retirement savings

Senior Dilemma

American seniors retain over 6 trillion dollars in their homes and more of them are beginning to use their equity to extend their retirement funds  (Everyone is worried about out-living their savings) by using a reverse loan to leverage their portfolio’s longevity.

Another reason, might be to eliminate an existing mortgage payment and thus free up some extra money each month to be used for other expenses.

But maybe they decide to sell their home instead and take the remaining equity after Broker fees and expenses related to selling it and possibly rent instead of “own”.

What are the costs to the seller if they opt this route?    I’m going to give a very simple example in this post, but obviously it would depend on the sales price, if they are paying off a mortgage and the Broker fee and other miscellaneous expenses related to the transaction.

  • Sales Price:  $450,000 @ 6% Broker Fees   ( Might be less)  = $27,000;  Paying off existing loan $150,000 = $273,000 remaining equity.
  • Now there are the “other” costs associated with the sale of a home.
  • Escrow Fees and Title Insurance Policies  Approx: $1800
  • Repair and any “staging” fees; approx: $2,000 assuming any repairs are minor, etc.
  • Moving expenses.  Local rates can be $25.00 per “mover” and the average cost is $1000 to $2000.  If the move is out of the state then it’s obviously more expensive and can be between $4000 to $8000.   But again, it depends on the amount of items being packed and moved and the size of the home.
  • Surprise expenses:   There is no way of knowing what could happen in the process of selling one’s home.   But it could be more money out of your pocket.  Such as a Buyer wanting you to pay for some of their loan’s Closing Costs.
  • Hassle and stress factor?   It’s impossible to determine the “costs” of the amount of stress just trying to organize, pack, toss and find a new home to live in.
  • And where?   Going to rent or buy?

So if we deduct the estimated costs associated with our fictitious Seller and deduct it from the equity they have leftover after paying the Broker to List and sell their home, they would have somewhere in the “middle” of $260,000 and $245,000 left over after the entire, frustrating experience ends.

Now what?   Rent until the money runs out or possibly consider buying another home, but this time use a Reverse mortgage to purchase it.

In the next post, let’s discuss why using a Reverse loan to purchase a property can be very beneficial method to qualify for a mortgage on a new residence.

 

 

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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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Who is “LESA”?

LESA isn’t anyone at all, but a new layer of underwriting that was put into place two years ago for Reverse loans.

This is an acronym for “Life Expectancy Set Aside” and it’s purpose is to review a potential Reverse loan borrower’s ability, capacity and willingness to continue to pay their housing expenses;  property taxes, Homeowners Insurance, any HOA fees or Flood insurance premiums.

The Lender will verify that the expenses associated with the property will have been paid on time for the previous 24 months and if they haven’t a Letter of Explanation must be provided by the borrower to explain “why’ they were late, along with any documentation to support their explanation.

This letter must also explain any derogatory credit that may show on their credit report, as well.

The Loan Officer is now required to collect all sources of any income the borrower is receiving in addition to their Social Security and what this means, that there are more documents to collect from the clients than in the past.

  • (2) Years 1040’s if they are self-employed or have rental income from other properties
  • (2) W’s if they are still employed and recent YTD Paystubs for 30 days.
  • Social Security Award Letter to document how much they will receive in the following year.
  • (2) Months Checking acct statements to verify SS and or Pension deposits
  • (2) Months or most recent Quarterly statements for all Cash Reserves.
  • And additional items may be requested during the loan processing time.

Because this post is becoming too long, I will continue it on another one after this one has been published.

But don’t let this scare you, as reverse loans are still easy to qualify for, there’s just more Underwriting being done than there was previously.

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Reverse Loans for Retirement

Well, this is the direction the FHA loan is going as America is staring at a huge domestic crisis, as to how to take care of the aging Baby Boomers.

Most don’t have enough money to retire and live on for the rest of their lives and with the recent positive changes in the FHA HECM Reverse mortgage, it will provide them an additional option to preserve the funds that they do have in any portfolio.

This is the most regulated loan in the Lending industry.   Safe, affordable and a realistic option to fund one’s longevity.

Here is the remainder of the article.

New Study Underscores Retirees’ Need for Non-Traditional Funding Sources
Posted By Jason Oliva On June 7, 2016 @ 5:32 pm In News,Retirement,Reverse Mortgage

“Such reluctance can be largely attributed to a lack of education on how to strategically leverage home equity in a retirement income plan, coupled with a lack of understanding for the new consumer protections that have been enacted in recent years.

Of a total of 1,003 people between ages 55-75, roughly 70% failed a retirement income literacy quiz on reverse mortgages administered by The American College earlier this year. While more than half of these retirees and pre-retirees (56%) said they haven’t considered home equity use in retirement, far less (14%) admitted they have considered the idea of using a reverse mortgage to support their retirement.

Despite these attitudes, as longevity is expected to increase, more seniors may find themselves with insufficient savings to sustain their financial needs in retirement. This presents a plausible scenario that could lead to increased demand for reverse mortgages in the future, but it all starts with education.”

If you would like an honest and detailed presentation of the facts about Reverse loans, please contact me.

I will meet with anyone living in the Southern California region.

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