Reverse mortgages provide funding for home purchase
Many homeowners more than 62 years old find that they want to downsize and may have a substantial amount of equity in their current home when they cash out. At that point, they often are also facing the dilemma of whether or not they should pay cash and tie up liquidity but avoid having a mortgage check to write or if they should take out a loan and face mortgage payments on what will likely be reduced income after they retire.
A possible solution
There is a solution that can work well for many people, and that is a reverse mortgage to purchase a home. Many are familiar with the concept of reverse mortgages to stay in the current home, but a lot of people don’t realize a reverse can be a good financial tool for planning your retirement.
In general, a reverse mortgage does not require principal and interest payments but does require tax and insurance payments and that the property be maintained reasonably.
How it works
On a purchase, the borrower brings a sizeable down payment — usually 45 to 55 percent — and the reverse mortgage funds the balance of the purchase price. The amount one can borrow is determined by the age of the youngest borrower.
After the purchase closes, the interest on the outstanding balance accrues monthly and the loan balance grows throughout the years. Depending on the down payment, the borrower might be able to access some of the equity throughout the years, either through a monthly stipend or a line of credit.
When the borrower either sells, dies, moves to a new home or can no longer live in the home for a 12-month period due to health reasons, the loan is due and the borrower, the heir or the estate have several options.
When the loan is due
If the borrower is still alive or the heirs have no interest in keeping the home, then it is sold and the loan and accrued balance are paid off, if there are not enough proceeds, then the lender and Federal Housing Administration (all conventional reverse loans are insured by the Federal Housing Association) takes the hit and there is no recourse against the borrower or his estate.
If one borrower dies and the spouse or partner is still alive, the spouse may continue living in the home provided that they were on the original loan. If they were not on the loan to begin with, then it is possible that the home may still have to be sold to satisfy the debt. However, there are numerous court cases right now contesting the issue and it remains to be seen how it shakes out.
If the borrower and his spouse or partner are both deceased, then the heirs may have the option of purchasing the home at 95 percent of the appraised value if there is more owed than might be realized from a sale.
Recently, I ran the numbers for a couple who had both recently turned 70. They would get about $500,000 from the sale of their current home and were looking at a townhome for about $500,000. If they put about half down ($250,000), then they could get a reverse mortgage for the balance, and have no house payments. If they put $350,000 down, then they could also get a line of credit for $100,000 to access as needed.
Credit and qualifications
Borrowers do have to make tax, insurance and HOA payments out of their own pockets, and under new rules adopted recently, they must show the ability and resources to make those. There is no real income test or requirement, but rather a formula is used combining liquid assets and income to determine qualifications. Those with a higher income require fewer liquid assets to qualify and those with more liquid assets require less income.
Reverse mortgages are fairly lenient on credit standards, but the borrower must show a willingness to pay bills. If there was a large medical collection or previous foreclosure or bankruptcy tied to a job loss or health event, then it would likely be overlooked. A chronic history of late payments when the borrower had the ability to pay would likely be cause for scrutiny.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and can be reached at 970-748-0342. He welcomes mortgage related inquiries. His blog and website is http://www.mtnmortgageguy.com and he has a website dedicated to reverse mortgages at http://www.getareverse.info.