Back to Basics: What is a Reverse Mortgage?

What Is a Reverse Mortgage?

Huffington Post | May 3, 2015 | link

A reverse mortgage is a type of home loan that doesn’t require any payments until after you die, as long as you continue living in your home. If you move out or decide to sell your house while still alive, the reverse mortgage comes due immediately. You can receive the loan proceeds in one lump sum or in monthly income payments.

Who Can Benefit From a Reverse Mortgage?

It’s important to be aware of the age restrictions for reverse mortgages: Everyone listed on the deed of the house, even if they don’t sign the loan, must be at least 62 years old for the house to qualify for a reverse mortgage. Also, reverse mortgages aren’t useful if you still owe a lot on your regular mortgage. For example, if you owe $100,000 on your house, and you get a reverse mortgage for $125,000, you would only receive $25,000. The rest of the reverse mortgage proceeds would be immediately applied to your regular mortgage. Here is a more in-depth explanation of how reverse mortgages work.

The main pros and cons of reverse mortgages are:

Pros of Reverse Mortgage

  • One big advantage to reverse mortgages is that credit checks are minimal. Since you don’t have to make loan payments during your lifetime, your credit score or monthly income are mostly irrelevant. However, new laws require lenders to set aside a certain amount of the loan funds if it looks like you won’t be able to afford property taxes, home repairs or mortgage insurance premiums.
  • The value of your home may have risen dramatically since you bought it. Reverse mortgages give you access to this profit while allowing you to remain in your home.
  • If you have limited income, a reverse mortgage can provide you with greater self-sufficiency and comfort.

Cons of Reverse Mortgage

  • You (or your spouse, if he or she also signed the loan) must be living in your home to keep the reverse mortgage in place. You can’t be absent for longer than 12 months, even if you have to go into a long-term care facility or move away to care for a family member. Longer absences result in the termination of the loan, and any money you received must be repaid immediately, with interest.
  • You must commit to maintaining your home and to keeping property tax and insurance payments up to date. Before the loan closes, the house is inspected, and you must sign a binding agreement to complete all recommended repairs by a specified date. The bank inspects your home to certify that you have completed these repairs as agreed.
  • A reverse mortgage usually makes it impossible to leave your house to your children. When all borrowers have passed away, the reverse mortgage must be repaid in full. In most cases, this requires the sale of the house. The only way to avoid this is if your heirs have enough personal wealth to pay off the reverse mortgage without needing to sell the house.

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Super helpful tips for starting out your home search…

10 Things I Wish My Realtor Would Have Told Me

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Ah, home ownership—the dream we all chase. Owning your own home is freeing, but it certainly catapults you quickly into the adult world of bills, brokers, and banking. There are so many things to know before buying a home, and even if you have owned and sold homes in the past, there may be things that your realtor never revealed to you.

Here we attempt to share with you the tricks of the trade, and perhaps the secrets behind the scenes, revealing what may really be happening when you hire your realtor. Here are the top then things that you will wish your realtor would have told you:

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 1) Spend A Bit More Than You Planned

While this seems to defy logic, there is some merit to spending a wee bit more than you initially intended. Say your budget is $250,000 USD. Well, it really won’t break the bank to buy that dream house for $275,000. Why?

Well, for one— your monthly mortgage payments will really only be around $15-20 more per month (depending on interest rates). Perhaps just give up your daily high-end coffee? Plus, that dream house has everything you want; it has the granite countertops; the walk-in closets; the finished basement.  These are the things you will eventually add to the less expensive house; thereby, spending that $275,000 in the long run. (Although, always be sure to stay within your means—see affordability calculator below)

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 2) Buy In A Growing Neighborhood

Maybe you are single and buying your first home. Most likely, this isn’t going to be the home you raise kids in. We still encourage you to buy in a growing family neighborhood where schools are established or are in the phase of being built.

This is the perfect investment scenario. A home where families are flocking and schools are growing is only going to go up in value. So buy that family home even if you don’t plan on staying in it for the long haul—your wallet will thank you in the end.

Looking for a loan? This is a must-read!

3 Things You Didn’t Know About Government-Backed Loans

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Conventional loans are the foundation of the mortgage industry. In a recent week, only about one in four prospective borrowers applied for a government-backed loan, according to survey data from the Mortgage Bankers Association.

The Federal Housing Administration and the Department of Veterans Affairs basically insure home loans made by participating lenders. These loans tend to have more lenient credit and underwriting requirements compared to conventional loans, which carry no government backing.

FHA and VA loans feature benefits that can be the right fit for the right buyer at the right time. To be sure, they also come with their own drawbacks. But there are misconceptions surrounding government-backed loans that can cloud the home-buying process and hurt both buyers and sellers.

Let’s take a quick look at three benefits of government-backed loans that tend to fly under the radar.

They Have Lower Average Interest Rates

Many buyers assume they can get the best interest rate with a conventional mortgage. Depending on your credit, the size of your down payment and other factors, that might be exactly the case. But every buyer’s credit and asset picture is different.

More important — and perhaps surprisingly — average interest rates actually tend to be lower on government-backed loans.

It may be time for a mortgage overhaul…

Are mortgage lenders ready for a total makeover?

The time has come to transform how business gets done

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Until now, we’ve discussed change at a minor level. While greater responsiveness and a more seamless process are important steps to undertaking a transformative experience, they are just the beginning. If the industry truly experienced a real makeover, what could the future of mortgage lending look like 10 years from now?

To consider such a scenario, imagine what your daily life could look like. With the technological advancements taking place, what if electricity could be delivered wirelessly? What if computers became disposable, to be recycled like aluminum cans?  What if internet access was free, much like broadcast TV was years ago?

Whether any of these ideas become a reality remains to be seen. However, change of this magnitude would require mortgage lenders to transform how they view change — from a process that is reactionary to one that embraces what is possible. What if the industry could open up to consider the possibilities, and not the boundaries, of change?

Author David Levithan in his book The Realm of Possibility states: “Here’s what I know about the realm of possibility — it’s always expanding, it is never what you think it is . . . Most of the limits are of our own world’s devising. And yet, every day we each do so many things that were once impossible to us.”

What are the things considered impossible today that housing finance will take for granted 40-50 years from now? The sheer volume of information that is available and accessible is changing rapidly. As a result, the expectations mortgage borrowers have is being influenced by experiences in other parts of their lives. What if the function of mortgage origination or servicing, as we know them today, looked completely different? What would it look like?

Is it possible that borrowers would no longer send lenders their financial information? Let’s imagine that all the information resided in the cloud and borrowers granted permission to mortgage companies to examine the data to make an offer. As borrowers demand greater transparency and control of the process, it’s conceivable this is the direction we are headed toward. One firm is already building a model to make this possibility into a reality.

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Grab those low rates while you can!

Is This the Right Time to Refi? 8 Tips to Smooth the Way

Successful Refinance Refi tips
Trulia

Ready to consider refinancing your mortgage? It can seem like an overwhelming prospect. So we broke it down into the key tasks you’ll need to take care of. Here are eight checkpoints that can help make sure you’re on track, each step of the way. But it’s important to remember that every situation is unique: Consider consulting a real estate or financial professional to evaluate your specific scenario.

1. Identify Your objectives.

Are you trying to save money by reducing monthly payments, or do you want to take out equity from your home? Interested in switching from an adjustable-rate mortgage to a fixed-rate mortgage? (Or vice versa?) When you shop around with lenders, they’re going to want you to be able to answer these questions. Make sure you can clearly articulate why you’re looking to refinance.

2. Refresh old paperwork.

Remember all that paperwork you needed to obtain your first mortgage? Yep, you’ll need to dig it up and update each piece. (Remember, it’s important to be truthful.) Get a copy of your most recent credit report and make sure that you understand your score and take steps to correct any errors. (And remember, now is not the time to apply for a new card. Every time you open a new account, your credit score is affected — and lenders can (and will) check your credit again, sometimes days before closing on the refi.

3. Crunch the numbers.

Not a math genius? No problem. You can use online tools such as Trulia’s refinancing calculator to figure out what makes sense for you. Don’t forget to consider closing costs when you evaluate totals: Even “no-cost” refinancing options can have associated fees.

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Do you know your mortgage docs?

It’s no secret that there’s a lot of paperwork involved in buying a home. After you select a mortgage lender to pre-approve you, you’ll be asked to provide all your most private financial documents, detail your income and residence history, and sign a stack of disclosures to get your loan approved. Then you’ll sign yet another stack of documents at closing.

The process can be confusing, but it helps if you go into it with a full understanding of the three most important closing documents you’ll be signing.

The settlement statement (aka “the HUD”)

Your settlement statement shows you the final versions of all line items you’re paying on your financed home purchase.

This document goes by many names, including estimated settlement statement, U.S. Department of Housing & Urban Development settlement statement, the “HUD,” or “HUD-1.”

Early in the loan process, you’ll see fees in disclosures lenders are required by law to give you, such as the Good Faith Estimate (GFE). However, the GFE doesn’t provide line-item detail.

Conversely, the HUD shows each individual fee clearly, starting with your total transaction summary on the left side of page one, then line-item fees on page two. These fees are broken down into the following categories:

  • Real estate agent fees, which are commissions you might pay to the real estate agent as the buyer.
  • Lender fees, including origination fees or “points;” any fees or credits for the rate you chose; and appraisal, credit report and other loan processing fees.
  • Prorated items like loan interest from the loan funding day to the end of that funding month, prepaying one year of homeowners insurance (which is required by lenders), and any required prepaid mortgage insurance.
  • Reserves deposited with the lender, which are only required if you’re setting up an “escrow” or “impound” account from which your lender will pay your insurance and property taxes. This is optional, and if you decline it, you won’t have to prepay these reserves at closing.
  • Title fees, which are assessed by the title/escrow company serving as settlement agent for your transaction. This section also includes the title insurance you’re required to purchase to protect yourself and your lender from any unwarranted third-party claims on your property.
  • Additional fees like contractors or pest inspections, or homeowners association move-in/move-out fees.

Critically, page three of your HUD shows how close or far your initial Good Faith Estimate was from your HUD, so you know if your closing terms match what your lender originally quoted to you.

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Truth time…

Why It’s Important to Be Truthful on Mortgage Applications

Mortgage Loan Application
Bariscan Celik/Getty Images

Your income is one of the major factors lenders use in determining whether you qualify for a mortgage. Which is why omitting, hiding, manipulating or not showing income may put you in a decidedly gray area with your mortgage company.

When you apply for a home loan, lenders require specific income documentation to fund a mortgage, including:

  • Income tax returns for the two most recent years, with accompanying W-2s
  • Corporate tax returns for the two most recent years if self-employed
  • 30-day pay stub history

One exception to this rule is when completing a government loan streamline refinance or a HARP 2 refinance. For those, no income documentation may be required.

But there are some circumstances in which you might decide to omit your income from your mortgage application. Here are a few scenarios where you can get into sticky territory when trying to get a mortgage.

The Self-Employed Borrower

There is no getting around the lending requirement to show two years of tax returns — including corporate returns when applicable. Today’s federal lending requirements prevent a lender from cherry-picking which income years to use for qualifying. For example, if your 2013 income was strong but your 2012 income was very low, the lender cannot simply ignore the 2012 income, as they must calculate a 24-month average of your income. So the lower income will, of course, lower your average.

Furthermore, if you are an employee of your own company, you’re still considered self-employed. Why? You control and set your own income, unlike a traditional employee who does not have an ownership interest in the company. In this case, you’ll still need to submit all the required documentation.

Non-Disclosed Income

The first question a prudent lender would ask is: Why are you trying to hide your income? Most of the time when the situation arises, it is because showing full income will make the lending scenario worse in trying to qualify. For example, if you’re receiving income you don’t disclose on your tax returns and you don’t pay taxes on, you have bigger problems (as the IRS is particularly on the lookout for tax fraud). Simply put, it’s best to give your lender all material information regarding your income. Doing so allows them to help you get a mortgage.

Side Jobs & Cash Deposits

If you’re putting cash deposits independent of your normal income into your bank account and you don’t document it with your application, you could throw a big wrench in your mortgage process. This is true whether it’s a regular side income or not. If you’re applying for government financing, all cash deposits must be documented and sourced, meaning you’ll need to explain the origin of the funds. For conventional loan financing, lenders must source and document cash deposits that are 20% or more of your monthly income.

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