A couple of months ago, I noted that the housing market had a problem: there were too few homes for sale. Persistently low inventory means that there are a lot of frustrated would-be buyers out there, spending weekends at open houses. It also has led to home prices continuing to rise at a more than six percent clip from a year ago.
The Great Recession and stock market rout eviscerated retirement nest eggs, changing the course of retirement planning for millions of people. And while the value of real estate also plunged, many older Americans owned their homes outright, allowing them to utilize a reverse mortgage to help finance retirement. A reverse mortgage is a loan that allows homeowners 62 and older to convert a portion of the equity in their homes into cash, as long as the home remains their primary residence. Most reverse mortgages are offered through the Department of Housing and Urban Development and are guaranteed by the Federal Housing Administration (FHA) through a program called Home Equity Conversion Mortgages (HECM).
A reverse mortgagor must keep paying real estate taxes, utilities and hazard and flood insurance premiums. The amount you can borrow depends on several factors, including the age of the youngest borrower, the current interest rate, the appraised value of your home and whether the rate is fixed or adjustable. The more valuable your home is, the older you are and the lower the interest rate, the more you can borrow. In essence, a reverse mortgage can help retirees convert an illiquid asset — a house — into a liquid one that can help supplement retirement income.
According to the National Reverse Mortgage Lenders Association, since 1990, just over 900,000 people have tapped their home equity through a reverse mortgage. Because of the sharp decrease in the housing market, the number of seniors applying for these loans dropped by more than half last year (51,642) from 2009 and those numbers could drop even more with the announcement of new reverse mortgage application rules.
As of April 27th, the federal government has decided to make applying for a reverse mortgage more like the process for qualifying for a traditional mortgage. Prior to the change, reverse mortgages did not require lengthy underwriting process, but new borrowers will have to complete “financial assessment” tests.
Would-be borrowers must now prove that they paid their real estate taxes, homeowner association fees and other property-related charges on time for at least the past 24 months. Additionally, they will have to produce documentation, like tax returns, paystubs (if they are still working), bank statements and details of financial assets. Finally, reverse mortgagees will undergo a “residual income” analysis that examines their monthly expenses and cash flow.
If potential borrowers fall short, they may be required to fund a “life expectancy set-aside,” which would funnel a portion of the loan proceeds into a separate account and would ensure funding is available for future tax and insurance obligations. This is akin to escrow accounts on conventional mortgages, which are established to pay property taxes and homeowners insurance.
The set-aside amount is based on a number of variables, including: the total of current property taxes plus hazard and flood insurance premiums; the likely increase in tax and insurance costs; the expected average mortgage interest rate; and the life expectancy of the youngest borrower (the younger the borrowers, the higher the potential set-aside amount).
Critics say the new rules that will make it more difficult for consumers with low income or poor credit records to obtain reverse mortgages. But that’s just the point, according to regulators, who want to prevent defaults by extending reverse mortgages only to qualified borrowers. They note that borrowers with shaky financial situations may be better off selling their homes and using the equity to purchase another home or rent.
The new rules do not address the cost of reverse mortgages, but you should be aware fees can run 2 - 3 percent of the loan amount. It’s also important to remember that reverse mortgage payouts also can impact a borrower’s eligibility for means-tested benefits programs, like Supplemental Security Income (SSI) and/or Medicaid.
Fans of reverse mortgages note that the new rules preserve the ultimate benefit of the transaction: Borrowers can still receive a monthly check for life or get a line of credit insured to grow for as long as they live in the home. If you are serious about a reverse mortgage, consult a registered investment adviser or an attorney, who can help determine if it is in your best interest.
Borrowing money to finance a real estate purchase is about to become more expensive for some homeowners. Fannie Mae and Freddie Mac will charge higher fees on loans to borrowers who don't put down at least 20 percent or who have credit scores of 680 to 760. The Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie, is imposing the new fees in order to level the playing field between the government-owned companies and private providers of capital. Separately, the FHFA said it would study reducing the loan amounts that Fannie and Freddie guarantee by to $400,000 from the current level of $417,000. Those changes would not take effect before October 2014. Meanwhile, the Federal Housing Authority loan limits are set to change. Loan limits currently can’t exceed 125 percent of the median home price for a given county, with a national ceiling of $729,750. Those limits, which were enacted by Congress five years ago and extended repeatedly, expire at the end of the year. Beginning next year, the FHA will only be able to guarantee loans up to 115 percent of the median home price, ranging between $271,050 and $625,500.
The real estate industry is going to fight these changes, claiming that they will kill the housing recovery. The anti-bailout crowd will respond by saying that the country needs to reduce the government's role in housing. Regardless, if you are in the market for a mortgage or a re-fi right now, it would be prudent to move the process along!
What do you need to know about attaining a mortgage now? “The process has improved from a year ago, but it is still labor intensive. Borrowers need patience and perseverance” according to Mike Raimi, President of WCS Lending. Mortgages for new home purchases can take about three weeks to close, while refinancing can take longer – “anywhere from 45 to 90 days.”
If you are looking for a 30-year conventional mortgage with 20 percent down, the best rates are available for those with credit scores above 740. For every 20-point drop in score, the mortgage rate jumps by a quarter of a percent. If your credit score is below 620, it’s tough to get a loan closed, unless you qualify for the government’s HARP plan. (Credit scores do not have nearly as much impact on loans of 15 years and shorter.)
Whether you are trying to refinance or buy a home with a mortgage, here's what you need:
- W-2 (2 years)
- Tax Returns (2 years)
- Pay Stubs (2 months)
- Bank statements – all pages (2 months): You may also need to provide the lender with an explanation for any large deposits that have been made into bank accounts. This has more to do with beefed up anti-money laundering efforts than the mortgage process itself.
- 6 months of mortgage payments in cash reserves (sometimes less, but this is a good rule of thumb)
- Investment accounts: If bank accounts do not show adequate assets, lenders may ask for investment account statements.
- Donor letter: If a family member or friend is helping you with your down payment or providing cash for the re-fi, he or she may be required to provide a letter and may also have to present his or her account statements.
- Self-employed applicants: Must have 2 years of proof of self-employment and 2 years of tax returns. Gone are the days when self-employed borrowers can "add-back" tax preference items. While you may have used the tax code to your advantage, the bank will not cut you any slack - the numbers on the return are set in stone.
After the housing boom and boost, the real estate market is clawing back from the bottom. For those keeping track, prices peaked in 2006, before dropping by over 30 percent nationally and far more in some markets. Housing bottomed in January in 2012, almost three years after the stock market. The reason for the lag is simple: a house is an illiquid asset, which makes it more difficult to sell than a publicly traded stock or stock mutual fund. This year, activity has picked up and prices are finally rising. This is good news for those who were counting on selling their homes and/or using equity to help supplement their retirement income.
The firming housing market has brought reverse mortgages back into the spotlight. A reverse mortgage is a home loan that allows homeowners 62 and older to convert a portion of the equity in their homes into cash, as long as the home remains their primary residence. Most reverse mortgages are offered through the Department of Housing and Urban Development and are guaranteed by the Federal Housing Administration (FHA) through a program called Home Equity Conversion Mortgages (HECM). (FHA provides on line counselors as well as valuable information here or by phone at (800) 569-4287.)
The borrower is required to continue to pay real estate taxes, utilities, and hazard and flood insurance premiums. The amount you can borrow depends on several factors, including: the age of the youngest borrower, the current interest rate, the appraised value of your home and whether the rate is fixed or adjustable. The more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow.
If the home is sold or no longer used as a primary residence, or the borrower dies, then the loan, the accumulated interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. If the house sells for less than the money owed, the FHA takes the loss - no debt is passed along to the estate or heirs.
Unlike a traditional mortgage, there's currently no lengthy underwriting process and you don’t make monthly principal and interest payments. But the reverse mortgage market could change in the coming months. The FHA has informed Congress that the housing market crash has meant that some reverse mortgage borrowers don’t have enough money to pay their property taxes and homeowners insurance. To shore up the system, FHA wants to introduce some form of financial assessment to the process as well as cap to the amount of money that can be extracted from the home’s value. To change the current system, FHA needs Congressional approval. The House gave the new ideas a thumbs up earlier in the summer, but it’s unclear whether the Senate will follow suit.
In essence, a reverse mortgage can help retirees convert an illiquid asset - a house - into a liquid one that can help supplement retirement income, which explains why at least 595,000 households have an outstanding reverse-mortgage loan, according to the National Reverse Mortgage Lenders Association.
But there is of course a downside: younger retirees who use them may run out of money and options at too young an age. These folks may have been better off selling their homes and using the equity to purchase another home or renting. Additionally, it may make sense to spend other assets before extracting home equity via a reverse mortgage.
Another consideration regarding reverse mortgages is the cost, which may be far less expensive than it was a few years ago, but can still total 2-3 percent of the loan amount. It’s also important to remember that reverse mortgage payouts also can impact a borrower’s eligibility for means-tested benefits programs, like Supplemental Security Income (SSI) and/or Medicaid.
If you are serious about a reverse mortgage consult a registered investment advisor or an attorney, who can help determine if it is in your best interest.