August 19, 2017

How Much Money Can I Get From A Reverse Mortgage? A Step By Step Procedure

We have previously discussed the merits and potential drawbacks of the reverse mortgage program.  The reverse mortgage is officially known as the Home Equity Conversion Mortgage or HECM.  A reverse mortgage is obtained through the FHA and is a relatively small part of their lending business.  While the FHA will receive almost two million routine mortgage applications for the refinance or purchase of a home, the number of reverse mortgages remains very small at about 100,000 application per year.

As with all mortgage programs, there are unscrupulous and dishonest lenders who will try to take advantage of a borrower.  For example, earlier this year, the FDIC Consumer News warned the elderly to be aware of reverse mortgage scams.  The reason why elderly borrowers need to be very careful when contemplating a reverse mortgage is due to the complexity of the product and the layers of fees, including monthly mortgage insurance, that add to the cost of the loan.

Many elderly borrowers who have taken out reverse mortgages were not fully informed or did not understand the product and fell into foreclosure due to delinquent property taxes.  According to HUD, an astonishing 46,000 borrowers are in default on their reverse mortgages and risk losing their homes.  The problem became so bad that many banks decided to exit the business entirely due to the adverse publicity and questions about the suitability of the product for elderly Americans.  Trying to address the problem after it became a problem, HUD finally tightened up on the eligibility guidelines for reverse mortgage approvals.

Part of the seduction of the reverse mortgage program for many Americans was the absolute lack of income or credit requirements.  Many borrowers who should have never been approved for the product are now in foreclosure.  Met Life at one time offered the reverse mortgage program and realized that, even if not required by the FHA, a financial assessment of all applicants was the proper thing to do to avoid future problems for an elderly homeowner.  According to Craig Conn, head of reverse mortgages for Met Life, “When we think about financial assessment we think about it in the context of responsible lending.  It is (not only) ensuring that applicants can responsibly meet the obligations of the HECM loan, but also that they can responsibly age in place and meet the essential expenses of living.  That was the spirit of financial assessment to us.  If we determine after analysis that someone has $100 a month left over, maybe a HECM is not the right thing for this individual.  Maybe we should look at other options.”

Although HUD requires a financial consultation with a HUD housing consultant, a potential reverse mortgage borrower should also review the terms and conditions and costs of a reverse mortgage with his independent financial consultant and accountant.

If, after deciding that a reverse mortgage is right for you, the best option is to visit the HUD page which contains all the information on reverse mortgages, including a reverse mortgage calculator to let you know how much you can borrow.  Keep in mind that this is a very profitable, high commission product for your friendly loan broker, so to avoid high pressure salesmanship, visit the HUD site first and talk to a HUD housing counselor.  Only after you are educated and armed with the facts about reverse mortgages, should you start the process of finding a reputable and low cost reverse mortgage lender.