frequently asked questions
Each reverse mortgage borrower must undergo a financial assessment. This is conducted by the lenders and is done for the purposes of assessing whether or not the potential borrower can afford to maintain living expenses and keep current with the payment of all homeowners insurance, property taxes and other fees over the loan period. All income sources are reviewed including pensions, social security benefits, investment income and other sources. Bank account statements and tax returns are also used in these assessments. Credit scores are also reviewed and if there are issues, there is room for explanation of extraordinary circumstances when determining credit worthiness for reverse mortgage loan approval.
After compiling income streams and projected expenses, the residual income amount is determined. This is the amount of money that is leftover after all expenses are paid in a month. It is compared with the established amounts which are based upon the size of the family and the region of residence to determine whether or not the borrower(s) have a high enough residual income to pass the assessment for eligibility.
Failure to pass the financial assessment can result in a decline on the loan application. If the borrower(s) pass the assessment, they may move to the next step to get the loan. In cases where the borrower(s)’ cash flow is inadequate to meet the eligibility for loan criteria, the majority of loan proceeds can be placed in a special fund called “Life Expectancy Set-Aside” to be used for the sole purpose of paying homeowners’ insurance, property taxes and other associated real estate fees until the funds are exhausted.
It may seem like its a complex process but its not, here at Reverse Mortgage in Rancho Cucamonga, we are dedicated to ensure that you are first educated on every aspect of this loan process, and then we will guide through every step of the way, structuring your loan in a way that will be the most beneficial for your specific scenario.
Proprietary Reverse Mortgage: There are currently only two companies that are offering the Proprietary Reverse Mortgage and these are Finance America Reverse Mortgage located in Tulsa, OK and the American Advisers Group of Orange, CA. Proprietary reverse mortgages are different from HECMs in that there are variances in the regulations, but they are similar in the protection clauses benefiting the borrowers. They are privately insured by the participating companies. Proprietary types are generally preferred when the borrower has a home with a higher value. It offers the possibility of higher loan amounts with the cap being $625,000. Mandatory counseling is a requirement that all borrowers must satisfy prior to eligibility.
Home Equity Conversion Mortgage or HECM: The United Stated Department of Housing and Urban Development regulates this type of reverse mortgage. This loan is not administered by the government, but it is insured by the Federal Housing Administration, a component of HUD. It is issued by a mortgage lender. This is the most common type of reverse mortgage issued and it also requires mandatory loan counseling for the borrower(s). HECM loans charge an insurance fee of 1.25% annually on the total balance of the loan. In the event that the lender cannot make the payment, the insurance guarantees that the borrower will be paid. If the home value is not adequate to pay off the loan balance, the government is responsible for paying off the balance so both borrower and lender are protected by the insurance.
This is one of the most frequently asked questions and the answer is that there are several different payment options. Each has been configured to meet additional financial needs and increase cash flow under a variety of different circumstances. It is generally up to the discretion of the borrower, which payment options are used.
The borrower of a reverse mortgage is required to complete a loan counseling session. In most cases, this must be by a third party independent agency and generally a list of appropriate agencies is provided. The borrower sets up the counseling and completes the session. This can be scheduled online. A packet of preparatory materials is supplied for the borrower.
The purpose of the loan counseling is to ensure that the borrower has a full understanding of the reverse mortgage loan processes, benefits, requirements and potential disadvantages. It helps in determining the circumstances of the client’s situation along with the established financial needs. It also explains the features of the reverse mortgage along with all tax and other financial implications of the reverse mortgage.
Detailed information about monthly expenses and income amounts are reviewed and discussed as well as eligibility requirements, borrower responsibilities and how much the borrower may be eligible to receive. At the end of the counseling session, the counselor asks the borrower relevant questions that help to establish that there is a full understanding of the entire reverse mortgage process. Upon successful completion of the counseling, the borrower will fully understand the pros and cons of reverse mortgage.
The counseling is helpful for many retirees who are on the fence about whether or not this is a good option for them. There is no obligation to proceed after completing the counseling. It is a useful tool that helps both the lender and the borrower to make the final decision about whether or not to proceed.