Okay, so, we all know how a Regular Mortgage works. The borrower can be any age, they have to qualify with income and fico scores. Then after they close, they start making payments.
A Reverse Mortgage is a way for seniors age 62 or older to take a portion of equity out of their home. The proceeds are tax free and they do not have to make payments. The loans are FHA governed therefore there are many rules to protect the seniors and their homes.
A colleague of mine has decided that Reverse Mortgages are extremely more expensive than a traditional mortgage. They really aren't. If your client is purchasing a new home with a Reverse it's comparable to a Traditional Mortgage. Both have mortgage insurance, but in the case of a reverse, the insurance protects not only the lender but the borrower. For instance, if your client had gotten into a Reverse three years ago with an equity line, obviously the value isn't the same. However, because of the mortgage insurance, the line of credit would remain the same, not be lowered to the home value.
The only real difference is in the origination fee which is capped by FHA at $6,000. Yes, it's a bit more than a regular mortgage, but it provides a service for seniors who may not qualify due to income or fico scores. And let's face it, some seniors really need help, especially with the government cuts to their income and healthcare.
Really, if it's the best or the only solution for your client, wouldn't you want that for them? I would!
Warmest Regards,
Linda K. Mayer,
Realtor, Office Manager
License # 01767321
A Realtor you can Trust!
(626) 824-8927 Cell
LindaKMayer@live.com
Yes, but what happens when their property value falls dramatically and then the aged home owner passes away? Well - the heirs inherit some really bad debt. As a matter of fact, this happened to someone that I know and he attempted to "short sale" the home. Unfortunately the deceased had some life insurance, 401k investments, etc and the bank would not agree to the short sale because they had the funds to pay the difference. The heirs didn't get the house (which had been in the family for 3 generations) - the bank foreclosed on it - but they did get to keep their inheritance.
Actually, Melissa, the Reverse is a "non-recourse" loan. Therefore it is only tied to the home. The heirs do not incur any debt, even if the home hasn't fallen in value and thewy simply choose to walk away. The bank can only get the home value at the time the loan is due, hence the mortgage insurance.
Sorry, I pressed enter before I finished my comment. In the case of those people you are speaking about, I'm sure they weighed the options at the time, any maybe the only recourse for the parents at that point was a reverse. I advise all my clients to look at the big picture, part of which, in your case, would have been the fact that the home had been in the family for generations.
Linda, just wanted to drop by have not seen seen you in a while hope you are doing well, I blogged about this recently too:))
Hi Endre. Thanks for posting a comment. I am actually doing a couple of different things right now and have become a bit slack. I am hoping to be back in the groove around the new year! Mery Christmas!