December 30, 2013
Hyman G. Darling, Esq.
More and more people are starting to realize that reverse mortgages aren't just for those struggling to keep their homes. These loans can also work for affluent retirees as a tax savings strategy (using these income tax-free funds to pay off traditional mortgages rather than using taxable retirement savings income) and for those who are looking for a cushion to keep them from selling investments at the wrong time.
In prior years, it was fairly expensive to get a reverse mortgage, as the fees were considerably higher than those of a typical mortgage or home equity loan, but that has changed. A reverse mortgage, also known as a home equity conversion mortgage, becomes a good solution for our people who may wish to cash in on the equity in their house.
If you (or your parents) need additional funds for home care or possibly to pay the costs of living, including heat, taxes, insurance, etc., then a reverse mortgage is a valuable alternative, since it does not need to be paid back during your lifetime. One of the problems, however, is that once the limit is reached on the withdrawal amount of the loan, further funds are not available, and you may have to either sell the house or attempt to obtain a new reverse mortgage if the value of the home has increased sufficiently enough.
A reverse mortgage is similar to a regular mortgage, except that the bank advances funds to you, either in a lump sum, on an annuity basis, or possibly merely on a credit basis, which means that you can withdraw funds as desired up to the allowed maximum. The loan does not have to be paid back unless you die or live out of the house for at least six months, possibly in a long term care facility. As long as at least one spouse lives in the home, however, no payments need to be made, nor does the house have to be sold.
In most cases, your assets and income are not considered for a loan to be approved or denied, as the bank is merely funding it based on the equity in your house. Also, in most cases, the funds received from a reverse mortgage do not adversely affect your eligibility for any governmental benefits, since it is not construed to be income, but rather, merely the withdrawal of equity from your home.
Many retirees have already transferred their houses to their children and reserved a life estate. In these cases, provided that they (the homeowners) are at least 62 years or older, many banks will consider providing them with a reverse mortgage, but their children will have to sign off on the mortgage also. If this is a concern for your kids, they could deed the house back to you, but this may trigger an additional 5-year waiting period, in the event that you wish to re-transfer the property to your children, in order to protect the asset from long term care expenses.
What’s new in 2014
Created by the Consumer Financial Protection Bureau, one of the most important new regulations that go into effect Jan. 1, 2014 prohibit banks from approving mortgages for anyone whose debt-to-income ratio is higher than 43%. This means that borrowers' total debt liability, including housing, should not be more than 43% of their income. A qualified mortgage is one that would be eligible for resale on the secondary mortgage market.
The other new rule requires banks to limit the fees for originating mortgages to no more than 3% of the loan amount. (This could discourage many institutions from pursuing loans for lower-priced houses.)
While the ability-to-repay rules, effective in January 2014, will now apply to most mortgage loans, they exclude certain types of loans, such as home equity lines of credit, timeshare plans, and reverse mortgages.
Until the new rules become effective, almost any homeowner who had equity in a home could qualify for a reverse mortgage. However, starting January 13, 2014, there will be new underwriting standards for new applications to ensure that borrowers have the ability to continue to pay taxes and insurance on an ongoing basis. Additionally, homeowners may only be able to draw 60% of the available principal limit, unless there are mandatory obligations, such as mortgage payoffs or liens. (Credit card debt is not considered a mandatory obligation.)
Prior to obtaining a reverse mortgage, the federal government requires that you be counseled as to its pros and cons. This counseling is free, and you may obtain information from the AARP Reverse Mortgage Education Program or by calling 800.209.8085. You may also wish to contact an elder law attorney who is also skilled in advising clients as to the benefits and detriments of obtaining a reverse mortgage.
by: Hyman G. Darling
December 30, 2013