Reverse Mortgages Can Provide Seniors with Financial Alternatives
The tightening lending requirements by the banks have made it very hard for some people to get a mortgage. For others, it's outright impossible. Today the banks are overreacting to the liberal practices they had in the past by requiring almost all loans to be fully documented with tax returns, bank statements and higher credit scores. The only thing they haven't asked for yet, is a copy of your latest physical exam with the meds you're on to make sure you're healthy enough to make payments. But who knows, that may be required next week.
This overreaction has really made it tough for many groups of people who have done everything right and are sitting on a pile of equity. With stock portfolios down and loans for lines of credit hard to find, getting a hold of cash is much harder.
The tough lending standards have really impacted senior citizens. Even though many older couples may own their homes, have 401Ks, and have social security income, they still might not qualify for a loan in today's environment. Recently, I've seen a few well established clients turned down for small loans. A year ago this would have been a no-brainer.
Reverse mortgages
Well there is good news for these people with special type of financing that's offered through U.S. Dept of Housing and Urban Development (HUD). It goes by the long name of Home Equity Conversion Mortgage Purchase Program (HECM) but most people know of it as Reverse Mortgages.
A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you.
I won't go into the lengthy details, but here are some key benefits:
1. To qualify, you must be 62 years of age or older and this must be your primary residence.
But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. Once the property is no longer your primary residence, the loan must be repaid. This can be done by either refinancing the property or selling it.
Here's an example of how this could work for you. Let's say you own your home free and clear, have a small mortgage balance or wish to downsize to a smaller home worth $500,000. With a reverse mortgage, you could borrow up to $232,000 with the balance being your equity. To qualify for this loan, you do not need to show any tax returns or proof of income. No credit score is required either. Your monthly payment for this $232,000 mortgage is $0 — as long as this remains the primary residence for you or your spouse. Let me repeat that, your monthly payment for the life of the loan remains at $0. Once your property is either refinanced or sold, all remaining equity after repaying loan and accrued interest is passed on to you or your heirs. Loan proceeds are not considered income and will not affect your social security or Medicare benefits. One more benefit, all the proceeds are tax-free and federally insured by HUD.
2. With a reverse mortgage, you can borrow the money in a lump sum or small increments through a line of credit as you see fit.
The loan can be used to pay medical expenses, make home improvements, pay for in-home care, supplement your income and much more.
With access to cash limited today and stock prices down, this may be worth exploring. It's always good to have a cash cushion because you never know when unexpected expenses come up.
When it comes to important decisions like this it's wise to talk with your family, your financial adviser and attorney to make sure this is going to work best for your particular situation and your long term goals. One thing you should avoid is anyone trying to sell you an annual annuity because it's not needed and is a large additional expense. It's also a good idea to speak with a few lenders to make sure you are getting the best deal.
Steven Hyman is the Broker & Owner of Century 21 Sunset Properties. He can be reached at 650.726.6346 or at www.century21sunset.com.
Comments
Because of their unscrupulous practices of the last 5 years, Mortgage Brokers are looking for business. Seniors beware, they are preying on u! The loans called reverse mortgages seem too good to be true. Do the math urself on AARP and u will learn that u only qualify for 1/3 of the value of ur house, even if the mortgage broker told u 1/2 of an overblown quick estimate. U need counseling. So u pay the fee up front over the phone (from $75 to $125). While ur thinking ur going to go to a class with other seniors with whom u can exchange notes, a man comes on and speed reads a number of pros and cons u read already online and that is it. A week later the appraiser arrives. Remember he depends entirely on the mortgage broker to make a living. Within 20 min he appraises ur home for far less than the broker estimated and recommends a new a/c, a new roof and new doors and windows and paint in and out. He demands his fee up front. If u pay him ur duped coz his fee is payable at the closing. If u don't follow that (or have an attorney follow that) u'll pay twice. So u pay him up front thinking that the loan will arrive next. Wrong. Next inspectors arrive and give a quote for the roof, the a/c, the painting and repairs. The sum of these quotes cover most of ur anticipated loan. Desperate, u sign the repair contracts, hoping the closing will be soon. The closing comes and woopdeedoo the broker shows u a clear report on all the repairs. Ur stunned coz no repairs were ever done. The broker deducts the sum of repairs and gives u the rest of the loan. Not enough to pay the real estate taxes for the next 5 years. The broker lies about the inspection fees being payable up front. They are not. All fees are payable at the closing. The broker lies that if u do the repairs urself and do the painting urself, the contractor can give u a clear report for free. Sure. Who would make a free inspection and give a free clear report and make no money on the job? I tell u, Reverse Mortgages are a perverse scam. In this downtrodden economy it puts the mortgage broker in a position of power. Like never before, he brokers that power over appraiser and contractors alike to fleece the senile citizens, and the government guarantees it.
Equal Housing Opportunity