As published in Scotsman Guide's Residential Edition, November 2005.
Based on questions I have heard from brokers, it is clear that some concepts of reverse mortgages can be difficult to grasp. I believe this is because people in our industry are trying to understand reverse mortgages using concepts common to conventional mortgages. They are applying what they already know to something new. This doesn't always work.
The reverse-mortgage concept is simple: At age 62, a homeowner becomes eligible. The loan requires no repayment as long as the borrower remains in the home. The approved funds can be accessed in a lump sum, line of credit, monthly payments or a combination of these methods. So far, there's nothing tricky.
The loan amount a borrower can receive is based on factors such as age, interest rates and appraised property value. There are also lending limits set by the Federal Housing Administration (FHA) and Fannie Mae and a jumbo product that has lending limits based on appraised value.
Here comes the tricky part. Conventional mortgage brokers want to understand qualification in terms of debt ratios, credit scores and loan to value (LTV). They are always trying to figure out what maximum LTV and rate they can get for borrowers based on their qualifying factors. With reverse mortgages, you have to set these concepts aside -- they have nothing to do with a reverse-mortgage approval.
First, there is no income or debt-ratio qualifying. Remember, borrowers do not make payments, so the maximum loan amount is not determined by their ability or likelihood to repay. In fact, the interest rate is the same for every borrower regardless of credit and which originator provides the reverse mortgage. All lenders have exactly the same rate, and there is no way to buy the rate up or down; there is no rebate pricing.
The older a person is, the higher the loan amount. In other words, an 82-year-old will be approved for more money than a 62-year-old and will get less money than an 83-year-old. Another factor is the interest rate. The higher the rate, the lower the loan amount; the lower the rate, the more borrowers will be approved to receive.
The question of what the maximum LTV is for a reverse mortgage is not part of the underwriting process. It is merely the result of a confluence of factors: age, rate, lending limit and appraisal. Consider these examples:
Dorothy is 62 years old and owns a home valued at $315,000. Based on today's rate of 5.34 percent, she qualifies for a loan amount of $175,974.
Burt is 62 years old and owns a home worth $500,000. Based on the rate of 5.34 percent, he also qualifies for a loan amount of $175,974.
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