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7/31/2017

Reverse Mortgage Questions Answered



Questions and the Answers about Reverse Mortgages
Q: What if I have an existing mortgage?
A: You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so any existing indebtedness must be paid off. You can pay off the existing mortgage with a reverse mortgage, money from your savings, or assistance from a family member or friend.
For example, let's say you owe $100,000 on an existing mortgage. Based on your age, home value, and interest rates, you qualify for $125,000 under the reverse mortgage program. Under this scenario, you will be able to pay off ALL the existing mortgage and still have $25,000 left over to use as you wish.

Social Security and Medicare
Q: Will I lose my government assistance if I get a reverse mortgage?
A: A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid or Supplemental Security Income (SSI), any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain count as an asset and could impact eligibility. For example, if you receive $4,000 in a lump sum for home repairs and spend it all the same calendar month, everything is fine. Any residual funds remaining in your bank account the following month would count as an asset. If the total liquid resources (including other bank funds and savings bonds) exceed $2,000 for an individual or $3,000 for a couple, you would be ineligible for Medicaid. 
Payment Options
Q: What are My Payment Plan Options?
A: You can choose to receive the money from a reverse mortgage all at once as a lump sum, fixed monthly payments either for a set term or for as long as you live in the home, as a line of credit, or a combination of these.
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Amount of Proceeds
Q:  How Much Money Can I Get?
A:  The amount of funds you are eligible to receive depends on your age (or the age of the youngest spouse when there is a couple), appraised home value, interest rates, and in the case of the government program, the FHA lending limit in Orange county California is currently $636150. If your home is worth more, then the amount of funds you may be eligible for will be based on the $636,150.00 loan limit. In general, the older you are and the more valuable your home (and the less you owe on your home), the more money you can get.
During the first 12 months after closing, a borrower cannot access more than 60 percent of the available loan proceeds. In month thirteen, a borrower can access as much or as little of the remaining funds as he or she wishes.

There are exceptions to the 60 percent rule. If you have an existing mortgage, you may pay it off and take an additional 10 percent of the available funds, even if the total amount used exceeds 60 percent.

Use of Proceeds
Q: How can I use the proceeds from a reverse mortgage?
A: The proceeds from a reverse mortgage can be used for anything, whether its to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, cover property taxes, or prevent foreclosure.
Interest
Q: How does the interest work on a reverse mortgage?
A:  With a reverse mortgage, you are charged interest only on the proceeds that you receive. Both fixed and variable interest rates are available. Rates are tied to an index, such as the 1-Yr. Treasury Bill or the London Interbank Offered Rate (LIBOR), plus a margin that typically adds an additional one to three percentage points onto the rate you're charged. Interest is not paid out of your available loan proceeds, but instead compounds over the life of the loan until repayment occurs.

Growth Feature
Q:  If the unused balance in the HECM Line of Credit Option has a growth feature am I earning interest?
A:  No, you're not earning interest.. After the first month of your HECM loan, the principal limit increases each month thereafter at a rate equal to one-twelfth of the mortgage interest rate in effect at that time, plus one-twelfth of monthly mortgage insurance premium rate.  
Why Two Mortgages?
Q: Why did I sign two (2) Mortgages and Notes at my closing?
A: Your lender is in a first lien position and the Federal Housing Administration is in a second lien position. If your lender fails to meet its obligations under the terms of the Loan Agreement, FHA can step in and assume responsibility for the loan, so that you continue getting uninterrupted access to your funds.  Both the first and the second mortgage will be recorded with the county in which your property is located. FHA is a government backed mortgage.
Servicing Fee
Q: What is the Service Fee Set Aside?
A: The service fee set aside is the dollar amount deducted from your Original Principal Limit and serves to ensure the future payment of your monthly servicing fee.  The amount of the service fee set aside is NOT part of your outstanding balance and is NOT accruing interest.  As the service fee set aside is not part of the loan balance, the funds remaining in the service fee set aside at time of loan repayment are not subject to refund.
Q: Why am I charged a servicing fee?
A: The monthly servicing fee covers the costs associated with administering your reverse mortgage loan.  This administration includes, among other tasks, providing customer service, maintaining accurate records of your outstanding loan balance (including the interest and mortgage insurance premiums, etc) at all times, tracking your property taxes and your hazard insurance, certifying your occupancy status, issuing your statements of account, issuing and collecting payments, collecting on the loan when it becomes due, and discharging the mortgage.
Mortgage Insurance Premiums
Q: Why is there a Mortgage Insurance Premium with my HECM reverse mortgage?
A: Under the HECM program, you will be charged a mortgage insurance premium (MIP) at closing that is based on the amount of funds withdrawn during the initial year. As long as you don’t take more than 60 percent of the available funds in the first year, you will be charged an upfront MIP of 0.50 percent of the appraised value of the home. If, however, you take more than 60 percent, the upfront MIP will be 2.50 percent. On a $200,000 home, 2.5 percent is $5,000 versus $1,000 if you were paying 0.50 percent. 


You also are charged MIP on an annual basis, however this fee doesn't come out of your available loan proceeds. Rather, it accrues over time and you pay it once the loan is called due and payable. The annual premium is equal 1.25 percent of the outstanding loan balance.
Payments
Q: I elected to receive monthly payments, when will those monthly payments commence?
A: Your first monthly payments are to be sent to you the first business day of the month following your loan funding date. For example, if your loan closed at the end of May and your loan funded in June, then your first monthly payment will be issued the first business day of July.  If your loan closed in June, and your loan funded in June, then your first monthly payment will be the first business day of July.
Q: Can I change the type of payment plan I elected at closing?
A: If you have a Home Equity Conversion Mortgage (HECM), and your loan documents allow for a payment plan change, then yes you can change your payment plan. This means that you can change from monthly payments to a Line of Credit, or vice versa.  There is usually a fee associated with changing you payment plan. NRMLA strongly advises that you discuss the payment plan change options that may be available, and any possible fee for changing your payment plan, with your reverse mortgage servicer.
Q: What if my loan servicer does not send my requested funds in a timely manner?
A: Your loan servicer is to send your requested Line of Credit funds within five (5) business days of receiving your request for funds.  If you have scheduled monthly payments, then these funds are to be disbursed by the first business day of each month.  If your servicer does not disburse your funds within these timeframes, FHA can fine your loan servicer and make them pay you an extra 10% of the payment that is due to you, plus interest on that sum for each additional day the disbursement is delayed.  This fine shall not exceed $500 for each instance of late disbursement.  This fine may not be added to your loan balance.
Prepayments
Q: Can I make a partial prepayment to my reverse mortgage account?
A:  Most reverse mortgages will permit a partial prepayment to your reverse mortgage account without penalty

Interest charges and your income taxes
Q: Can I deduct the interest charges for income tax purposes?
A: Interest charges can only be deducted once those interest charges have been paid.  Generally you are not making  payments to your reverse mortgage, you can't write them off for income tax purposes.  If you have made partial prepayments, then you must be assured that your prepayments have been applied to your interest charges 

Occupancy
Q: What are “Occupancy Certificates”?
A: Reverse mortgages require you to periodically certify that you continue to reside in the property as your primary residence.  
Property Taxes
Q: Do I have to pay my property taxes?
A: Yes, it is your responsibility to ensure that your property taxes are paid in a timely manner. 
Q: What is a “Tax Set Aside”?
A: You may choose to have your reverse mortgage servicer pay your property taxes on your behalf.  Property taxes can change as time goes on, your loan servicer will work with you to keep current on any increases in property tax or special assessments.These funds do not become part of your loan balance until which time the funds are actually disbursed.
Q: Can I participate in a property tax deferral program?
A: You may only participate in a property tax deferral program if the lien created by your deferral program is subordinate to your reverse mortgage loan.  
Q: May I participate in a tax exemption program?
A: Yes, tax exemption programs are permitted under the reverse mortgage program.  
Hazard Insurance
Q:  Am I required to maintain Hazard Insurance on my mortgaged property?
A:  Yes.  You must maintain Hazard Insurance on your property in an amount that is equal to at least 100% of the insurable value of the improvements at the time of your loan closing.  You provide loan servicer with a copy of your Hazard Insurance policy and renew upon expiration. Failure to maintain adequate Hazard Insurance on your property is considered a DEFAULT in the terms of your Loan Agreement and may be grounds for calling your loan due and payable.
Q: What is an “Insurance Set Aside”?
A: You may choose to have your reverse mortgage servicer pay your Hazard Insurance premiums on your behalf.  This can be set up similar to an impound but as fire and hazard charges may change annually it is your responsibility to make certain the home is covered and your servicer has the copy of the policy
Flood Insurance
Q: Do I have to carry Flood Insurance in addition to my Hazard Insurance?
A:  If your property is in an area that has been identified by FEMA as having special flood hazards, then you must maintain Flood Insurance in compliance with the Flood Disaster Act of 1973.  I
Loan Assignment
Q: Why have I received a notice that my loan is being assigned to HUD?
A: Under the Home Equity Conversion Mortgage (HECM) plan, your loan servicer may assign your loan to HUD when your outstanding loan balance reaches 98% of the maximum claim amount. HUD will continue to administer your HECM reverse mortgage.  
Maturity
Q: What is a maturity event?
A:  A maturity event is any event which may cause your reverse mortgage to be called due and payable.  Maturity events include:
1.        All borrowers have passed away
2.        All borrowers have sold property or conveyed title of the property to a third party
3.        The property is no longer the principal residence of at least one borrower for reasons other than death
4.        The borrower does not maintain the property as principal residence for a period exceeding 12 months because of physical or mental illness
5.        Borrower fails to pay property taxes and/or insurance and all attempts to rectify the situation have been exhausted
6.        The property is in disrepair and the borrower has refused or is unable to repair the property.
Payoffs
Q: Can I pay off my reverse mortgage before a maturity event is reached?
A: Yes.  You can pay your reverse mortgage in full at any time during the term of your reverse mortgage.
Q: How long will my estate have to pay off the reverse mortgage once it has been called due and payable?
A: The reverse mortgage is to be paid in full once it has been called due and payable.  You and/or your estate must work closely with your loan servicer to ensure your reverse mortgage is paid in full in a timely manner.  If arrangements to pay the reverse mortgage are not made with your loan servicer, then your loan servicer may proceed with foreclosure between 30 days and six months from when your loan has been called due and payable.  If you or your estate are actively working to either refinance your property or sell your property so as to satisfy your reverse mortgage, then foreclosure maybe forestalled.  
Non-recourse Provisions
Q: What does “non-recourse loan” mean?
A: Most reverse mortgage loans are considered “non-recourse loans."  This means that you can never owe more than the value of your home at the time you or your heirs sell your home to repay your reverse mortgage.  If your loan is a Home Equity Conversion Mortgage ("HECM"), the reverse mortgage debt may be satisfied by paying the lesser of the mortgage balance or 95% of the current appraised value of the home.


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