home loans

Use a Reverse Loan or Sell Your Home?

The first time I ever speak with anyone who’s seeking information about Reverse loans, I always ask them why they are looking into one and how it would improve or change their life.

Most of the common reasons are the following ones:

  • Eliminate an existing mortgage and stop having to make mortgage payments each month.
  • Increase “cash” flow.
  • Home improvements
  • Money for unexpected expenses, especially for care-giving and medical bills.
  • Avoiding withdrawals on savings and investments.
  • Traveling
  • Downsizing and buying a new residence.

If the reason to use a reverse loan is for cost of living expenses and increased cash flow, the funds from it can certainly make a difference in the quality of life for a senior, but what is the other option or options?

Sell their home?  Or possibly rent out a bedroom or two, to family members or strangers?

Most people don’t want their privacy compromised by having strangers living in their home and having to tolerate someone else’s habits and behaviors that may not be compatible to their way of doing things.

Plus, it can be dangerous or at the least a bad experience.

This leaves the other option of simply selling their home, taking whatever money they net after paying Broker fees, home inspection costs and paying off an existing mortgage.

Hopefully they will net enough money to afford rent payments and continue to live on their own until they run out of their funds from the sale of their home.

Let’s discuss this last option in my next post.   Does it make sense?   Is it a good idea?

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Reverse Loans Improve Lives

I mentioned in my last post that quite often I am asked why people apply for a reverse loan and what are the most common reasons.

In my previous post I spoke about a client who had been using her credit cards to pay for her “cost of living” expenses, because her Social Security income was too low to get her through each month.

However, the downside to using credit cards, is eventually you use all of the credit available on them, but still have an ongoing payment that now cannot be met.

You can read about Sylvia and how we managed to eliminate that debt and give her additional money each month from a reverse mortgage in the previous post.

My next example is Bonnie and Jim   ( No last name for privacy reasons) who had had a major medical disaster destroy their lives.  Medical emergencies are probably the number one reason for causing personal financial collapse as no one is prepared for the medical expenses that come with aging.

He had a great career in the movie studios as a transportation driver and life was quite good for them until he developed diabetes.

Unfortunately like so many men, Jim ignored it and continued to eat and drink whatever he wanted and did not take care of his health.   Needless to say he became very ill and almost died resulting in the loss of both of his legs and kidneys to the disease.

He was no longer able to work and they quickly ran out of their savings to pay medical bills and their regular ongoing monthly expenses and used up all of the funds that were available on their credit cards leaving them in a terrible, crushing financial situation.

They owed the IRS money, all the credit cards and ended up doing a Chapter 13 Bankruptcy but somehow managed to continue to make their mortgage payments and ultimately repaid the money they owed to the IRS

I was referred to them by a CPA and in spite of the ugliness of their credit and the bankruptcy, I managed to get them approved for their reverse loan, relieving them of the burden of mortgage payments, plus additional funds that they were able to receive at the close of Escrow.

Making their life just a little bit better.

Jim and Bonnie are doing very well as of this writing and even though their credit had been ruined, I was still able to get them approved for their reverse loan and help them move forward and into better circumstances.

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Life Expectancy Set Aside

LESA is  a bit easier and less “tongue twisting” to say rather then the entire term in the title of this post.

In my previous post, I explained the changes that have taken place two years ago in Underwriting a Reverse loan and what the Lender is reviewing to determine whether or not the client can be relied upon to continue to pay their property tax payments, Homeowners Insurance and any other housing obligations they are responsible for in relationship to their home.

If they have been late on any of these items the previous 24 months, the Lender may elect to create a LESA for the borrower.   They will set aside funds in an impound account from the Reverse loan to cover all of these expenses for the rest of the borrower’s lifetime.

And it can be a big figure depending on the age of the borrower.

And if the borrower is using the loan to payoff an existing mortgage along with the costs associated with doing the new mortgage, there is the possibility that there will not be enough funds to include a LESA and the loan will end up being cancelled.

The reason for the change in Underwriting was due to the fact, that in the past there were some borrowers who lost their homes in foreclosures to their County Tax Assessor due to non-payment of their property taxes and of course the Lender wants to be sure that this isn’t a risk in the future for the new borrower.

Using the current Underwriting standards that is referred to as the Financial Assessment, they will determine if there is any risk or not for the possibility of non-payment in the future due to the borrower’s inability or unwillingness to be financially responsible for these on-going obligations.

Therefor if it appears that the borrower is capable of paying all housing expenses but was unwilling to do so, they might have to have a LESA put into place to make sure that in the future, these obligations will be met and there will be no risk for a foreclosure on the secured property.

The post following this one will discuss a bit more in detail what you need to know.

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How to Qualify for a Reverse Loan

In my previous two posts, I discussed the new Underwriting procedures for qualifying for a Reverse loan and I don’t want anyone to become too concerned or afraid that they would not be able to get one if their income is low or they have some negative credit on their credit report.

The loan has never been Underwritten using FICO scores or “debt to income” ratios and that is still the case.

As long as you are at least 62 years of age and live in your property, you are eligible for the FHA loan that is only offered to seniors.

I don’t want to repeat myself here in this post about the documentation that the borrower will need to provide to the Loan Officer or discuss the Financial Assessment or the LESA but I want to explain how you can still be approved.

(Please look at my previous post that lists the items that you might have to provide to the Lender.   Not all of them are necessary depending upon your particular sources for income, etc.)

But the borrower will need to be prepared to provide more documentation than in the past and a letter of explanation if they have any derogatory credit and or have been  late on their property taxes, etc.

I have had clients who were essentially not a good risk to the Lender because they were clearly irresponsible when it came to making their obligatory housing expenses AND they had some “shaky” credit as well.

With the cooperation of my clients, I was able to write an excellent Letter of Explanation for them and they were not required to have a LESA set up for their loan.

However, a LESA can provide the client the peace of mind that their property taxes, homeowners insurance and any HOA fees will always be paid from the LESA account and with not having a mortgage payment on a reverse loan is a benefit to the borrower.

Plus, if for any reason the borrower’s income declines in the future, they will never have to worry about how to make any of their housing expenses, as the LESA account will automatically do it for them.

And they can feel secure living in their home.

Please feel free to call me if you have any questions about The Life Expectancy Set Aside and or would like to know approximately how much money you could receive from a reverse loan.

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Reverse Loans and Call Centers

This next section of my article cautions the prospective borrower on how to locate information about Reverse loans and what to avoid.

Part V

The best option is to not “shop” around on the Internet or call any of those “800” phone numbers, but to meet in person an experienced and qualified Reverse Loan Consultant who will prepare a personalized proposal and assist you by providing various options to achieve a satisfactory solution for you.

If they are unwilling to meet with you personally, avoid them and do not provide any personal information, setting yourself up for relentless, endless and annoying sales calls.

It is very typical for companies to employ sales people who are not licensed or experienced in the mortgage industry to answer incoming calls from ads in a Call Center.

They will never personally meet with the potential borrower and will mail a loan application package to them without previously providing a proposal or explaining how the loan works and expect them to sign it correctly and return all the necessary documentation that is needed to process the loan.

This is unprofessional and lazy.

And HUD and FHA require a potential borrower to complete telephone counseling with a HUD certified counseling agency before they can apply for the mortgage.

And it is very, very confusing and overwhelming for the individual that was only seeking information about Reverse loans and is now bombarded with phone calls from sales people.

Be smart and ask your Bank, CPA, Realtor or Estate Planning attorney if they can refer you to a licensed and professional loan consultant.

And consider taking advantage of telephone counseling with a HUD approved agency who will help you to understand the loan without and potential for personal gain or commitment to apply for it.

 

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