The Housing and Economic Recovery Act of 2008 recently approved that mortgage for its purchase program, allowing lenders to close them after Jan. 1. The move allows seniors to make a large downpayment on a new home and then utilize the reverse mortgage as permanent financing.
Annapolis, MD -- (ReleaseWire) -- 12/15/2008 -- Reverse mortgages have been available for more than two decades for senior homeowners that have significant amount of equity in their homes and want to tap it. With recent HECM guideline changes, the HUD is backing a program to help older homeowners purchase a home with the increasingly popular financing program.
The Federal Housing Administration, a component of the U.S. Department of Housing and Urban Development, insures the nation's most popular reverse mortgage -- known as the HECM or Home Equity Conversion Mortgage.
The Housing and Economic Recovery Act of 2008 recently approved that mortgage for its purchase program, allowing lenders to close them after Jan. 1. This new ruling allows older homeowners to make a large downpayment on a new home and then utilize the reverse mortgage as permanent financing.
The same law reduced some costs of securing the HECM reverse mortgage by limiting maximum fees associated with the loan; the maximum loan fee on reverse mortgages to 2 percent on the initial $200,000 of the home's value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, the fees were capped at 2 percent of the home's value or the county lending limit, whichever was lower.
A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free and do not affect medicare or social security.
"The HECM for purchase will give seniors several more options," said Larry Benton, a Certified Senior Advisor and VP Mid-Atlantic region of the National Reverse Mortgage Center of 1st Metropolitan Mortgage, a reverse mortgage lender. "I think one of the key aspects is that they can stay more liquid. They do not have to reinvest all of their funds into their new home before getting the reverse mortgage, freeing up more cash for other uses."
"For example", Benton continues, "if a 72-year-old senior buyer was downsizing and wanted to purchase a $300,000 home, he or she may find it difficult to qualify for a mortgage because of income or credit requirements." "However, he or she could put approximately $123,000 down from either the sale of previous home or other assets, and secure a HECM reverse mortgage for the balance of $177,000 plus closing costs. The buyer would make no monthly payments for as long as he or she maintained the home as a principal residence.
Interest and mortgage insurance premium accrues on the initial loan amount and become due when the borrower, or surviving spouse, dies, moves or sells the home. The current annual percentage rate for the monthly adjusted HECM 200 is 3.62 percent (including the government's 0.5 percent annual mortgage insurance). When refinanced, the rate for the program has averaged approximately 6.5 percent for the past 15 years.
Eligible properties include:
* 1-to-4 unit single-family homes
*Manufactured homes, built after June 15th 1976, that meet HUD's permanent foundation guidelines.
"I think you will see the the primary user of this HECM Purchase program will be seniors that want to downsize to a smaller senior-friendly home... those seniors that desire to keep more of their assets for retirement, yet still have no housing payment" Benton added.
Customers interested in the conversion mortgage for purchase must enroll in a HUD counseling class. Borrowers may not obtain a bridge loan (also known as gap financing) or borrow against other assets for the downpayment or closing costs. This restriction includes personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing.
To avoid cases of property flipping, lenders must take steps to ensure that: Only current owners of record may sell properties that will be financed using FHA-insured mortgages; any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and FHA will require additional documentation validating the property's value for resale that occurs between 91 and 180 days where the new sales price exceeds 100 percent of the previous sales price.
More than 450,000 conversion mortgages have been made since 1989, the year FHA launch its reverse mortgage pilot program. FHA insured approximately 112,000 home equity conversions in fiscal 2008, up from 107,367 in 2007 and 43,131 in 2005.