Dec
11
Denver’s relationship with Fannie Mae and Freddie Mac hits the rocks:
The chief executives of Fannie Mae and Freddie Mac on Tuesday warned that their ailing mortgage-finance companies will suffer further in 2008 because of a weakening housing market and rising home-loan defaults.
Read the full article: Freddie and Fannie: More woes in 2008
Metro Denver’s designation as a “declining market” could delay any recovery in the area’s long-suffering residential real-estate market, local housing experts said Tuesday.
Read the full article: Fannie label on Denver ominous
What does this all mean: Putting 5% down is the norm to get a Fannie Mae or Freddie Mac loan. They do have several high risk 100% loans but these loans have higher rates with higher levels of mortgage insurance.
FHA only requires 3% down.
Some companies will have 100% down programs it just remains to be seen who.
Oct
12
Aug
21
Here’s a mortgage primer on which loans are no longer the flavor of the month on Wall Street. They’re the Michael Vick’s of the mortgage world, they were once very popular on but now nobody wants to be associated with them. Okay, that’s a little bit too harsh since these loans didn’t kill dogs. Then again, these loans have put families in dire straits so lets keep the Michael Vick analogy.
Loans the Wall Street doesn’t like:
- THE LOANS WITH THE REALLY REALLY REALLY LOW RATE AND LOW MONTHLY PAYMENT
- THE LOANS FOR BORROWERS WITH REALLY REALLY REALLY BAD CREDIT HISTORIES
- THE LOANS FOR BORROWERS WHO HAVE GOOD CREDIT BUT WHOSE OVERALL LOAN APPLICATION DOESN’T MEET FANNIE MAE OR FREDDIE MAC’S STANDARDS
- THE LOANS FOR BORROWERS WHO CAN’T REALLY REALLY REALLY SHOW HOW MUCH MONEY THEY’VE MADE OR HOW MUCH THEY HAVE SAVED UP
- THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY DON’T WANT TO PUT ANY MONEY DOWN
- THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY DON’T WANT TO PAY AN AMORTIZED PAYMENT
- THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY WANT TO BUY A HOME THEY HAVE NO INTENTION OF LIVING IN
- THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY MAKE A LOT OF DOUGH
- THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY HAVE NO INTENTION OF LIVING IN THEIR HOMES FOR 15 to 30 YEARS
- THE LOANS WITH REALLY REALLY REALLY NO RISK
Also called: 1%, NEGATIVE AMORTIZATION, NEG AM, OPTION ARMS, PAY OPTION ARMS or
“A CAN OF WHOOP ASS WAITING TO HAPPEN”
Also called: SUBPRIME, NON PRIME, POOR CREDIT, 2/28s, 3/27s, or
“I GUESS THIS IS WHAT I GET FOR NOT PAYING MY BILLS”
Also called: ALT-A or
“SO I’VE GOT GOOD CREDIT AND A GOOD JOB BUT I’M PENALIZED FOR NOT SAVING ANY MONEY”
Also called: STATED INCOME, STATEDSIVA, SISA, NO DOC, or
“DON’T THEY HAVE LOANS FOR PEOPLE WHO DON’T HAVE JOBS?”
Are called: 80/20, 100% Financing, NO MONEY DOWN, 103%, 107% or
“I WANT A LOAN WHERE I GET TO KEEP MY MONEY IN CASE MY JOB GETS OUTSOURCED TO INDIA”
Also called: INTEREST ONLY, IO, or
“IF I LIKE PAYING DOWN PRINCIPAL MY PAYMENT GETS RECAST TO A LOWER PAYMENT EVERY MONTH”
Also called: INVESTMENT PROPERTY LOANS, NON OWNER OCCUPANCY, NOO or
“I’M GOING TO BE THE NEXT DONALD TRUMP”
Also called: JUMBO, NON CONFORMING, SUPER JUMBO, MILLION DOLLAR LOANS, ANYTHING OVER $417,000 or
“THAT’S PRETTY LOW FOR A RATE OF RETURN AND PRETTY HIGH FOR A MORTGAGE INTEREST RATE”
It remains to be seen if Wall Street still likes:
Also called: ADJUSTABLE RATE MORTGAGES, ARMS, 3/1, 5/1, 7/1, 10/1, TEASER RATE LOANS, HYBRID LOANS, BALLOONS or
“THE AVERAGE PERSON MOVES EVERY 5 to 7 YEARS, SO WHY SHOULD I GET A LOAN FOR 30 YEARS?”
Wall Street will always like:
Also called: FHA, VA, CONFORMING, FANNIE MAE, FREDDIE MAC or
“THE LOANS THAT MAKE UP THE MAJORITY OF THE AMERICAN MORTGAGE LANDSCAPE”
Feb
21
Yesterday, ZERO DOWN LENDERS FOLDING was emblazoned on the front page of the Denver Post.
The article discusses in detail how subprime lenders are going out of business. The model suprime lenders use is usually the same across the board. Typically they offer 2 or 3 year adjustable rate mortgages. Once the borrower has a two year history of paying a mortgage they usually refinance to another loan. Hence the term band aid loans or band aid lenders. These lenders are going broke and now it’s front page news.
About two dozen of the largest subprime mortgage lenders across the country - some with offices and customers in Denver - have gone under or stopped making loans since December….
Subprime lenders are typically viewed as lending options to poor credit borrowers as well as borrowers with collections, bankruptcy, or foreclosures. However, they cater to more than that:
- If a borrower has great credit but no assets, they may be a subprime borrower.
- If a borrower has poor credit and a multitude of assets, they may be a subprime borrower.
- If a borrower is buying their first home but doesn’t have the income necessary to qualify for a FHA loan, they may be a subprime borrower.
- If a borrower has more than one late payment on a mortgage, they may be a subprime borrower.
- If a borrower is buying a home and renting a room to a friend, they may be a subprime borrower.
- If a borrower… well you get the point. The scenarios are endless.
Sep
26
A letter from a reader
Filed Under mortgage | Leave a Comment
I get a lot of email. Some are linking requests. Some are spam that somehow get through GMAIL’s spam filter. Some are mortgage requests. Some are mortgage questions. Some are mortgage vendors trying to sell me something.
On Sunday, I received a well written argument from a reader who asked me to post his response to the Denver Post article NO MONEY DOWN: A HIGH RISK GAMBLE.
Phil,
I enjoy frequenting your blog, and wanted to be sure to share this with you. I am an independent Mortgage Broker with my own company Source Financial LLC, and I wrote an extended response to The Sunday Denver Post’s lead article from September 17, 2006 entitled “No Money Down: A High-Risk Gamble” [www.denverpost.com/ci_4347686].
I found the Denver Post article to be riddled with misrepresentations, one-sided accountings, and dangerous misinformation, all supporting a traditionalist approach to mortgages that has put two-thirds of all families into home ownership, but yet has led to a situation where the average fifty year-old American is worth negative $7000, only 5% of Americans retire at age 65 in financial dignity, and 9 out of 10 Americans die in debt.
In reference to my 2000 word response, Denver Post Business Editor Stephen Keating indicated that “I will take the time to read it and digest your observations, and discuss it with the rest of the reporting/editing team here.” Article author and Denver Post Business Writer Greg Grifffin wrote “This is a well-reasoned and well-supported argument. I don’t agree with everything you’ve said, but you’ve managed to get me thinking.” Unfortunately, checking today’s (September 24) Sunday Denver Post and www.denverpost.com, my response remained unpublished…
A Response to “No Money Down: A High-Risk Gamble” – The Sunday Denver Post, September 17, 2006 lead article [www.denverpost.com/ci_4347686]
As an independent Mortgage Broker that owns my own company, Source Financial LLC, in addition to being affiliated with a larger mortgage company that handles the processing and servicing of my loans, Lion Financial Corporation, I read the lead article “No Money Down: A High-Risk Gamble” with great interest. Knowing that a lot of folks along the Front Range turn to the Denver Post as an objective source for information, I was shocked and dismayed by much of the information and conclusions that were put forth on a topic that already invokes a fight or flight response among many home owners.
100% financing loans have been an amazing tool that has greatly contributed to the 5% increase over the last twenty years in percentage of homes occupied by the owner. But it is not the lack of equity that is putting these borrowers into jeopardy, it is a lack of a flexible asset base to deal with changes that has been increasing the risk of these folks defaulting. In general, people that utilize 100% financing for home purchases usually are lacking the liquid assets, emergency funds, and overall wiggle room to deal with financial hardship.
Of course lenders usually have guidelines concerning liquid asset reserves that must be held by the borrower in order to qualify for a loan, but often they only require enough to cover two to four months of mortgage payments. When people do face catastrophic events rightfully referenced by the Denver Post, “job loss, medical problems and divorce,” those reserves can often quickly disappear.
But having equity in one’s home when faced with these situations does not “give homeowners options when they face financial problems,” because it is precisely when folks are facing such dilemmas that they are quite often unable to qualify for refinancing, as at that point in time they are too high risk of a borrower for lenders to work with. As a Mortgage Broker I am deeply disturbed by this fact, but unfortunately it is a reality that we all must face when dealing with banks and lenders.
And probably the most misunderstood aspect of homeownership is the fact that equity is a ZERO PERCENT RETURN INVESTMENT. Yet two-thirds of Americans hold the majority of their wealth in home equity, which is a non-liquid asset that gives them absolutely zero return. Many people confuse appreciation, which is the increase in home value due to market trends, with getting some kind of return on their equity, but that is a common misconception. That is why it is so important for homeowners to separate their equity from their home via refinancing, and put those “cashed out” funds into investment vehicles that offer an actual rate of return. In doing so, homeowners increase their overall liquidity, improve their capacity to face emergencies, reduce their financial risk, increase their rate of return, improve their tax deductions, and diversify their investment portfolio.
Instead of spending their liquid asset base (savings) to finish their basement and send money to their parents, such as in the case of Jose Garcia and Maria Vanderhorst, borrowers with 100% financing have to exercise greater financial discipline. And putting money down and getting into a 30-year fixed would not have improved their situation, as then their down payment would be tied up as equity, which is a non-liquid asset, money that can only be accessed through refinancing or by selling their home.
100% finanacing loans are not dangerous, what is dangerous is borrowers not having a liquid asset base to deal with life’s contingencies. Unfortunately, these are the type of borrowers that tend towards 100% financing, as it really is their only option for home ownership. And tying up their wealth in the straightjacket known as equity is not part of the solution, it is part of the problem. An incredible means to access equity for the purpose of greater fiscal flexbility and all the other goods mentioned above, or “cashing out equity as one goes,” is the Option-ARM loan, which received quite a misguided slamming in the Denver Post article.
The Payment Option Loan gives the borrower four different payment options each and every month: they can make an Interest Only, 30-Year amortized, or 15-Year amortized payment based upon the fully indexed interest rate, or they can make the minimum payment that is based upon a very low “start rate” (usually between 1% and 4%), which involves deferring interest (a.k.a. negative amortization), or adding the difference between the Interest Only payment and the minimum payment onto the principal of the loan. Now while most lenders offer the Payment Option Loan with an adjustable fully indexed rate, one that starts adjusting as early as the first month, some lenders offer the Payment Option Loan with a fixed interest rate for the first five years.
The Payment Option Loan has proven to be a favorite of Real Estate Investors and Real Estate Agents, as it frees up extra cash flow on a monthly basis for much greater investment opportunities. Knowing that equity is a zero percent return investment is some powerful information to have.
The annecdote concerning Louis and India Harts conflated the fixed “start rate” with the adjustable “fully indexed rate”, such that readers were left with the impression that the Harts’ interest rate went from 2.6% to 8.1%. The start rate, which determines how much the minimum payment will be, is not a “teaser rate” that “quickly shoots up”. Some lenders do gradually increase the minimum payment itself (not its determining start rate) on an annual basis, usually somwhere in the range of 7.5% per year, to keep the borrower from deferring too much interest. But the start rates is always otherwise a fixed rate. It is the fully indexed rate, upon which the Interest Only, 30-Year amortized, or 15-Year amortized payments are based, that is adjustable is this case. And this fact is consistent with the numbers quoted in the article: the minimum payment of $919 the Harts are making would be the combination of $721 (2.6% start rate on a $180,000 loan) and $198 of escrowed Property Taxes and Hazard Insurance, which is approximately what they would be for such a home.
In the Harts’ particular case, they are going to have plenty of time to refinance before their loan starts to recast when the principal hits 115% (which would be $207,000 in their situation), as they will be well below that total when their three year prepayment penalty period is up. So the answer to Louis’ “I don’t know how we’re going to do it,” is that when those three years are up, they’ll refinance and get themselves into a loan that they feel more comfortable with and educated about. Though given their situation, if properly understood the Payment Option Loan really is their best option.
My question is how can mortgage products themselves be blamed for foreclosures? At best the article points towards a correlation, but demonstrating causation surely requires more than offhanded references to what some unnamed experts stated the next wave of defaults “may” come from. Beyond unpredictable catastrophic occurences like job loss and overwhelming medical bills, foreclosures occur because borrowers are getting into loans that they do not understand, and often they do not know that they do not understand the mortgage product. It is the responsibility of the Mortgage Broker to completely explain all the details of any mortgage product to the borrower. But it is also the responsibility of the borrower to be certain that they understand the terms of loan before signing off on it at closing. Vehicles and guns both kill in the range of 35,000 Americans each year, but it is the human misuse due to lack of education, ignorance or simple negligance that creates this reality, much like in the mortgage scenario.
Every different mortgage product serves its purpose, and what works for one borrower will not work for another given the specifics of their situation. To label certain categories of loans as “high-risk gambles” or as leaving “no room for slips” ignores the millions of families that are in these loans and find that they very much work for them. It is also a disservice to consumers to mislead them with such one-sided representations.
The true irony of the lead piece in September 17th Sunday Denver Post is that the conclusion that “Option-ARMs… could fuel a surge in foreclosures in the next few years” is the opposite of what we find is actually going on in the mortgage industry, as Payment Option Loans have proven to have the lowest foreclosure rate of any mortgage product currently on the market. World Savings is a bank that specializes in this product, which they refer to as the Pick-A-Pay Loan, as more than 90% of the loans they outfit borrowers with are of the Option-ARM variety. As a lender they have less than a 1% percent foreclosure rate! But World Savings, along with the independent Mortage Brokers like myself that they work with, take on the responsibility of educating the borrowers as to how to properly and smartly manage this incredibly powerful mortgage product.
A lot of mortgage brokers I know will not touch Payment Option loans, but I believe that is primarily because they are not all that interested in educating the consumer. Why not just throw them into a 30-year fixed APR mortgage? Everyone pretty much knows how that works. But that is also how banks make of the most money off of borrowers! The “list of higher-risk, alternative mortgages” the article refers to are not only not necessarily higher risk (Payment Option loan has the lowest risk, as discussed above), but they also provide the borrower the opportunity to increase their monthly cash flow by lowering their monthly mortgage payments by as much as 40%. In this way consumers are empowered to “become the bank” and grow their own investment portfolio, rather than falling into the trap of handing over their hard earned capital to the banks in the form of a large down payment or paying down principal so that they can have more of a zero percent return investment, equity.
Affiliates of Lion Financial Corporation, like myself through my company Source Financial LLC, do not shy away from the privilege or responsibility of educating our clients how to properly utilize alternative mortgage packages. And why is this? Because when families are taught smart mortgage product and equity management, they learn to utilize their mortgage as a financial tool for building wealth, which easily makes a $500,000 to $1,000,000 difference for the borrower over the next fifteen to twenty years. The affluent have always understood how to leverage their mortgage, pay as little down as possible, and keep very low monthly payments in order to increase cash flow for investment purposes. The American middle class is being transformed by engaging in these very same concepts and increasing their fiscal discipline, and I absolutely would not have it any other way.
Brent Ritzel
President/CEO, Source Financial LLC
Denver, Colorado, USA
An affiliate of Lion Financial Corporation
303-590-8999
Brent.Ritzel@lionfinance.com
Aug
25
Fraudulent Friday?
Filed Under blog, colorado, denver, foreclosure, mortgage, real estate | Leave a Comment
The Denver Post three articles devoted to real estate and mortgage fraud:
- 3 men named in real estate scam
- Big profits oil the wheel of loan fraud
- FHA program key in surge of foreclosures
The indictment claims the men solicited investments in duplex projects in Colorado, Texas and Florida that were never built.
Former prosecutor Anthony Accetta cleaned up mortgage fraud 34 years ago - or at least, he tried.
Accetta said nobody in the lending industry cares about mortgage fraud, because nobody in the lending industry suffers when a loan goes bad. The mortgage industry is a financial game where all of the players are covered against losses.
A key factor in the state’s record-setting wave of foreclosures, critics say, is an FHA program that allows people to borrow more than their houses are worth with little or no money down.
Created to extend the dream of homeownership to first-time buyers, the so-called FHA gift program instead has led to rampant foreclosures. Nearly 6,000 FHA loans have wound up in foreclosure in Colorado in the past two years, and during that time the program allowed more than 25 percent of FHA buyers to use gifts as down payments.
To read more about mortgage and real estate fraud check out these two blogs:
Jan
1
Types of Loan Programs
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Editors Note: Due to the mortgage and credit crunch, many loan programs have been eliminated. If you’re in need of a Denver mortgage contact us to discuss your mortgage options.
There are a wide variety of loan programs available.
One of the most popular loan options in the market today is the Pay Option adjustable rate mortgage, which is often called a flex or borrower’s choice loan. Available in 30 and 40 year amortized varieties, many of our customers who value having cash in their pockets each month have taken advantage of this innovative financing program.
For example, you have fixed rate mortgages, adjustable rate mortgages, VA mortgages, FHA loans, Reverse Mortgages, Interest-Only loans, Option Arm loans, Stated-income loans, No Ratio loans, HELOC’s, 30 year loans due in 15 years, etc. The list goes on and on. You should ask your mortgage professional which loans apply to your situation, whether you qualify, and what will save you the most money.
Adjustable (or Variable) Rate Mortgage (ARM) is a mortgage in which the Note rate can change throughout the life of the loan. The interest rate of an ARM is calculated by adding a predetermined margin to an interest market index. Some of the more common indices chosen as the underlying index are the 1-year Treasury Bill, London Interbank Offered Rate, and the 11th District Cost of Funds. Because the underlying index constantly changes to reflect market conditions, any ARM that base the their interest rates on that index would move in tandem.
Interest only options can be used on many of the other types of programs. It can be used on the fixed rate or adjustable rate programs. With the interest only option the borrower is paying only the interest and not the principle. There is usually a small fee charged to the interest rate for adding this option.
NINA loans are loans that don’t require income and assets to be disclosed or verified.
A HELOC is a home equity line-of-credit.
The traditional fixed rate mortgage is the most common type of loan programs, where monthly principal and interest payments never change during the life of the loan.
With a 15 year fixed loan, you will pay off your principle faster than with a 30 year fixed loan, even if you were only to stay in the loan for a few years.
The option arm loan is a loan that provides four payment options each month:-minimum payment-interest only-30 year amortization-15 year amortization This loan has a variable interest rate. However, the minimum payment is very low - much lower than the interest payment. The unpaid interest for each month is added to the total loan amount. This is referred to as “negative amortization”, because the amount you owe on the house will go up in time, not down. This loan can be good for short terms, such as for investors who will soon sell the property. It is also good for people whose income may change from month-to-month, and they need some flexibility.
Jan
1
The Loan Process
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Here is a list of the information mortgage lenders will use to consider your loan application.
If you rent Name, address and phone number of landlords for the past 24 months
If you own real estate Name and address of all mortgage lenders for the past 24 months, account numbers, monthly payments and balances If you’ve sold your home but not closed: A copy of the sales contract If you’ve sold your home, closed, and you will use the proceeds for your new down payment: A copy of the HUD-1 Uniform Settlement Statement
If you’re buying a home Purchase sales contract or offer to purchase and all addenda Furnish contract with original signatures of buyer and seller If a source of your down payment is a gift: Name, address and relationship of donor. Gift funds will be verified in both the donor and recipient’s accounts. Note: Not all loan programs allow gifts to be part of your down payment. For FHA Financing Evidence of Social Security Number and photo identification For VA FinancingDD214 and Certificate of Eligibility For Construction/Perm Loan Signed construction with cost breakdown, builder plan and specifications
For all loans Social Security Number, for borrower and co-borrower if any Employment History For the last two years, employment dates, addresses, salary. Current pay stubs or W-2 forms. Check and Savings Accounts and Certificates of Deposit Location of bank accounts, account numbers and balances; Address of bank if out of town Last 3 months’ statements Stocks, Bonds, and Investment Accounts Broker’s name and address, description of stocks, bonds, etc. Last 3 months’ statements or copies of stock certificates Life Insurance Policies Insurance company, policy number, face amount, cash value, if any Retirement Plan Approximate vested interest value Copy of latest statement Automobiles Make and model of automobiles, their resale value Other Assets Market value of personal and household property Liabilities and Other Non-Mortgage Debt Creditors names, addresses, account numbers Monthly payments and balances
Other income information you may need If you’re self-employed Two years tax returns, profit and loss statements, both company and personal if separate. Current balance sheet and profit and loss statement if more than two months into the new fiscal year, signed by CPA. If you have income from: Commission Overtime Bonus Partnership Rental Property Trust Notes Receivable Interest/Dividends You’ll need two years’ personal federal tax returns If employed in family business Personal federal income tax returns and all schedules for the past two years If divorced or separated Complete executed divorce decree and settlement agreement Payment history of alimony/child support over the past 12 months, if it is a financial obligation. If you choose to have this be considered as part of your income (you don’t have to), be prepared to provide 12 months canceled checks or bank statements reflecting income deposits.
Jan
1
Saving for a down payment
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You used to have had to put at least 20% down on homes. Today, there are many programs that don’t require you to save money for a down payment.
There are many programs available that help you with your down payments. These programs are called Down Payment Assistant programs. Many cities also have grant money available if you meet the specific guidelines.
FHA insured loans only require 3% down payment and are very flexible about the source of your 3% down payment. Some FHA lenders will allow grant programs for the 3% down.
A gift of funds from a family member can often be used for the down payment. Both the borrower and the family member must provide evidence that the funds are a gift and no repayment is required. They must also show that the family member had the funds to give and they were not borrowed.
Saving for a down payment may be unnecessary with the many loan programs being offered today. However, a down payment may save you money in the long run because lenders associate higher risks to borrowers that have little equity in their home. The lender usually sets rates higher as the loan to value increases or they require PMI which is costly. So, a having a down payment may mean more money upfront but may save you thousands of dollars in the long run.
There are many different strategies you can follow to save money. A simple one to start with is to shop around for insurance or some other monthly bill. Try and cut down on those monthly expenses then whatever money you would be saving by the changes you make put into a savings account. A similar plan can be used when you get a raise. What ever the difference is increase is in your paycheck, have automatically deposited into a different savings account.
You can use up to $10,000 from an IRA for a down payment penalty free or most employers will allow you to borrow against a 401k plan if you do not have the necessary funds to put down on a mortgage but you may not need any money down if you have a satisfactory credit history or rent history. Please call to discuss your options.
Another option for young couples to utilize for a down payment for a new home together is to set-up a savings account and add it to your bridal registry. Make sure you keep a record of who contributes to the savings account, you will can include this as a gift fund for most mortgage programs, you will just need to show that no one who contributed has anything to gain by the purchase of the property, (the people who contribute can’t be the seller, the mortgage broker, the realtors, etc.)
If you have never purchased a home before you can withdraw your 401k for the down-payment. You will not be penalized.
Jan
1
Reverse Mortgage
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A form of mortgage in which the lender makes periodic payments to the borrower, using the borrowers equity in the home as security. For older owners who have a lot of equity in their home, this can be used as income. The loan does not need to be repaid until the borrower sells the property or moves into a retirement community.
When you sell your home or no longer use it for your primary residence, you or your estate must repay the lender for the cash received from the reverse mortgage, plus interest and service fees. Any remaining equity belongs to you or your heirs. It’s important to remember that you can never owe more than the home’s appraised value when it is sold. None of your other assets will be affected by your reverse mortgage loan.
Reverse mortgages are a great way for an elderly person or couple to supplement income, especially if they are only getting social security as retirement income.
Any principal and interest accrued over the life of the loan is due and payable in one lump sum when the last borrower in the home is no longer the primary resident. In most cases, the amount that is due can be paid either by the selling of the home (where the difference of the selling price and remaining debt is left with the heirs), or refinancing the reverse debt with a traditional mortgage.
This is a great income supplement for those who need it.
A reverse mortgage is an agreement allowing a homeowner to borrow against home equity and receive tax-free payments until the total principal and interest reaches the credit limit of equity.
In reference to the HECM (most popular reverse mortgage), the fees associated with this loan are as follows: 1) Maximum of 2% origination fee based on the lesser of FHA’s lending limit or the home’s appraised value; 2) Closing costs such as title, escrow, appraisal, etc; 3) 2% charged by HUD on the lesser of lending limit or home value for initial mortgage insurance premium; 4) Monthly servicing fee of between $25 and $30 that is set aside initially and added to the loan balance as the loan progresses.
Loan to Value calculations, Credit requirements (FICO scores), and Debt to Income calculations are not used in determining how much a borrower can access in equity. For the HECM program, the amount that can be borrowed is based on the lesser of home value or lending limit, age of youngest borrower in the home, and an interest rate.
A Reverse Mortgage is a financial tool which provides seniors 62 years of age and older with funds from the equity in their homes. Generally speaking, no payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed to not exceed the proceeds from the sale of the home.
There are currently 3 reverse mortgage programs available. The most popular reverse mortgage program is the FHA insured Home Equity Conversion Mortgage (HECM). The second program is the Fannie Mae Home Keeper, and the third is a jumbo reverse mortgage (cash account) offered by Financial Freedom. With the exception of the Home Keeper, the HECM and the Cash Account can be structured in different ways (i.e. interest rate adjustment for HECM, point variation on the Cash Account).
Possible income source for those who are on social security or limited fixed income.
A Reverse Mortgage borrower cannot be forced out of his/her home. Nor will he ever owe more than the value of his house. Reverse Mortgages are “non-recourse” loans, meaning in the rare case of drastic declines in home prices, the homeowner can never be held liable beyond the value of the subject home.
A reverse mortgage allows homeowners that are 62 and older to unlock a portion of the equity in their home without having to make a monthly repayment. The amount that they can unlock will be determined by a combination of three things: 1)Youngest borrower’s age 2) Lesser of their home’s value or a lending limit (HECM and FNMA) 3) An interest rate.
There are three basic types of reverse mortgage are: single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations; federally-insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs), and are backed by the U. S. Department of Housing and Urban Development (HUD); and proprietary reverse mortgages, which are private loans that are backed by the companies that develop them.
Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable.
You can get your money in a lump sum or monthly payments.
There are no credit requirements. Only that you need to 62 years of age or older and have sufficient equity.
You maintain complete ownership of your home.
If you are a senior at least 62 years old who is “house rich, but cash poor”, a reverse mortgage may be a viable option to help get you the cash you need. Whether paid to you in lump sum or in installments, reverse mortgages require no payments from your side and are generally not taxable and generally don’t impact social security or Medicare benefits.
Because this loan must be the first lien on the home, any existing mortgage balance must be paid with the proceeds of the reverse mortgage. For instance, if the amount that can be borrowed from the reverse is $100,000 and the existing mortgage balance on the home is $50,000, the $50,000 will be paid with the amount available from the reverse ($100,000) and the remaining balance ($50,000) will be available to the homeowner. The homeowner can elect to convert the $50,000 into a monthly payment, place it in a line of credit, take any or all of the amount at closing, or any combination of the three.
The amount of cash that a borrower can receive is based on a formula of factors that include age of the youngest borrower, the interest rate, value of the home and the county where the home is located.