By Jessica Legge
Times West Virginian
FAIRMONT
September 28, 2008 12:12 am
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Many people describe reverse mortgages as “allowing your house to pay you or to work for you once you’ve retired,” said Kathy Lawson, legal counsel for the West Virginia Division of Banking.
She said reverse mortgages allow older homeowners to take advantage of the equity in their homes and use it for any number of purposes. Seniors commonly use these loans to pay for medical expenses, in-home health care, travel, or to supplement retirement income.
Darryl Hicks, vice president of communications for the National Reverse Mortgage Lenders Association, said a reverse mortgage could also help pay off an existing mortgage or other types of debt, or help people avoid foreclosure or bankruptcy. The money could be used for home modifications or general repairs, too
A reverse mortgage is basically a method of “setting up a line of credit and drawing on that line of credit whenever the homeowner needs money,” he said.
People with reverse mortgages either receive a lump sum, a check every month, or a line of credit from the lender. The loan is paid off when the borrower moves, sells the home, or passes away.
“There’s never any monthly payment obligation,” Lawson said. “Your house pays you basically.”
Persons have to meet an age requirement to obtain a reverse mortgage, and they need to have enough equity in their home, she said.
The vast majority of these loans are through the U.S. Department of Housing and Urban Development’s Federal Housing Administration. The Home Equity Conversion Mortgage Program, which is for homeowners at least 62 years old, makes up more than 90 percent of all reverse mortgage business.
“It’s a loan program where the borrowers actually get paid money and do not have to pay it back basically during their lifetime,” Anthony Sexauer, senior underwriter for HUD’s Philadelphia Homeownership Center, said. “We’re finding that more and more people are taking the reverse mortgage to kind of keep up or improve their lifestyle.”
To qualify, the borrower must be a homeowner and the home must be his or her principle residence, he said. The individual can’t be delinquent on a federal debt that can’t be taken care of from the proceeds of the HECM loan.
Because this is a loan program where borrowers get money from the bank, there is no income verification. Assets are verified in limited areas only, and the property must meet FHA property standards, Sexauer said.
He said the expenses are substantially less than what the private lenders can charge, which gives the borrower a higher return. Homeowners can add to their monthly income and pay for their needs using the proceeds of the reverse mortgage.
“We are the best program out there,” Sexauer said. “It’s an insured mortgage backed by the full faith and credit of the federal government.”
Hicks said some other private-sector reverse mortgage programs have gone down to 60 years old, but they aren’t offered in every state.
Fannie Mae has a program called Home Keeper and private label products are also available, but these loans aren’t nearly as prevalent as HECMs, Lawson said. A limited number of lenders, which must be qualified, provide these products.
Persons are required to go to consumer counseling in order to get a reverse mortgage. Each state has HUD-certified housing counseling agencies.
The counselor will explain how a reverse mortgage works as well as the costs, advantages and disadvantages, Hicks said. The professional will also look at the person’s budget and may offer alternative options.
“The role of the counselor is critically important,” he said. “They’ll let the borrower know if there’s another program that might benefit them other than the reverse.”
Sexauer said borrowers must go through mandatory counseling because the reverse mortgage program is very expensive to get started. The fees are relatively high and borrowers may find better ways to meet their needs.
“It can get very expensive at the beginning,” he said. “The reverse mortgage is not the only vehicle around, and people should be well aware of what they’re getting into.”
Hicks said people interested in reverse mortgages generally have a need of some sort or a particular reason for looking into these loans. Sometimes homeowners will contact lenders to learn about reverse mortgages, but afterward indicate that they don’t want to get a loan at that time. But a few years later, they may be ready.
Sexauer said the number of reverse mortgages has grown significantly since the HECM program started in 1990, and this is HUD’s fastest growing product.
“It’s almost been exponential the way its been increasing in the past several years, although this year it’s kind of leveled off because of the housing market,” he said.
In 2003, 18,000 of these loans were made nationally, and that number jumped to 107,000 in 2007. So far this year, there have been 103,000 loans through August. Sexauer expects that amount to reach 110,000 to 112,000 for the federal fiscal year, which ends Sept. 30.
He said West Virginia had 255 reverse mortgages last year, and this year there have been 236 loans through August.
“They anticipate this being the next big product out there,” Lawson said. “There’s a lot of potential out there, so hopefully (people) are going to start looking at it more closely.”
She said reverse mortgages offer several advantages. The loan doesn’t have to be paid until the homeowner is no longer in the house, which provides options for seniors who have built up equity. A senior on a fixed income can use the resources in the home to take care of other things. Plus, it supplies additional income that allows a person to stay in his or her home and not have to sell it.
“A lot of seniors are using their homes as an investment tool,” Lawson said. “Used properly, I think it’s a great tool.”
She said any senior, especially those who might be feeling the financial crunch today, could consider a reverse mortgage as an alternative. Persons will know whether one of these loans are right for them after going through the counseling and literature.
Of course, people need to remember that a reverse mortgage is a loan and must be repaid someday. Lawson recommended that seniors consult with family members if they’re getting a reverse mortgage.
Hicks said there are some other things to consider before obtaining a reverse mortgage, which is a collateral-based loan.
“While the costs to get a reverse mortgage are regulated by HUD and capped, the costs are somewhat substantial, probably anywhere from 5 to 6 percent of the value of the home,” he said.
The costs of a traditional mortgage are spread out over a longer period of time, but those fees are all paid up front with a reverse mortgage, Hicks said.
“It’s a little bit of a toll charge to get a reverse mortgage,” he said.
The longer that a person is planning to stay in the home, the more economical the reverse mortgage becomes because the cost spreads out. If an individual is only remaining in their house for a few years, he or she may want to look at some other options that may be cheaper, like a home equity loan.
For more information on reverse mortgages, visit www.reversemortgage.org, www.fha.gov or www.hud.gov.
E-mail Jessica Legge at jlegge@timeswv.com.
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