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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2007

How to Broker FHA Reverse Mortgages

If you want to broker in this growing sector, here are the basics you should know

Increasingly, homeowners ages 62 and older are turning to reverse mortgages to help with retirement and other expenses. As such, brokers who enter this market can find great opportunity.

Although there are other reverse-mortgage products available, such as Fannie Mae’s Home Keeper, 90 percent of reverse mortgages are Home Equity Conversion Mortgages (HECMs), insured by the Federal Housing Administration (FHA). Before entering this market, brokers must understand the nuts and bolts of reverse mortgages, as well as what it takes to broker HECMs.

Understanding reverse mortgages

Homeowners must be 62 years or older to qualify for this product, and they must live in their home. Eligible homeowners can use a reverse mortgage to convert a portion of their home equity into tax-free cash — essentially, to receive payments from the lender.

There is flexibility in how reverse-mortgage borrowers take the money. They can set up a line of credit, receive monthly payments for a specific term or for their tenure in the home, take it as a lump sum or use a combination of these methods.

The amount of money available depends on a number of factors:

  • The age of the youngest borrower;
  • The lesser of the appraised value or the FHA limit for the county;
  • The rate of the 10-year Treasury bill plus the lender’s margin; and
  • All judgments and liens to be paid at closing.

The U.S. Department of Housing and Urban Development (HUD) allows a margin —the amount added to the one-year Treasury rate that determines interest rates — of 1.5 on the monthly adjusting program, and some lenders have new products at 1. Further, to determine how much of a home’s value can be used to determine the reverse-mortgage amount, FHA uses specific county limits.

Let’s consider two examples of how much reverse-mortgage borrowers can borrow. These examples assume that the 10-year Treasury bill is at 5.5, the lender’s margin is at 1, and the home is appraised at $100,000.

  • Example 1: If the youngest borrower is 62 years old, homeowners can take out about $50,000, provided this is enough to pay off all judgments and liens. If they paid off an existing mortgage that had a $500 monthly payment, their cash flow would thereby increase by $500 a month.
  • Example 2: Using the same assumptions, but changing the age of the youngest borrower to 80 years old, the maximum cash-out would be about $66,000. If they own the home free-and-clear, borrowers may consider taking a guaranteed tenure payment of about $475 a month as long as they live in the home. Any unused equity remains with the owner.

A reverse mortgage is more expensive than a bank’s line of credit. For example, a reverse mortgage on a $100,000 home would have about $6,000 in fees, which is financed into the loan. The note rate adjusts monthly with the one-year Treasury bill, plus the lender’s margin. Additional costs generally include a 0.5-percent annualized mortgage-insurance premium on the loan balance and a monthly service fee of $30 to $35.

Indeed, one of the biggest expenses is the mortgage-insurance premium, included in the above fee estimate. HUD collects a prepaid premium of 2 percent of the lesser of the appraised value or the county limit, plus the 0.5 percent annualized premium.

Debt-to-income ratios and credit scores are not taken into account, and there are no payments as long as the home is the borrowers’ principal residence. Borrowers retain complete ownership of the home and cannot be forced to move. The home’s continuing appreciation often offsets the accruing interest. The homeowners are expected to maintain the taxes, insurance and general condition of the home.

This is a nonrecourse loan. And HUD insures any loan balance that might exceed the future selling price. Without HUD insurance, these loans likely would not exist.

Brokering HECMs

Only FHA-approved brokers, lenders and correspondents may originate, process or underwrite HECMs. Once approved, these professionals become correspondents to one or more of the larger reverse-mortgage providers.

Non-FHA brokers can earn a portion of the origination fee by providing advice and assistance to borrowers through the HECM adviser program. As an adviser, brokers enter a contract with borrowers to provide specified services for an agreed-upon fee, which may not exceed 25 percent of the origination fee.

Brokers in this program also enter a contract with a reverse-mortgage lender at an agreed-upon fee. Lenders have their own guidelines for fees and are not required to accept a broker’s borrower. Reverse-mortgage borrowers do not pay extra for the broker’s services; the broker fee comes out of the lender’s origination.

FHA-approved correspondents often work with a reverse-mortgage specialist who actually originates the loan. Many brokers and correspondents find it easier to choose a reverse-mortgage specialist with whom to work, rather than directly approaching a reverse-mortgage lender.

Brokers’ services to reverse-mortgage borrowers generally include:

  • Recognizing potential eligibility;
  • Explaining the pros and cons of the program;
  • Exploring other loans and solutions;
  • Helping borrowers choose a lender;
  • Working with borrowers and lenders throughout the process;
  • Helping borrowers receive the required third-party counseling;
  • Collecting documentation required for the loan; and
  • Attending the closing if requested.

Some borrowers require a lot of patience and care. Reverse-mortgage specialists may do fewer loans and spend more time with borrowers than other mortgage originators. They generally have a strong desire to protect borrowers from negative circumstances or experiences.

Borrowers should not be pressured in any way. Brokers should provide education and let the borrowers decide.

Other issues

There are a number of other issues brokers who wish to enter the reverse-mortgage market should understand. These include:

  • Property qualifications: Not all properties qualify for a reverse mortgage. The home must generally be in good condition. If needed, some basic repairs may be completed after closing.

    Condos must be FHA-approved or must meet FHA guidelines. Condominium parks for manufactured homes do not qualify. Most co-ops do not qualify.

    Manufactured homes must be constructed after June 1976, be on an approved permanent foundation, be on the owner’s property and not be set up at another location.

    There also are guidelines involving water sources, septic systems, easements and commercial use.

  • Third-party counseling: Before a reverse-mortgage lender can begin to process an FHA-insured reverse mortgage, borrowers must receive counseling from a HUD-approved third party. Borrowers can receive free information and/or counseling from many sources. Brokers and lenders may provide the contact information of at least five approved agencies.

  • Tax and benefit issues: Reverse mortgages have a big impact on quality of life, retirement planning, Medicaid eligibility, Medicaid recovery and estate taxation. Few mortgage professionals understand these issues and how they play into the whole, intertwining puzzle of reverse mortgages. 

    Elder-law attorneys specialize in these issues and can provide valuable advice. They can be found in the phone book or through the National Academy of Elder Law Attorneys at www.naela.com.

AARP, which was instrumental in the development of reverse mortgages, also is an important resource for reverse-mortgage information. It does not endorse or recommend any reverse mortgage, and it emphasizes that reverse mortgages are not right for everyone. It also is an FHA-approved provider of reverse-mortgage counseling.

Brokers who understand reverse mortgages, use the right resources and educate their clients may find that taking their businesses in reverse can be a beneficial move.


 


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