When Does a Reverse Loan Need to be Paid?

This is a question that many ask about since there are no mortgage payments made on a reverse loan as are required on a traditional loan.

Plus there is no loan term but when does the loan become due and what are those circumstances?

They are referred to as a “maturity” event and include the following situations.

  • Sells the home Conveys title of the property to someone else
  • Passes away
  • Resides outside of the principal residence for a period exceeding 12 consecutive months due to physical or mental illness
  • Fails to pay property taxes, insurance premiums, condo fees, and other “mandatory obligations,” and all options to bring the loan current have been exhausted
  • Fails to maintain the home and allows it to fall into disrepair.

The most common reason for the loan becoming due and payable is that the borrower(s) has passed away and the property and or the estate has been received by the heirs.

As soon as is possible, the heirs must contact the Loan Servicer letting them know that the borrower(s) have passed away.   The Loan Servicer will send them by mail a “Due and Payable” letter within 30 days and the heirs must respond as soon as possible to the Lender.

The Loan Servicer will explain the options the heirs have to repay the loan and it’s very important that the heirs contact the Lender by calling or emailing them to avoid the possibility of a foreclosure being activated by the Lender.

The Lender does not want to foreclose on the property and the heirs have the option of refinancing it and putting the Title in their name or  simply selling the home and thereby paying off the reverse mortgage.

But it is crucial that the heirs respond to the Lender letting them know how they plan to repay the loan.   The Lender will work with the heirs and help them through the steps to satisfy repayment, but communication is very important in the process.

My next post will go into additional details about how to satisfy the repayment and other details about the entire process.

 

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Reverse Loans and Bad Credit

In general having derogatory credit is less of an issue for being approved on a reverse loan than it would be on traditional financing.

The reverse loan applicant does undergo some “light” credit Underwriting to determine their residual income after all housing obligations are paid and this would also include any revolving or installment debts as well.

The underwriting process is referred to in the industry as the Financial Assessment and was put into place within the last few years, providing an overview of the borrowers financial capacity and willingness to continue making any on going payment obligations after the reverse loan has funded and closed.

FICO scores are not used to determine an individual eligibility for the loan, but if there are any late payments on an existing mortgage and other obligations, a letter of explanation must be provided along with the necessary documentation to support it.

But what if one had had a bankruptcy? Can they still be approved for the loan or not? The short answer is “yes”.

Chapter 7 Bankruptcies must be dismissed or discharged prior to closing the new loan. If it was dismissed over one year ago, no additional documentation is required.

But if it was less than one year, the borrower must provide a court order signed by the judge as proof of the discharge or dismissal along with the discharge schedule.

Chapter 13 Bankruptcies have a couple of options.

The borrower pays the bankruptcy in full at the close of Escrow.  And obtain a payoff letter from the trustee.

The borrower must pay off any liens against the property and any federal debt.

The court must provide written permission signed by the judge indicating that the borrower does not need to pay off the bankruptcy to proceed with the reverse mortgage. This permission must specify that the mortgage may be an adjustable rate mortgage, if applicable.

Chapter 11 Bankruptcies are most prominently used by businesses and have similar guidelines as a Chapter 13 Bankruptcy.

This is a brief description about what the lending process is and what must take place in order to approve a reverse loan for a borrower who has had credit problems in the past.   But do contact me if you have any questions.

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Stopping a Foreclosure

Can a reverse loan be used to stop a foreclosure on a seniors property? Yes, it can but it must meet the other loan requirements per the lender.

Sadly, some senior homeowners have found themselves unable to keep up with their mortgage payments or property taxes because of unexpected events such as a health crisis or a major repair to their home and they end up falling behind on their payments, triggering a foreclosure.

If they are not too deep into the process and apply for a reverse loan, there is a good possibility that it can be stopped and they won’t lose their home.

Here is what a reverse mortgage lender will need in regards to the foreclosure from the potential borrower.

  •  Proof of foreclosure and the dates associated with it.
  •  A letter from the attorney handling the foreclosure confirming that the payoff is not a short pay.
  • Confirmation that the borrower is still occupying the property
  •  Confirmation that the borrower is still the legal, vested owner of the property.
  •  Confirmation that the Sheriff’s sale has not taken place, OR that the borrower is still within the redemption period AND vested in title.
  • The borrower must provide a letter of explanation describing what happened to them and what steps they took to avoid having a foreclosure.

Documentation must be provided by the borrower for the reason they fell into foreclosure, which could have been due to income loss, large and unexpected medical expenses or other viable reasons.

This is a very simple overview about using a reverse loan to stop a foreclosure that is in process, however there are additional qualifications regarding “residual” income , the amount that is “owed” and if there is enough remaining equity in the property to complete the transaction.

Please contact me for more details and/or a quote and I will answer any questions about the process and what you need to know.

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Why use a Reverse Mortgage?

In my previous posts I have been sharing and discussing various mortgage options for seniors to use if they want to borrow equity from their home.

There are advantages to each of them, but overall they will require a mortgage payment each month and depending on the borrower’s finances, that may become difficult in the future, which leaves the last option, the only one for seniors and has the greatest flexibility.

And that is the FHA HECM/Home Equity Conversion Mortgage, otherwise known as a reverse mortgage and it’s only available to seniors.

“Yes”, the Closing Costs are more expensive than the other loans, but the borrower will generally receive more money and not have a mortgage payment each month and that is “priceless”.

The amount is calculated on the age of the youngest borrower and the value of the property or the HUD Lending Limit whichever is less.

The Line of Credit will never be potentially “frozen” as could happen with a traditional HELOC, plus any unused funds that are in it, will increase over time, allowing more of the borrower’s equity to be available to them without re qualifying.

There is a “Fixed” rate reverse mortgage option for those who feel more comfortable knowing that the interest rate cannot change at any time.

The loan is insured by FHA and has no prepayment penalties on it and if a borrower wishes to buy it down or pay it off any time, they can without any restrictions.

And if they wish more funds than the FHA loan provides, a Jumbo Fixed rate mortgage can be had for properties that are valued  1 MM or more.

The borrower continues to “own” their property ( not the “bank”) and it will go to their heirs per their wishes who may want to keep it and refinance the reverse loan using a traditional mortgage, but in most situations they will sell the property, receive any remaining equity and have a mortgage interest deduction in that tax year.

And if the loan amount exceeds the value of the property, the estate is not responsible for paying the difference between the two and the FHA Mortgage Insurance Premium will cover the difference

In conclusion of these multiple posts, the choices for borrowing equity are a HELOC and a Second Fixed rate mortgage or a Reverse loan.  Each person’s situation is different from another’s and what might be ideal for one, may not be the best for someone else.

Each one has it’s benefits and and drawbacks but only the potential borrower can decide and hopefully will select the most appropriate loan for their goal.

 

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Seniors Seeking Additional Money

I have been sharing different ideas in my last couple of posts about the options for a senior if they want to borrower equity out of their home and whether or not they are a good or ideal solution to solve a financial problem or simply wanting extra funds to be available to them for any use.

I’m going to continue this discussion in this post and one more that will follow it in a few days.

In the last couple of days, I talked about the traditional HELOC, the one that every Bank offers to their customers and now  let’s pick up where I left off.

The HELOC will allow interest only payments for the first 5 years, but then will adjust to a much larger payment. Plus, the lender at any time can “freeze” the account and the funds in it will not be available to the borrower.

Too often the borrower is unaware that the loan will be “reset” in the future and if they no longer have the same income as they did when they initiated the transaction, they may not be able to afford the new and higher payment.

Sometimes a senior will use one of these loans for additional income to pay on going expenses, but obviously they will eventually run out of money in the HELOC and of course, will have mortgage payments for the term of the loan.

This can be disastrous for a senior and possibly result in them losing their home through foreclosure if they are unable to afford the payments.

The next possible choice, would be to do a traditional fixed rate 2nd Trust Deed. At least you will know what the payment will be each month, but again the borrower is obligating themselves to a mortgage payment for 15 years and they may not have the income in the future to continue comfortably making the payment each month.

And if they are a senior and or hoping and or planning to retire within a few years, will they be able to afford this obligation every, single month?

So would be the next choice?

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