REVERSE MORTGAGES FOR AGE 62+
An Article by WILLIAM A. TAYLOR (The Business Lawyer)
With so much uncertainty in the financial world (what with Countrywide needing a $2 billion bailout by BofA and mortgage financiers closing their doors forever on a moment’s notice), a retiree might be wondering how safe is their home ownership?
Theoretically, since they have lived in their homes for a while, if they did not join the feeding frenzy of the past ten years to take out an interest-only loan or one where their interest and principal payment amounts would reset, they should not be affected by the storm – particularly if they have a fixed interest loan.
The Price of California Living However, the crisis now roiling the financial world still affects everyone and, here in California, it places emphasis on the high cost of living here, even for people with stable mortgage loans. For someone in retirement or contemplating it, that high cost of living might strain their abilities to live in comfort. The reverse mortgage might be an answer to that problem.
Reverse Mortgage As long as a homeowner is age 62 or older and owns their residence, they will be eligible for a reverse mortgage loan, which is a loan against their residence that does not have to be paid back until the borrower dies, sells the residence, or permanently moves out of the residence.
Husband And Wife What happens to repayment if both a husband and wife are on the reverse mortgage and one of them dies? Nothing; no repayment is due as long as one co-owner resides in the house.
Qualifying for the Loan What happens if the borrower’s income is low or zero? Everything; the loan does not call for monthly repayments like regular mortgage loans. The loan is not based on ability to repay or on credit scores (which are the histories of on-time payments). The loan amount is determined by reference to the equity in a house, the difference between the fair market value (FMV) at the time of the loan and the total of mortgage amounts and other encumbrances on the house. (If the house FMV = $100 and all of the encumbrances = $60, the equity will be $40.)
Payment Plans The homeowner can choose to receive monthly payments of that $40 over any number of years; the longer the number of years (i.e., the younger the borrower), the smaller the monthly payment. In the alternative, the homeowner can choose to receive a lump sum payment of the $40, so that they can take the bus to Reno. The homeowner can also establish a line of credit (LOC) against that $40 and draw upon that LOC when and in the amounts they decide. (The LOC would be used to fill-in unexpected shortfalls.)
How Does It Work? The borrower will continue to own the house. A reverse mortgage must be the first encumbrance against the title; the lender will either pay off the existing first mortgage or negotiate that first into a second position (usually government loans). The interest charged during the life of a reverse mortgage loan must be repaid along with the new loan financing charges and the principal paid to or (in paying off the first mortgage) for the borrower (all of such payments are called cash advances).
At the borrower’s death, the estate of the borrower bears the responsibility of repaying the cash advances and loan interest. That might mean the heirs selling the house; it might mean financing the house in the name of the new owner, a relative of the deceased borrower.
However, if the cash advances equaled the FMV (e.g., if the borrower lived a long time with the loan), the heirs and the estate of the deceased borrower would still not be responsible for paying off the reverse mortgage loan; it is a non-recourse loan – where only the house is collateral for the loan. The loan amount will never exceed the equity in the house.
On the positive side, any money left over, after paying off the reverse mortgage lender, is money for the estate and the heirs of the deceased borrower. That money may total more than is anticipated if the FMV of the house goes up over the life of the reverse mortgage loan – which is the normal long term course of California real estate.
Property Taxes, Insurance & Repairs The borrower still has responsibility for timely paying the property taxes and insurance as well as keeping the house in good repair. Failure to do so could be the cause of a default, triggering the requirement for repayment.
Defaults could also be triggered by the borrower declaring bankruptcy or using the house as collateral for a new loan or adding another owner to the property title or renting-out even a part of the house. Any of these activities, including preparing a living trust that includes the house, absolutely requires the borrower to obtain from the reverse mortgage lender a written agreement regarding the planned actions.
Three Day Right of Rescission The reverse mortgage industry is watched by the federal government (HUD, FTC) for fraud on elderly borrowers. One of the requirements on the industry provides the borrower a three business day window, from signing for the loan until it takes effect, during which the borrower can write the lender a cancellation notice. For this purpose, a business day includes Saturdays, but does not include Sundays or holidays.
Conclusion At age 62, it might be a wise thing for a retiree to sign for a reverse mortgage to provide funds as part of their retirement income. The house can still go to the heirs and none of the other assets of the retiree’s estate are liable for repayment of the reverse mortgage loan. Bad credit or no credit applicants are welcome; low income or no income applicants are welcome. All that is required is ownership of a residence that has equity.
It is always advisable to review the paperwork with someone in the business of reading financial contracts.
ABOUT THE AUTHOR: William A. Taylor, attorney at law, does business as “THE BUSINESS LAWYER.” He can be reached at (510) 893-9465