserve the cash they will need to make the monthly mortgage payments. That’s a good option too, of course (except perhaps when you invest that cash in the stock market and the market crashes).
A clear advantage of an Arizona reverse mortgage I can see (besides not having to make monthly mortgage payments) is that you can make a larger down payment. The larger down payment will let some people qualify for a more expensive home (still with no monthly mortgage payments) and hopefully live more comfortably in retirement.
I’ll ask Sean if I’m on the right track here.
Sean just sent me some information from Wells Fargo Home Mortgage which does an excellent job of explaining reverse mortgages. It’s directed at the traditional reverse mortgage refinancing product, not the new reverse mortgage for home purchase product, but it’s very good. See an extended excerpt below.
The information below is from Wells Fargo Home Mortgage publication, “Your Reverse Mortgage Guide.”
What Is A Reverse Mortgage?
A reverse mortgage allows you to borrow against the equity you’ve established in your home. Instead of making monthly payments, you can choose to receive them. That’s the ” reverse” part of a reverse mortgage. To be eligible, you must be age 62 years or older and own your home free and clear or have a remaining mortgage balance that can be paid off by the reverse mortgage.
You’ll want to consult a tax advisor to confirm this, but in most cases a reverse mortgage gives you access to tax-free funds, though it may impact your eligibility for some benefits.
Why Get A Reverse Mortgage?
There are no restrictions on how you may use proceeds received through a reverse mortgage. You can direct the funds toward a variety of purposes, including:
- Eliminating existing mortgage
- Supplementing retirement income
- Remodeling or repairing your home
- Paying property taxes
- Covering healthcare expenses
- Planning for long-term care needs
You can even use your reverse mortgage funds to purchase a second or vacation home.
How Does It Differ From A Traditional Home Loan?
With a traditional mortgage or home equity loan, homeowners qualify based on their credit history and debt-to-income ratio. They borrow money, which requires making monthly payments. With a reverse mortgage, your home can make payments to you and in most cases, is available regardless of your current income, credit score or debt -to-income ratio.
Three Essential Facts
Making an educated decision begins with addressing common misconceptions that keep many senior homeowners from looking into the advantages of a reverse mortgage. Contrary to what you may have heard “” as long as all property tax, insurance and maintenance requirements are met:
- You cannot owe more than the value of the home.
- You retain title to the property.
- You receive payments instead of making them. Please ask your reverse mortgage consultant for details about when repayment may be due.
Reverse mortgage eligibility requirements are quite simple. There are no income, employment or credit score qualifying restrictions.
- All homeowners must be age 62 or older and occupy the property as their principal residence.
- The home must be owned free and clear or have a remaining mortgage balance that can be paid off by the reverse mortgage.
- The property must be a single-family or a one-to-four unit, owner-occupied dwelling.
- Townhomes, detached homes, condominium units, planned unit developments (PUDs) and some manufactured homes are eligible.
- The home must meet Department of Housing and Urban Development (HUD) minimum property standards. In some cases, home repairs can be made after a reverse mortgage closing.
How Much Can Be Borrowed?
In most cases, maximum reverse mortgage loan amounts are based on the
- The age of the youngest homeowner
- The appraised value of the home
- The current interest rate
- The locally established lending limit
In general, the older you are, the more your home is worth, and the lower the interest rate, the more you’ll be able to borrow. Ask your reverse mortgage consultant for further details.
Reverse mortgage customers have differing needs. Some would rather receive their entire loan amount up front, while others prefer a steady monthly stream of funds to supplement their other income. Regardless of how you choose to receive your proceeds, you can adjust your plan as often as you wish to accommodate changing needs.
You have several options to receive your reverse mortgage proceeds, they are available to you in the following distribution options:
- Lump Sum “” A specific amount is made immediately available (often used to pay off an existing mortgage).
- Term “” Funds are released in set monthly amounts for a set period requested by the customer.
- Tenure “” Loan proceeds are distributed in equal monthly allotments for as long as at least one homeowner continues to occupy the home as a principal residence.
- Line Of Credit “” Funds remain available for the customer to draw on as needed or in automatic monthly payments.
- Combination “” Customers receive any combination of lump sum, monthly, or line of credit distributions.
Wells Fargo offers both fixed and variable rate reverse mortgages. In most variable rate cases, you may choose monthly or annual adjustments. Interest rate adjustments have no effect on the number of loan advances you can receive, but they do cause your loan balance to grow at a faster or slower pace.
You do not need to repay the loan as long as you or one of the borrowers continues to remain in the home as your principal residence, keep the taxes and insurance current, and maintain the property to FHA standards. The balance due can come from home sale proceeds, or from other resources, such as savings, insurance or possibly applying for a new mortgage. There is no requirement that the home be sold, only that the loan be repaid. Please ask your reverse mortgage consultant for more details about when repayment may be due.
Effect On Other Benefits
Reverse mortgage loan proceeds are not considered income and will not affect Social Security or Medicare benefits. However, receiving monthly reverse mortgage advances could affect your eligibility for some public assistance programs that are based on need. Consult a local attorney to determine how “” or if “” your reverse mortgage distributions might impact your specific situation.
The Reverse Mortgage Process
The process of getting a reverse mortgage begins with the phase you are in now. You are taking the time to get information and learn more about this kind of home financing to determine if it is right for you.
Reverse mortgage applicants are required to participate in a consumer education session with a HUD-approved counselor. Family members and other advisors are welcome to accompany you. The counselor will explain the legal and financial obligations of a reverse mortgage and discuss other financing alternatives to help ensure you make the right decision.
Your reverse mortgage consultant will help you complete and sign your reverse mortgage loan application. Shortly after the application is submitted, as required by the federal Truth-in-Lending Act, you will receive a disclosure that outlines your total estimated loan cost.
We will arrange for a professional appraiser to contact you to schedule an appraisal that will determine the value of your home. The appraisal will be used to calculate the amount you can receive from your reverse mortgage. Once your appraisal is completed, your appraisal report will be reviewed to ensure it meets minimum guidelines and my be approved, suspended, or approved subject to repairs. You will be provided with a copy of your appraisal at closing.
Wells Fargo requires that your homeowner’s policy provides for loss/settlement on a replacement cost basis. In the event that replacement coverage is not available, your home must be insured at the maximum dwelling coverage limit allowable for your property. We will verify your coverage with your insurance agent. At that time, your homeowner’s insurance will also be updated, with your authorization, to reflect Wells Fargo as the first mortgagee on your hazard policy or condo certificate of insurance.
There are two types of title insurance. One protects the lender and one protects the borrower. Together, the coverage protects you and your lender from claims against ownership of the property, which might be made by:
- Undisclosed spouses
- Heirs of previous owners
- Creditors holding liens against previous owners
- Or other parties
You will be required to purchase a title policy that covers your reverse mortgage lender’s interest in the property. The decision to purchase a policy that protects your interest is up to you.
Once your appraisal is approved, a value has been determined, and the title report has been cleared, an underwriter will review your loan and supporting documents to ensure that approval conditions have been met and then issue the clearance to close. If additional approval items are required, you will be notified by your reverse mortgage consultant or loan document specialist. If all approval conditions have been met, your loan is now ready to close.
Processing and underwriting your reverse mortgage generally takes approximately six to eight weeks before you are ready to close. Your closing must be coordinated with many parties, which may include: you, your lender, your attorney, and the title company representative.
Before The Closing “” Your reverse mortgage consultant will help you go through
a loan closing checklist to make sure the following items are in order:
- Closing costs and escrow amounts “” Your Good Faith Estimate may not include all closing costs such as interim interest or property taxes. You will need to finalize your actual costs with your attorney or closing agent to avoid last-minute surprises.
- Acceptable method of payment “” In most cases closing costs may be financed as part of the reverse mortgage.
- Any additional items needed “” Some counties require photo ID, evidence of hazard or flood insurance or other miscellaneous documents. This is the time to gather all the paperwork that may be required at closing.
At Closing Time “” Reverse mortgage closings typically take place in the home. The loan documents, including the mortgage or deed of trust, are forwarded to you to read and sign as instructed, and pay any applicable closing costs. Any funds disbursements due to you will be forwarded from the processing center shortly thereafter.
After The Closing “” As a reverse mortgage customer, you have responsibilities similar to those associated with a traditional mortgage, such as:
- Paying your property taxes
- Keeping your insurance coverage up-to-date
- Maintaining the home
Questions And Answers
Questions And Answers
Q. Am I qualified for a reverse mortgage if I have an existing loan on my home?
A. Yes, but the existing loan must be paid off prior to or at your reverse mortgage closing. Quite often a reverse mortgage is used to pay off an existing loan.
Q. My property is held in a Living Trust. Do I qualify?
A. Yes, as long as you are the primary trustee and are qualified by age.
Q. My children and I own the property in joint tenancy to avoid probate. Do we qualify?
A. Yes, if the children are age 62 and older and live in the property.
Q. Does the IRS consider monthly reverse mortgage advances as income?
A. No. The reverse mortgage advances are actually loan distributions and are not considered income. Consult your tax advisor to confirm your advances would be tax-free.
Q. Are manufactured homes eligible?
A. Yes. The home must have been built after June 15, 1976, placed on an FHA approved permanent foundation for a minimum of one year, and meet minimum HUD property standards.
Q. My spouse is permanently in a nursing home. Can we participate?
A. Yes. As long as all other program requirements are met, only one owner is required to occupy the property as a principal residence.
Q. Are there restrictions on how I can use my reverse mortgage proceeds?
A. Absolutely not! It’s your money to use as you see fit.
Q. Can the lender take my home away if I outlive my loan term?
A. No! Moreover, you do not need to repay the loan as long as you or one of the borrowers continues to live in the house, keep the taxes and insurance current and maintain the property to FHA standards.
Q. Will I still have an estate that I can leave to my heirs?
A. Any remaining home equity belongs to you or your heirs. None of your other assets will be affected by the reverse mortgage. Your heirs will be able to choose whether to keep or sell the home. Please ask your reverse mortgage consultant for more details about repayment.
End excerpt from Wells Fargo Home Mortgage publication, “Your Reverse Mortgage Guide.”
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