Reverse Mortgage Option Gaining Momentum, Seniors at Risk
More seniors are applying for reverse mortgages than ever before. This trend is gaining momentum as seniors are finding their retirement nest egg disappearing. Tim McDonald, a reverse mortgage specialist for Wells Fargo Home Mortgage, says, “the aging population is becoming more and more aware of reverse mortgages as a way to stay in their homes and not have to make payments and have extra money for anything they want”. President Obama increased the limit a homeowner could receive in a reverse mortgage from $417,000 to $625,000 with an extension approved into 2010. This extension has helped the reverse mortgage option gain momentum in the past year.
A small group of banks now require that applicants attend a counseling course as part of the reverse mortgage application process. Most banks do not require their applicants attend these courses. This part of the process is very important to the applicant because the applicant should have all of the information available to them regarding such a risky financial decision.
The requirements of a reverse mortgage and the rules for maintaining a reverse mortgage can be complicated. Applicants must be over 62 years of age, own their home free and clear or have any remaining mortgage balance paid off by the reverse mortgage. The home must meet the Department of Housing and Urban Development minimum property standards and be listed as the primary residence of the applicant.
The dangers and pitfalls that face seniors during and after this process are an important element when deciding whether a reverse mortgage will work for you. Most applicants applying for this type of mortgage do not know what awaits them. One of the first pitfalls an applicant will face is in the amount they will receive from the bank for their home. The amount you will receive is different from the amount you are told in the initial calculations. This is because all of the initial costs that are normally paid for through an escrow account, taxes, insurance, and fees, will now be deducted from your monthly payment you receive from the bank. This will reduce the net amount of money received each month.
The amount of the loan is determined by a HUD formula based on age, appraised value of the home, current interest rates and established lending limit.
The home must remain the primary residence of the applicant, if at any time the applicant is no longer residing in the home the bank can then take possession of the home. If the balance is less than the homes equity, the home will be sold and the equity beyond what is owed on the reverse mortgage will be given to the homeowner. If the balance is greater than the equity of the home it will be forfeited to the lender to satisfy the terms of the loan. One other condition that could trigger the primary residence provision is when the homeowner has a second vacation residence, if the homeowner spends time at the second residence they must make sure their stay does not exceed the provisions set in the reverse mortgage contract.
Most reverse mortgages are adjustable rate mortgages or ARM’s, which carry with them high risk and little reward. The FHA will charge a 2% fee to insure any ARM loan. Seniors should educate themselves about these type of loans before considering them as a financial option.
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- FTC Proposes Up-Front Fee Ban for Mortgage Modifications
- Qualifying For The New Foreclosure Relief Program
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