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.
- 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?
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.