STARTING WITH REVERSE MORTGAGES

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REVERSE MORTGAGE PRODUCTS:  

Massachusetts maintains a list of approved reverse mortgage lenders and programs.  The most popular reverse mortgage program is the HECM (Home Equity Conversion Mortgage).  It is a Non-Recourse Mortgage which means the homeowner or their estate is only liable to repay the balance due on the mortgage loan or give the lender the proceeds from a fair market value sale of the house - whichever is less.  

In addition to the HECM, Massachusetts offers its' own reverse mortgage program with its' own eligibility requirements.

The Massachusetts reverse mortgage is a "term" reverse mortgage and is offered through Homeowners Options for Massachusetts Elders (H.O.M.E.); a non-profit organization that may be able to help you with other programs if a reverse mortgage will not work for you.

The HECM also offers its' version of  a "term" reverse mortgage product as well as a "tenure" reverse mortgage product.  These will be discussed below.  Be sure you understand the difference between the "term" and "tenure" products before you make your decision. 

THE HECM REVERSE MORTGAGE:

GENERAL ELIGIBILITY REQUIREMENTS: The borrower must be 62 years old or older and cannot be in default on any federal debt.  The home must be a 1-4 family owner occupied primary residence.  2nd homes or investment properties are not allowed.  Borrowers who have a Life Estate in the home are eligible.  

Homes held in trust are also eligible for a HECM provided the trust is a valid, enforceable, intervivos trust which provides for notice to the lender of any change of occupancy or beneficial interest.  The trustee must have authority to mortgage the property and the current beneficiaries of the trust must be eligible HECM borrowers (i.e. 62 or older with no federal defaults).  Contingent future beneficiaries of the trust who do not receive any benefit from the trust and have no control over the trust assets until the HECM beneficiary is deceased do not need to be HECM eligible borrowers.  Check with your lender for details and restrictions and be sure to consult with your trust attorney. 

Condominiums are eligible but your condominium must be on the FHA Approved Condominium List.  Most Condominiums are not on this list.  If your condominium is not on the approved list the lender or your attorney will go through an application process with FHA to get the condominium on the FHA approved list for you.

FREQUENTLY ASKED QUESTIONS:

WHAT IF I HAVE AN EXISTING MORTGAGE AND LIEN ON MY HOME?:  Having mortgages and liens will not disqualify you from getting a reverse mortgage.  In fact, a very common purpose for a reverse mortgages is to free the homeowner from mortgage payments that have become too burdensome.  However, you must be able to borrow enough money to pay off your existing mortgages and liens.

HOW WILL A REVERSE MORTGAGE AFFECT MY ABILITY TO RECEIVE GOVERNMENT BENEFITS?: Because eligibility for basic Social Security and Medicare benefits is not based on assets and income, your eligibility for these programs should not be impacted by a reverse mortgage.  Nonetheless, certain rules must be followed.  For example, Massachusetts law does not allow the proceeds of a reverse mortgage to restrict your "... eligibility for, or the amount of payment from, any medical or other public assistance program or any state or federal low interest loan or grant ..."  However, this protection does not apply if the proceeds become 'countable assets'.

Remember, certain programs such as Medicaid/MassHealth and SSI do limit the amount of 'resources'  or 'countable assets' you can have.  It is therefore essential that you become familiar with these rules.  Before you choose a reverse mortgage product, sit down with your attorney and financial planner/CPA to discuss how you will manage your reverse mortgage proceeds.

WHAT EFFECT WILL A REVERSE MORTGAGE HAVE ON MY TAXES?:  Proceeds from a reverse mortgage are not taxable income. Therefore, reverse mortgages are said to be 'tax neutral'.  However, if you are refinancing and paying off your current mortgage with a reverse mortgage you will lose any interest deduction you were taking on your current mortgage.  Be sure to discuss all of the tax ramifications of a reverse mortgage with your financial planner/CPA.

WHAT EFFECT WILL A REVERSE MORTGAGE HAVE ON MY WILL OR MY ESTATE PLAN?:  You should consult with your estate planning attorney and discuss how a reverse mortgage may affect your estate.  Also, beware of requirements that you or your spouse transfer or execute a deed for your property prior to closing - even if the deed gives the property to you.  If structured properly, such transfers can be done without any adverse impact on you or your estate plan.  However, you must discuss the implications of a transfer or deed with your estate planning attorney before you execute the transfer.  

 
WHAT IF MY HOME NEEDS REPAIRS?:  As part of the application process your home will be appraised by an FHA approved appraiser.  If the appraiser finds any structural, health or safety issues in your home then these issues must be resolved.  However, provided the cost to repair does not exceed 15% of the value of your home, you can still proceed with your reverse mortgage.  At the closing the lender will set aside an amount equal to 1.5 times the amount necessary to perform the repairs.  The homeowner will then have 1 year to complete the repairs.  Once the repairs are completed any balance left in the amount set aside will be released back to the homeowner.

HOW MUCH CAN I BORROW?:  There are several factors that go into determining how much a homeowner can borrow with their reverse mortgage. Once determined, this amount is referred to as the 'Principal Limit'.  The first factor in determining the Principal Limit is the ceiling or 'Maximum Claim Amount'.  This sum is equal to the appraised value of your home or $765,600 - whichever is less.  The $765,600 figure is set by HUD and is adjusted on October 1st of every year.  The current maximum expires on December 31, 2020.  So until December 31, 2020 the maximum amount available to a homeowner using a HECM is $765,600.

The next factor in determining your Principal Limit is age.  The older you are the more you can borrow.  If there are 2 or more borrowers, the age of the youngest borrower will be used.  If you are 6 months from your birthday HUD will say you are a year older.  (You can still tell your friends and loved ones whatever you want.)

Finally, the expected interest rate will also affect your Principal Limit.  The higher the interest rate - the less you can borrow.  The lower the interest rate - the more you can borrow.  To see how much you may be eligible to borrow, go to the National Reverse Mortgage Lenders Association's Reverse Mortgage Calculator.

    •  NOTE:  One important aspect of a reverse mortgage to consider is the growth of the unused portion of your reverse mortgage credit line.  It will continue to increase each month based on the Note rate.  However, the increased amount is not available to the borrower until after the first 12 months.

FIXED RATE OR ADJUSTABLE RATE:

FIXED RATE:  HECM'S offer both fixed and adjustable rates.  If you choose a fixed rate HECM there may be only one way to access your funds.  You will likely have to take up to 60% of your loan proceeds in a single lump sum disbursement at the closing.  However, you may be able to increase your initial draw to up to 70% of your Principal Limit in order to meet 'mandatory obligations'.  (i.e. closing costs plus mortgage debt and property lien payoffs)

ADJUSTABLE RATE:  There are many variations of adjustable rate HECM'S.  For example, you can choose to have the interest rate adjust annually or every month.  If your interest rate adjusts annually, your interest rate should not increase by more than 2 points in any given year and should not increase by more than a total of 5 points over the life of the loan.  These 2 and 5 point limits are called 'caps'.  However, if you choose to have your rate adjust every month there may be no limits or 'caps' on how much your interest rate can increase - or the 'caps' may only limit interest rate increases to an additional 10 points over the life of the loan. 

10 points is not much of a 'cap'.  People who choose this option usually do so because the expected interest rate is lower thereby allowing them to borrow more. 

Note that lenders have begun offering 5 point 'caps' for the monthly adjustable rate program.   Be sure you know what options are available to you and understand the difference between them before you make your decision.

HOW DO I ACCESS THE MONEY:

In addition to these interest rate variations, you will be offered the following options to access your funds:

1)  LUMP SUM:  Just like with a fixed rate HECM the borrower takes all of their loan proceeds in a single lump sum at the closing.

2)  LINE OF CREDIT:  Here the borrower draws on the funds as they need them.  The Borrower is charged interest only on the money they draw out of the credit line.  The unused portion of the credit line remains available and is interest free.  Unlike a traditional Home Equity Line of Credit the lender cannot terminate your credit line when your home value goes up or down.  Also, the unused portion of your credit line has a guaranteed growth rate which means it will grow bigger over time.  It is important to remember that this growth is not money paid to you like interest or a dividend.  Rather, it is an increase in the amount of credit available to you.

3)  TENURED MONTHLY PAYMENTS:  These are payments that are guaranteed to be paid to you every month for as long as you live in your home.

4)  TERM MONTHLY PAYMENTS:  These are also payments that are guaranteed to be paid to you every month but only for a fixed number of months and then the payments end.  Generally, the monthly payments are higher with this option.  However, they will end even though you are still living in your home. 

5)  A COMBINATION OF PAYMENTS:  For example, you could choose to receive a line of credit in addition to tenured monthly payments.

WHEN WILL I HAVE TO REPAY THE MONEY:

Repayment of your loan is required upon the occurrence of one of the following events:

1)  SALE OF THE PROPERTY:  Or transfer of the property to a different person or entity such as an irrevocable trust.

2)  DEATH OF ALL BORROWERS:  When the surviving spouse is also a borrower he or she can stay in the home and continue to receive monthly payments or draw on their HECM credit line just as they did before the death of their spouse.  Upon the death of all borrowers your estate will have one year to repay the loan.

3)  VACATING THE HOME FOR 12 CONSECUTIVE MONTHS:  If you move out of your home and stay out of your home for 12 consecutive months (or if the home is no longer your primary residence) your HECM loan becomes due and payable.  However, if you move back in and occupy your house as your primary residence before the 12 consecutive months is up, the 12 month clock starts all over again.

4)  FAILURE TO PAY PROPERTY TAXES AND HOMEOWNER'S INSURANCE:

Remember, although you are not making mortgage payments you must still pay your property tax and insurance bills.  Also, prior to closing the lender will determine if your property is in certain flood zones.  If it is then you will be required to pay for annual flood insurance.  Ongoing delinquencies for these bills or failure to pay these bills can cause you to default so that the loan becomes due before any of the above events occur.

5)  FAILURE TO MAINTAIN THE PROPERTY:  Your home is the only security for the money the lender has given you.  Therefore, you are required to continue with normal maintenance and upkeep.

HOW MUCH WILL I HAVE TO PAY BACK:

The amount due to pay back the loan will be the total of the following:

1)  Monthly Servicing Fees:  These are capped at $35/month and are collected all at once at the closing as part of your loan.  The amount collected is based on your life  expectancy.  NOTE:  Many lenders no longer charge this fee. 
2)  Disbursements made to you:  This will include disbursements made on your behalf for items such as delinquent property taxes and homeowner's insurance.
3)  Any initial closing costs that were financed into your loan amount:  These costs include appraisal fees, attorney and recording fees, title insurance and the Up Front Mortgage Insurance Premium paid to FHA.  (See below for more information about this premium.)
4)  The amount of the Annual Mortgage Insurance Premiums charged by FHA:  (See below for more information about this premium.)
5)  Interest on any disbursements made to you or on your behalf.  

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WHAT IF THE HOME IS NOT ENOUGH TO PAY IT OFF: 

Currently, the sale of the house is most often more than enough to pay off the loan in full.  The amount left over after the sale is then given to you or your heirs.  If the sale of the home is not enough then FHA will step in and pay the lender any balance due.  The FHA does this by drawing on the Up Front and Annual Mortgage Insurance Premiums charged to all borrowers who get a HECM mortgage loan.  Also, thanks to AARP's recent lawsuit your home does not need to be sold to a stranger.  Your spouse or a family member can purchase the house from you or your estate.  For purposes of paying back the HECM, your spouse or family member must pay fair market value for the home (i.e. 95% of the appraised value) or enough to pay off the full balance due on the HECM - whichever is less.

WHAT ARE THE COSTS:

HECM COSTS:  In addition to traditional closing costs, (i.e. title, appraisal, state recording fees) interest and monthly servicing fees the following fees will be charged with the HECM Product:

1)  Initial Mortgage Insurance Premium:  You will have to pay an up front Mortgage Insurance Premium ('MIP') to FHA at the closing.  Most people finance this as part of their loan amount.  The premium will be equal to 2.00% of the Maximum Claim Amount (i.e. $765,600 or the appraised value of your home - whichever is less.)  The MIP is NOT based on your loan amount.  So if you borrow $200,000 and your home's appraised value is $400,000 your Initial Mortgage Insurance Premium will be $8,000.  (2.00% of $400,000 = $8,000)*

AND

2)  Origination Fee:  This fee goes to the lender and like the Initial Mortgage Insurance
Premium is usually financed as part of the loan amount.  The fee will vary based on your home's value.  If your home is valued at $125,000 or less then the maximum origination fee is $2,500.  If your home is valued between $125,000 and $200,000 then the maximum origination fee is 2% of your home's value.  For homes that are valued over $200,000 the maximum origination fee is $4,000 plus 1% of the home's value that exceeds $200,000.   The origination fee cannot exceed $6,000.

AND

3)  Annual Mortgage Insurance Premium:  This is charged at a rate of .50% every year
based on the amount of money you have taken out of your HECM.  So if you have a $200,000 HECM and you have used $50,000 of it then your Annual Mortgage Insurance Premium will be $250.  ($50,000 x .50% = $250)

THE FINANCIAL ASSESSMENT:

NOTE:  Beginning March 2, 2015 the following changes took effect:

•  All lenders must complete a "financial assessment" of reverse mortgage applicants.  The financial assessment is not used to determine a minimum credit score or minimum debt to income ratio as in a traditional forward mortgage.  However, it's purpose is to stem the tide of increasing reverse mortgage defaults.  Therefore, the lender must assess if the reverse mortgage applicant has the capacity to meet their reverse mortgage obligations (i.e. paying their property taxes and insurance premiums.) and is also able to meet their living expenses such as other debt, utility bills and maintenance expenses.  (Ability to pay utility

and maintenance expenses is factored in based on a monthly cost of 14 cents/month per square foot of living space.)   As a result, credit reports will be pulled and examined for derogatory histories that may indicate an incapacity on the part of the applicant to meet their

reverse mortgage obligations. Lenders will also be looking for any delinquent federal debt.

Delinquent federal debt will not, in and of itself, disqualify the applicant but it must be paid off at the closing. 

 
    •  The financial assessment will also look at the applicants income and include the positive impact  reverse mortgage proceeds will have on the applicant's ability to meet their reverse mortgage obligations and other living expenses.  This is mandated by HUD which states:  "The extent to which  the HECM may resolve financial difficulties must be taken into account during the financial  assessment."

    •  Based on the financial assessment the lender may determine that an amount sufficient to pay property taxes and insurance will be set aside each month just like in a traditional forward mortgage.  The applicant can also opt for this voluntarily.

    •  After the financial assessment the lender may also require a "Lifetime Expectancy Set Aside" for payment of property taxes and homeowner's insurance.  This can greatly reduce or even eliminate funds available to the applicant. 

PURCHASE MONEY HECM: 

 A HECM may also be used by homeowners who are looking to move or downsize into a new   home but are unable to qualify - or choose not to qualify - for traditional home financing   options due to lower retirement income or an inability to sell their current home.  With a   Purchase Money HECM the homeowner can borrow 50%-75% of the purchase price of the new   home and move in without the burden of mortgage payments.  Homeowners who have an   existing home for sale but are unable to sell it before moving into their new home, can use the   proceeds of that sale later to pay off the HECM or keep the money as part of their retirement   funds.  Be sure to consult with your attorney and financial advisor/CPA before you use a HECM   for this purpose.

 No Seller credits or concessions are allowed.  Any necessary repairs must be completed   before the closing.  Check with your lender for further details and restrictions.

HUD COUNSELING:
 

You will be required to attend a counseling session with a HUD approved counselor. However, you should not rely on a 60-90 minute meeting with a total stranger - no matter how nice, knowledgeable and well meaning that person might be - to give you the information you need to make an informed decision about a reverse mortgage.  EDUCATE YOURSELF and meet with trusted professional advisors, attorneys and family members before you attend this session.  This will help both you and your HUD approved counselor get the most out of your meeting.