financial advisors

Reverse Mortgages and Annuities

An annuity should never be purchased using money from a reverse loan, but in the past there were times when a reverse loan borrower would unwisely do just that and sometimes these vulnerable seniors were (for lack of a less sensitive term) “robbed”.

But what has happened since then to protect seniors from this kind of scam?

In 1987 Congress passed the FHA Insurance and Uniform Lending practices and the FHA insurance bill that would insure Reverse mortgages.

The first reverse mortgage to be insured by FHA was in 1989 and they continue to oversee this program very closely as an added protection to seniors and since that time additional oversight has come from Housing & Economic Recovery Act, HUD, Ginnie Mae, the National Reverse Lenders Association and the Consumer Financial Protection Bureau.

Prior to this time, reverse loans were created and offered by other entities  such as insurance companies in exchange for a portion of the equity of the borrower’s home when they passed away and at very high interest rates.

And quite often an annuity was tied to this transaction by obligating the borrower to use the funds from the reverse loan to purchase  this insurance product.

Is this an acceptable suggestion for a senior to utilize in their “later” years?

 

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Reverse Loans and Divorcing

In my previous post I mentioned that since the 1990’s, “Gray” divorce  ( As senior divorce is often referred to) has increased.   As a matter of fact it has tripled and more seniors are splitting up than in any previous time.

More often than not, the “wife” will want to continue to live in the home but is unable to qualify for a traditional loan due to lack of income and cash reserves.

So what happens if one of them wants to keep the home and continue to live in it?

More than likely they won’t have enough income to qualify for a traditional loan and even if they are going to receive spousal support, a lender will not use it for qualifying purposes because there will be no history of it’s receipt to the spouse who has been awarded support.

And what would be her option?

Depending on her age, the value of the subject property and if there are any mortgages on it, she may be able to qualify for a reverse mortgage, pay off the spouse and continue to live in her home.

Her only responsibilities would be to continue to pay property taxes, home insurance and any HOA fees and keep the home in good repair.

Reverse loans are a financial tool.  A tool to leverage the longevity of a retirement portfolio, purchase a home, provide additional income for on going expenses and other aging concerns.

And it’s also an excellent tool that can help the pain of divorce be just a little bit less and allow one of the divorcing couples to remain living in their home and not be displaced.

My description is quite simplistic in this post and the borrower does need to qualify on their residual income, but overall using a Reverse mortgage as part an option to retain the property in a divorce is a very good suggestion and should be considered in the settlement process.

 

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Seniors Are Divorcing

Divorce is always an emotional and difficult experience regardless of the reason or the age of the two individuals who are experiencing this wrenching event in their lives.

Overall the national average of divorcing couples has declined over the years but what is odd, is that it has tripled for those couples over the age of 65 since the 1990’s.

The reasons for senior or “gray’ divorce vary but some of the more common ones is that after raising their children for many years, they began to see themselves as simply parents and no longer friends or lovers.

Then when the adult children leave the home and start their own lives, an older couple may discover that they no longer have any shared interests as they have grown apart over this period of time.

The financial implications of a “gray’ divorce can be quite complicated in that any assets and or retirement funds could end up being liquidated with disastrous consequences for the couple and their future financial stability and security.

I am not a financial advisor and certainly not a Divorce attorney and not qualified to provide any guidance in this matter and it’s best for couples to always seek professional advice when it comes to something as serious as a divorce and splitting up their assets.

However if there is equity in the home, it may be adequate enough to utilize a Reverse mortgage as a tool to either give half of it to one of the divorcing party’s and or buy them out in exchange for the other party receiving any investments they may have accrued together.

But a property settlement would have to be created by their mutual Divorce attorneys to make a final determination as to how all assets are to be divided.

So how would that work?

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Fees or Costs Allowed on a Reverse Loan

In my previous post I discussed the one fee or expense on reverse loans that conventional mortgages do not have.  And that was the FHA insurance premium for MIP.

Conventional mortgages allow what some would call “Lender junk fees”, which typically are for processing, underwriting and other “back office” costs the lender will pass on to the borrower.  And they can add up to additional $1800 to $2000 on a traditional mortgage.

But they are not considered “allowable fees” to a reverse mortgage borrower and cannot be charged and built into the loan.

What are the fees that a reverse loan applicant can expect?

  • Flood Certificate – Pulled by the Appraiser
  • Appraisal fee
  • Credit Report
  • All title settlement, title insurance, transfer fees and recording fees.   These are based on the loan amount, the Title company and county or state.
  • Document preparation fee
  • Notary
  • Payees;  all third party fee and third party providers must be disclosed on the HUD-1 Settlement Statement per RESPA.  List all required loan fees, including fees paid outside of Closing on their worksheets.

All HECM/Home Equity Conversion Mortgage are subject to FHA’s requirements on allowable closing costs.

In my next post I will provide a list of fees that are not allowable and cannot be passed on to the borrower.

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Long Term Care Expenses

Most people are completely unprepared to pay for any costs associated with “care-giving” because it never occurred to them that at some point in the future they may very, well need help as they age.

And unfortunately if you haven’t purchased a LTC policy by the time you are in your 50’s, the premium will be very expensive later on, especially if you have developed some health issues and qualifying for the insurance will now be difficult and or too expensive to obtain.

Everyday a senior experiences either a fall, a stroke or a medical procedure that will require nursing and help of some sort within the home and  since few people have purchased Long Term Care Insurance, they and their family will find themselves in a crisis to come up with a solution.

If the senior has a substantial amount of money they have saved over the years, they could use it to pay for their care but if they don’t then maybe it will be the adult children who will have to use their own funds to cover the expenses associated with hiring a service to take care of the family member who needs it.

And a very frightening fact is that 70% of those who are 65 or older will have some sort of situation happen where they are going to need help and they won’t have any way to pay for it.

Typically it becomes the responsibility of a family member and the burden of that responsibility is extremely difficult as it up ends the family dynamic, the caregiver is unqualified to care for the parent and their own life becomes overwhelmed and in some cases, they develop serious health issues of their own due to the ongoing stress of being a caregiver.

An excellent option for the entire family is to use funds from a Reverse loan to pay the costs, plus any cash reserves the senior and their family may have, will be protected from being drawn down and the real fear of running out of money is eliminated.

I have found that more Financial Advisors are suggesting this alternative to their clients and families in lieu of drawing down on their investments and possibly experiencing tax consequences and it is an excellent solution to use to pay for the care-giving expenses and removes the fear and stress a family is experiencing when they don’t have the funds to pay for the services that are needed for the family member.

Funds from a Reverse loan is an excellent option to consider to cover these costs and relieve the worry and burden the senior and their family.

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