Sense on Cents

Given the current state of our economy, opportunities to access credit are diminishing. Where are more and more people going to gain credit? Their homes. What? With home values down so much and banks tightening credit standards, how are people utilizing their homes to get money? Welcome to the arcane world of reverse mortgages. In this world, people need to be EXTREMELY careful to avoid being taken. Let’s navigate.

From the website of The U.S. Department of Housing and Urban Development, we learn the Top Ten Things to Know if You’re Interested in a Reverse Mortgage. I will provide an overview and point out potential pitfalls where fraudulent activity may develop. That said, for anybody interested in a reverse mortgage, I strongly encourage you to fully review all of the details provided at the HUD site and work with a highly qualified and recommended lender. Additionally, a further resource can be found via Reverse Mortgage Alert. Let’s continue.

1. Definition: “A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence.”

2. Qualifications: “To be eligible for a FHA HECM (Home Equity Conversion Mortgage otherwise known as a reverse mortgage), the FHA (Federal Housing Administration) requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home.”

3. Eligibility: “your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.”

4. Difference between a Reverse Mortgage and Home Equity Loan: “With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.”

Sense on Cents RED FLAG: within these details lie the potential for true abusive, if not fraudulent, lending practices. How do you keep a mortgage lender honest? How do you make sure he is quoting competitive terms across all these variables (age, the effective interest rate of the reverse mortgage, the home appraisal, FHA-limits)? Never make a deal without getting a few competitive proposals. From there, check with a HUD-approved mortgage counselor. How? Contact the Housing Counseling Clearinghouse.

Other important information regarding the life of the loan, impact on your estate, total mortgage proceeds, and how to receive payments are also available at the HUD site.

Rest assured, there are plenty of quality mortgage brokers willing to help you with reverse mortgages. There are also plenty of unscrupulous mortgage brokers. Like who? The crowd at Taylor, Bean, and Whitaker.

Be careful and good luck!!

LD

Related Sense on Cents Commentary:
Fair and Fraudulent Mortgage Lending (August 5, 2009)

This entry was posted on Monday, August 10th, 2009 at 12:35 PM and is filed under General, Mortgage Crisis, Mortgages. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.