Posts Tagged ‘mortgages’

A new Reverse Mortgage Limit (FHA/HECM) has been announced. This new limit, a part of the FHA Modernization Act (which was part of the overall Housing & Foreclosure Rescue Bill) will be a nationwide limit – not the old county by county limit. It has been raised to $417,000.

By making the reverse mortgage one national lending amount, it will simplify things considerably for both the lender and the borrower.  This is welcome news as it brings the lending limit more in line with current housing prices (in spite of the downturn of the last couple of years).

A reverse mortgage is for seniors who are 62+, own their home (with or without a mortgage), and use it as their principal residence.  There are no mortgage payments; no credit, income or asset qualifying; it does not affect Social Security or Medicare; the funds are non-taxable. 

Seniors may take the funds (after paying off any current mortgage) as lifetime monthly payments, a lump sum or as a credit line, or any combination.  If they wish to makepayments, that is OK, too. 

The mortgage is good for as long as any of the borrowers  live in the property.  In addition it is a non-recourse loan, meaning that the lender cannot attach other assets if the loan ever exceeds the value of the home. 

If that happens, then when the house is sold FHA pays the difference to the lender.  Most of the time, the loan does not reach the value of the home, and when it is sold, the seniors, or their heirs receive the difference.

Starting in April, 2007, certain members of Congress, FHA and NRMLA (National Reverse Mortgage Lenders Association)  and AARP started working together to make the Reverse Mortgage loan amounts catch up to the real market prices, lower fees, enable it to be used for purchases (instead of only refinances), and to include Co-Ops in the program. Now, finally, some of these goals are in effect. 

BACKGROUND OF THE REVERSE MORTGAGE

Over the years, since 1987, when President Reagan signed FHA Home Equity Conversion Mortgage (HECM) bill into law, FHA and others such as Congress, AARP, and NRMLA have worked to improve this financing instrument.  For those who need to use part of the equity in their homes to get cash to cover rising living and medical costs, and, yet, have no mortgage payment, it has been a valuable program.

 It was part of the overall program called “Aging in Place” because studies and polls had shown that over 85% of seniors wanted to live in their homes, and neighborhoods.  Many were “house rich, but cash poor”, yet wanted to stay where their friends and relatives were, and where they had raised their children. 

Due to the rise in home prices, even downsizing was often over their financial means since their home price, less their mortgage didn’t leave enough to buy smaller place close to the old neighborhood, and smaller incomes did not allow them to qualify for a regular mortgage to make up the difference.

They also desired to retain as much of their independence for as long as possible.   When they got sick, they wanted to invite home-care workers in, rather than going to an assisted living facility or other care facility.  Sociological studies have shown the health of the elderly and the quality of neighborhoods is enhanced by keeping people of all ages in a neighborhood.

Prior to the government getting involved in the reverse mortgage program, some unscrupulous brokers had taken advantage of seniors by going on title and sharing in the homes’ appreciation, or steering seniors with new cash from their reverse mortgages into unsafe, irresponsible investments that made the broker more money – but punished the seniors. 

Often, seniors, especially those who were older did not understand, nor have the details of the reverse mortgage explained to them. Some even lost their homes.   And, today, while these practices are minimal, the rumors persist.

Those old practices have been curtailed by requiring mandatory counseling by HUD approved counselors, and required disclosure forms in the loan package – and by constant encouragement by professional lenders to have the seniors bring a relative, advisor, attorney or trusted friend with them when applying and closing a reverse mortgage.

 Now, new laws and enforcement have all but stopped these practices – and further new laws passed to close any loopholes. 

From time to FHA reviews the program.  For instance, when the program first started, only detached, single family homes were included, but over the year’s owner-occupied 2-4 unit buildings, condominiums and even some modular-type homes were added to the program.

 WHAT DO THE NEW FHA MODERNIZATION ACT CHANGES MEAN? 

It means that for certain seniors who have wanted to get a reverse mortgage to pay off their older, higher loan-to-value mortgages, but were a bit short of the equity to qualify (or would have to have come to the settlement table with cash), this problem may now be solved.  Also, people with higher value homes will receive larger loans, or credit lines.  In addition, the lender origination fee has been reduced and is also effective now.

There had been hope that there would be a limit of $625,000 for high-cost areas, but according to sources involved in the negotiations, just how that would be done created very complicated and uneven solutions.

So, the $417,000 was settled on as the final number.

Several other changes mandated by Congress for changes in the Reverse Mortgage are still forthcoming – such as being able to use the Reverse Mortgage for purchases, instead of only refinances; and including Co-op’s in the program.

These changes will be announced when details have been worked out. Will there ever be a differing high-cost area limit? That remains to be seen over time.

To begin with it depends on where you live. Here in Northern Virginia, and Washington, D.C. the old county FHA HECM (Reverse Mortgage) limits ranged from a high of $362,790 down to a low of $264,100.

Below are a few examples; they are based on a couple aged 70, who own a $450,000 home with interest rates between 4.5% and 5.5%. These are examples only, and to see what you would might qualify for:

1. If you have been living in a county (D.C., Arlington, Fairfax) where the lending limit was $362,790, you would have received $208,000-$218,000 in net proceeds (after costs, but prior to paying off your current loan, and depending on which HECM you chose). Under the new program your net proceeds would be about $281,800, giving you approximately $62,000-$69,000 more.

2. If you have been living in a county (Frederick) where the lending limit was $361,000, you would have received $206,000-$216,000 in net proceeds (after costs, but prior to paying off your current loan, and depending on which HECM you chose). Under the new program your net proceeds would be about $281,800, giving you approximately $76,000-$86,000 more.

3. If you have been living in a county where the lending limit was $290,319, (Culpeper) you would have received $165,000-$175,000 in net proceeds (after costs, but prior to paying off your current loan, and depending on which HECM you chose). Under the new program your net proceeds would be about $281,800, giving you approximately $109,000-$117,000 more.

4. If you have been living in a county (Prince George) where the lending limit was $264,100, you would have received $149,500 – $156,700 in net proceeds (after costs, but prior to paying off your current loan, and depending on which HECM you chose). Under the new program your net proceeds would be about $281,800, giving you approximately $126,000-$133,000 more.

The new limit of $417,000 is targeted to be effective on November 1, 2008. Taking a Reverse Mortgage application, doing the mandatory counseling, getting an FHA approved appraisal and setting up settlement takes about 30-45 days. So, if you have been waiting for this limit increase, or feel the reverse mortgage would be even more beneficial to you now, it’s not too early to get started.

 Also if you currently have a reverse mortgage and want to se if it makes sense to refinance it and ge more of our equity in cash, or to put in a credit line, or have lifetime monthly payments, please see a reputable lender.  If you refinance a reverse mortgage, the cost of the FHA Mortgage Insurance is lower, too.

If you are interested in the way a Reverse Mortgage works, please come to my blog at http://reversemortgagesnow.blogspot.com  and look in the left column.  Under the title Reverse Mortgage Basics you will find pages that explain how the reverse mortgage works, FAQ’s, who uses reverse mortgages, and more.