Question #1
How Does the Reverse Mortgage in California Work?
The first thing you should think of is a typical forward mortgage. California reverse mortgages work similarly except instead of the borrower making monthly payments the borrower makes no payments to the lender. Interest accumulates and is paid back to the lender when the mortgage ends. Additionally, there is no set end date to the mortgage. The lender requires repayment only when certain triggers prompt repayment. Those triggers include: Death of the last surviving spouse on the mortgage, sale of the property, vacating the property for 12 months, failure to pay property taxes and homeowners insurance, and failure to maintain property at or above FHA physical standards.
Question #2
In California Who Qualifies?
All borrowers must be at least 62 years or older. For a married couple, one spouse can be younger, however, that younger spouse must disclaim from the note and deed of trust. The older spouse is considered the sole borrower and homeowner at that point.
Question #3
What if I already have a mortgage?
In fact, the majority of people applying for a reverse mortgage are doing so to pay off a current mortgage. Why? To eliminate the burden of the payment and free up important funds for other life expenses. A reverse mortgage lender can easily determine how much money a borrower is qualified to receive. If this sum exceeds the current mortgage amount, the borrower can use the reverse mortgage as a tool to eliminate the burden of that mortgage payment.
Question #4
Does the Bank Have Ownership of the Home?
No. The bank only has a lien against the property, just like any other mortgage.
Question #5
I Have Horrible Credit. Am I Out of Luck?
Probably not. Your record of payments are not important to the reverse mortgage lender in California. Since the lender will not be receiving monthly mortgage payments, its interest in your ability to repay the money is of limited concern. However, pending bankruptcy, failure to pay student loans, and federal tax liens will stop the reverse mortgage until resolved.
Question #6
What are the Closing Costs for the California Reverse Mortgage
Borrowers can expect slightly inflated closing costs relative to typical forward mortgages. Closing costs, for FHA reverse mortgages, are charged on the value of a home (up to $417,000) rather than the actual loan amount. Furthermore, HUD charges 2 percent of the value of the home to cover mortgage insurance. Other closing costs are similar to traditional forward mortgages.
Question #7
How are Closing Costs Paid?
Closing costs are paid similarly to forward mortgages. The borrower has a choice of paying out of pocket for the closing costs or costs can be rolled into the loan. For California reverse mortgage refinances most choose to roll costs into the loan. If the reverse mortgage is used to purchase a home most tend to pay for closing costs out of pocket.
Question #8
How Much Money Will a Reverse Mortgage Lender Lend to Me?
California reverse mortgage borrowers can expect a loan amount from 45% to 75% of the value of the home. For homes valued over $417,000.00 the borrower can expect a lower loan amount as a percentage of the value of the home. The reason is HUD will only insure up to $417,000. After that the lender has greater exposure and risk. Lenders don't like that and will offer the borrower a more conservative loan amount.
Question #9
How Do I Receive Proceeds from the Reverse Mortgage?
Multiple ways to receive California reverse mortgage proceeds:
- Lump Sum: The borrower may receive the entire allotted loan amount or a portion thereof.
- Monthly Payments: Borrower has choice in this matter. The first option will offer fixed payments for the remainder of the borrower's life. The second option allows the borrower to choose how much he or she will receive on a monthly basis. Depending on the how much the borrower chooses to draw out on a monthly basis, proceeds may run out prior to death.
- Line of Credit: Allows money to be taken out at any time. Interest accrues only on moneys taken out. This is the most popular plan because it allows the borrower to draw money out on an "as needed basis". Any unused portion of the line of credit actually accrues interest and grows for the borrower's benefit.
- Combining Plans: Most people, unless they plan on using the entire portion of the loan immediately, tend to combine two of the three plans listed above. A good example of this: Bobby and Betsy Billings own a $400,000 home. The lender will loan the Billings up to $260,000 for their California reverse mortgage. The Billings have a mortgage on their home of $100,000. The reverse mortgage pays off their existing mortgage ("Lump Sum"), and the Billings use the remaining balance as a line of credit. Of the $260,000 original loan amount, $100,000 is used to pay off the current mortgage and $160,000 remains in a line of credit for the Billings.
Question #10
Will I Be Taxed?
Proceeds from a reverse mortgage are not taxable, because they are not considered as income. Therefore, social security and Medicare are not affected. Social Security and Medicare benefits are safe.
Question #11
What if I receive SSI or Medicaid?
Exceeding the maximum asset levels can negatively affect SSI and Medicaid. Most borrowers with this issue tend to work with a line of credit option for their reverse mortgage in California. The reason is the borrower can pull money out, as needed, use the money and the borrower's asset levels don't increase above the required amount to receive benefits. If you are in this situation, please check with your local Area Agency on Aging before moving forward on a reverse mortgage.
Question #12
How May I Use the Money From the Reverse Mortgage
?
Proceeds from a California Reverse Mortgage may be used in any manner. It is the borrower's money and no existing stipulations restrict its use.
Question #13
When Does the Mortgage End?
Unlike typical fully amortizing forward mortgages with 15 or 30 schedules reverse mortgages in California and elsewhere have no set ending date. are three main reasons a reverse mortgage comes to an end. Five triggers will cause the end of the mortgage.
- Borrower chooses to sell. Naturally, when the home sells this triggers the end of the mortgage, and the lender is repaid its loan plus interest.
- Borrower vacates the property for 12 Months. Reverse mortgages are for primary residences only. Once the borrower is out for 12 months, the home is not considered primary and lender will call the note at that time.
- Death of Last Remaining Borrower. When the last surviving spouse passes away, the lender must call the note due and payable. Family members will be given ample time to sell the home.
Question #14
Must the Heirs Sell the Home to Repay the Lender?
No. The lender simply wants the money the originally loaned plus accumulated interest. The heirs may pay the bank back in any manner. For obvious reasons selling the home is the pay back method of choice.
Question #15
How Long Does the Bank Give the Estate to Sell the Home?
In California the estate has 12 months to sell the home. Reverse mortgage lenders do not want to foreclose on any mortgage. In the case of a home with a reverse mortgage, as long as the home is not in the lender's possession the loan continues to accumulate interest for the lender's benefit. With this in mind, after twelve months and no sale the lender review's the marketing of the property and will most likely give additional 3 month extension.
Question #16
What if the Value of the Home is Less than the Mortgage?
Reverse mortgages are "non-recourse" mortgages. Thus, if more is owed to the lender than the home value the most the borrowers or heirs are required to pay the lender is the value of the home at the time of repayment. The mortgage lender cannot sue the borrower or heirs for the difference.
Question #17
What if Less is Owed Than the Home Value?
Remember, California reverse mortgages work similarly to any other mortgage. The borrower retains ownership of the home and the home's equity. At sale, any remaining equity goes to the borrower.
Question #18
What are Eligible Properties?
Eligible property are per FHA guidelines for forward and reverse mortgages. They include owner occupied single family residences, two to four unit properties in which the borrower lives on the premises, double or triple wide manufactured homes (built after 1976 with FHA approved foundation), townhomes and condos.
Question #19
Can I Buy a Home With a Reverse Mortgage?
As of January 1, 2009, FHA allows borrowers to purchase and fund the mortgage for the purchase of new or resale home. Guidelines for using a reverse mortgage in California to purchase a home are identical to getting a reverse mortgage to refinance the borrower's existing home.
Question #20
How Are Property Taxes and Homeowner's Insurance Paid?
The borrower is responsible for paying property taxes and homeowners insurance. Failure to pay these two items can trigger the mortgage company to either foreclose or call the note due and payable.
Question #21
How Does the Mortgage Company Make Money?
Simple. Interest accumulates on top of the money loaned to you. It continues to accrue until the property is sold or the bank is paid its original loan plus interest.
Question #22
How Likely is it My Home Will Be Worth Less Than My Mortgage?
Unlikely. Mortgage companies are not reckless (the current mortgage crisis aside). There is a reason they only loan between 45% and 75% of the value of a home. It is to hedge against this possibility. It has happened and it will happen again in the future, but typically the home will have equity when the note is finally due.
Articles Posted By the California Reverse Mortgage Education Center
February 3, 2009: Traditional Mortgages Affecting Reverse Mortgages
We all know about the mortgage crisis and what it's doing to mortgage lenders. Some have been sold for pennies on the dollar and have changed their names. Some are no longer in business at all.
Up until now, in California, reverse mortgages have not experienced any real problems.
The reason is pretty simple. The HECM has some built in positives investors in today’s mortgage backed securities like.
The most important is the fact that reverse mortgage does not require monthly repayment which essentially eliminates risk of default for these loans.
The problem is that some companies offering reverse mortgages also sell traditional loans and have lines of credit known as warehouse lines available to fund these loans.
The warehouse lines are not necessarily broken up between reverse and forward mortgages. All money comes from the same kitty.
So, what happens if the entire warehouse line is restricted based upon events in the forward mortgage market?
You guessed it.. The money available for reverse mortgages is thereby restricted. This is happening right now.
The lousy part of this is for the people currently in escrow planning on closing on their reverse mortgage. They are being told to hold on while the broker transfers the loan to a new lending institution.
The problem is it’s taking much longer to close loans. Rates are going up and many of these folks won’t realize as much money as they were originally told they would get out of the mortgage.
Rate locks are not a reality in the reverse mortgage business and increasing lender margins will effectively reduce the amount a borrower qualifies to receive.
This can have the net effect of hugely damaging plans to pay of a large medical bill or mortgage currently eating away what little income some of these folks have.
In California getting a reverse mortgage thus far has been a piece of cake. This is the first real sign of trouble.
Jan 10, 2009: Rumors Abound About the Reverse Mortgage
You’ve seen the spokesmen on TV and you’re getting solicitations in the mail about reverse mortgages. Maybe you’re well versed in them and know your stuff.
That puts you in the minority. Most seniors in California have very little idea of what a reverse mortgage actually is.
Some don’t know a thing about them other than what this guy they overheard at the coffee shop was saying. He talked about his brother who knew someone who had a friend in California with a reverse mortgage. The bank took this friend’s house and he had to live on the street.
This is a certifiable fact: Too many people speak without knowledge regarding the reverse mortgage. And moreover, too many people listen and take the face value of these uninformed individuals.
A few people in California were taken advantage of in the reverse mortgage business.
One of the biggies was a senior would go to their estate planning company and ask them for advice on a financial matter. The estate planner would refer the customer to his buddy down at the reverse mortgage company.
At close of escrow, the closing statement showed a fee up to $10,000 going to the estate planning company as a consultation fee.
Whether the California reverse mortgage was the correct financial response to the customer’s issue was not the problem. The problem lies in related business relationships causing a serious conflict of interest.
Can this still happen? No. It is now against the law. RESPA laws and every senior watchdog group you can name keeps a close eye the reverse mortgage industry, it’s hard to really get taken anymore.
Does that mean a lender in California won’t try to talk you into a reverse mortgage even though it may not be the best financial choice at the time? No.
But even this has its checks and balances. In California all reverse mortgage borrowers are required to counsel with an approved HUD reverse mortgage counselor prior to moving forward with a reverse mortgage.
The HUD counselor has no financial stake in the transaction. If it looks like a blatantly poor choice for the customer, the counselor will raise this serious question.
The point is if you have a financial issue or know a senior who does, and the subject of the reverse mortgage comes up, don’t parrot what you’ve heard until you really know. You might be surprised at the truth.