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..
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.
