income reverse loans

The Costs of Care Giving

As the Boomer population ages and the reality begins to loom that at some point they may need someone to provide them with “care giving” but no one wants to talk about this possibility happening to them.

But as we age and I’m going to be 72 myself  ( Yikes, when did that happen?) our bodies are going to start to give us trouble as we begin our slide down the slope of aging and at some point, we may need help.

Ideally the Boomer generation has taken better care of themselves then our own parents did and we certainly are much more active than their generation who smoked, didn’t exercise and had high fat diets.

But at the least, they didn’t have as much stress in their lives as we seem to have in our’s and their generation lived a much slower daily pace compared to the hectic lifestyles so many of us have in this period of time.

Hopefully those of you who are reading this post and are of a “certain age”, will manage to dodge falling apart and having to rely on a care giver.   But what happens if you need one and you don’t have Long-Term-Care Insurance?

Medicare will not pay for this service in case you were under the impression it would, you have to pay for it.

You will have to rely on your own retirement funds if you happen to have any and pay a professional care giver or rely on family members to take care of you.   And that’s a terrible option.

There are two kinds of “costs” in this equation, the actual monthly expense that can run $4000 or more each month while you are helpless or the physiological  and turmoil and burden to your family members who will be overwhelmed by the responsibly of taking care of you.

And if you don’t have enough funds to cover this expense, it will be up to your children to pay for it and in many family situations, the adult children will fight among one another and it typically will fall to one of the children to pay for all the expenses and also to attend to your needs.  And the one’s who refuse to help in any capacity, will disappear.

As for paying for the care of a professional, licensed and Bonded care giver that expense could be paid by the funds from a reverse loan and it will become a safe and valuable option for money to cover the costs and relieve the adult children from using their own funds to pay for your care.

It’s something to think about, utilize one’s equity to pay for your own needs and not rely on your adult children and keep your dignity and keep your family intact.

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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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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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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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