by Bessie Edwards
As a real estate professional, I hear lots of horror stories about people losing their homes. Most often heard is a story about a homeowner who has passed away and the family is surprised to discover that there is a reverse mortgage on the property. The next shocker is the homeowner’s heirs must repay the outstanding balance on the reverse mortgage or sell the property to cover the mortgage due. There goes the family inheritance of the house. That is an example of how the reverse mortgage has gotten an unfavorable reputation. I recently hosted a webinar for the National Association of Real Estate Brokers (NAREB) on the Home Equity Conversion Mortgage (HECM), the newly restructured reverse mortgage. I was surprised to learn of the many benefits and options that are now available to senior homeowners through this restructured mortgage. Of course, as with all financial decisions, one must evaluate the pros and cons and decide if the HECM mortgage is a tool that best meets their needs. It is an option to consider if you want to revise your retirement and estate plans to protect your legacy for the next generation, increase cash flow, increase retirement funds, eliminate mandatory monthly mortgage payments, or replenish income due to employment loss or death of spouse.
What is a HECUM Mortgage? Created in 1988, The HECM mortgage is designed to allow a homeowner, 62 years of age or older, to borrow money against a portion of the equity in their primary resident which can be a one-to-four-unit home or a condo. It is FHA insured, and is overseen by the Dept. of Housing and Urban Development (HUD). It has been updated over the years to make it a better mortgage solution for seniors.
To Qualify for a HECM Mortgage, one must demonstrate ability to meet the monthly mortgage payments, property taxes and insurance in a timely manner for past 24-36 months or proof of situations that had caused the inability to make payments. A HECM mortgage must be a first mortgage. All outstanding loan balances on the home must be paid off before closing or use proceeds from HECM to pay off the debts before using funds for other purposes.
How Much Can One Borrow depends on the age of the applicant, the value of the property and the interest rate associated with the HECM program. There are no mandatory loan repayments required. However, there is mandatory counseling required by a HUD certified councilor before applying. It is also recommended that applicant and a potential heir of the property attend the counseling session with the borrower.
The Borrower Can Choose From 5 Options To Receive Loan Proceeds:
A Lump Sum: 60% of available benefit in the first year and the balance in subsequence years.
A Line of Credit: Similar to a home equity line of credit; can be used as a regular line of credit as needed.
Regular Term Payments: Monthly payment of a set amount over a specific period
Regular Tenure Payments: Regular monthly payments, guaranteed to come to borrower for as long as the loan is opened.
Hybrid: A combination of a lump sum payment and monthly payments with the line of credit acting as a reserve.
The Borrower is Required to be the primary resident; maintain the home in lendable condition; have homeowner’s insurance and must pay all property taxes.
When Does Loan Get Repaid? All cash advances, interest and other finance charges related to the reverse mortgage must be repaid to the lender when the homeowner passes away or moves from the property. If the family wants to keep the home, they can repay the lender using their resources or refinance the HECM into a traditional loan. HUD requires repayment discussions to be initiated with the lender within 30 days from the permanent departure from the home. An executor will then have 6 months to settle the HECM. An additional 6-month extension can be requested from HUD.
A HECM mortgage strategy may not work for you, but it can be included in your wealth building strategies as a back-up plan for the unexpected.
Information: contact Bessie Edwards, bessredwards@mail.com
Online Resources: https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome