qualifying for a reverse loan
Effective this month and year, the HUD Lending Limits for FHA Reverse loans were increased from $765,600 to $822,375.00
This is quite a large increase over previous years and could possibly make a difference for senior borrowers who will now have more access to their home’s equity, than they would have had last year in 2020.
The Lending Limit caps a home’s value at this figure, even if a property is worth more, the reverse loan amount will always be calculated on the Lending Limit or the appraised value of the home, whichever is less and the age(s) of the youngest borrower.
For some seniors, this increase can make it now possible to do the loan, because the higher value will possibly provide them a larger loan amount that can pay off an existing mortgage with a high balance, whereas previously, the loan may have been not been adequate enough for refinancing an existing mortgage.
Mortgage interest rates are at the lowest they have ever previously been, and that includes the interest rates on reverse loans, too. And in addition to very low rates, home values have increased substantially, creating more equity for many homeowners.
Whether it is Fixed loan or a Line of Credit, FHA HECM, or one of the Jumbo reverse loans, now is the best time to apply for one,take advantage of low interest rates, and also the increased value of your home.
Use a reverse loan to increase your cash flow and create a safety net for the future, and have funds for unplanned expenses, and gain peace of mind.
Reverse loans offer many choices to senior borrowers, but it can be confusing to decide which one to use because they are different from traditional mortgages, no mortgage payments are required and they are easier to qualify for on a fixed income.
And they also do not have a loan term. Reverse loans are still a mortgage, but unlike what we are all accustomed to. They are different, but similar in that both are liens against the subject property.
In the past when applying for a mortgage to buy a home or refinance, the most popular one was the Fixed rate, because you always knew what your mortgage payment would be, unlike an Adjustable Rate Loan where it can change and possibly increase over time.
And everyone always shops for the lowest interest rate, but that meant you had to pay more Points to get a low interest rate, but if you chose a higher rate the Points would decrease, or possibly be a “Zero” Point loan.
However, with a reverse loan, it is entirely different. There are no Points, but an Origination fee and sometimes, there isn’t any fee at all.
The other difference is how the selected interest rate determines how much money you will receive from a reverse loan. Sometimes the lower interest rates provide less money, and cost more, but if the loan is being used to pay off an existing mortgage and freeing up more cash flow, then that would be a consideration.
And then there is the question whether or not to chose a Fixed interest rate or the HECM Line-of-Credit. is the borrower paying off a large mortgage? Then the Fixed rate might be the best choice.
But if there is a small mortgage or none at all, then the HECM Line-of-Credit would be the preferable choice, as it will give the borrower more flexibility with their funds, plus it has a “growth” feature that will provide additional funds in the future.
Anyone reading this is most likely thinking, it’s confusing. And it is. And that is exactly why it is important to meet with a Reverse Loan Consultant who can provide you with a personalized proposal and eliminate some of the confusion.
In the midst of Covid-19 and the uncertainty of the future, more seniors are now actively investigating the benefits of a reverse mortgage and many have applied for their own loan to preserve their savings and have a financial “safety net”.
And maybe you should, too.
FHA reverse loans are under the umbrella of HUD and recently they increased the amount of funds a senior may receive from a it and this is very good news as having additional funds for many seniors can make a substantial increase in the quality of their life and financial peace of mind.
Effective in January 2020 the Lending Limit will increase to $765,600. For 2019 it has been $726,525 and the previous year in 2018 it was $679,650. And what does this mean to a senior who applies for a reverse loan?
Increased access to their equity and along with the higher property values here in California, it might mean paying off a large loan balance a homeowner has now and eliminating the burden of mortgage payments.
If a senior already has a reverse loan, this will not be retroactive for them. But if their loan is at least 18 months old, they could possibly refinance it and take advantage of the higher Lending Limit.
And in addition to possibly a lower interest rate and more funds, they would be entitled to a credit on the MIP/Mortgage Insurance Premium they paid at the time their loan was originated.
For anyone who previously investigated doing a reverse loan but was unable to qualify for it due to lack of equity or a high loan balance, might be able to do it in 2020. And it certainly would be worth a few minutes of time to investigate it and find out if it is an option for one, or not.
Is that even possible? The answer can either be “yes” or ” no” because it depends upon the type of loan that is being used and the size of the new mortgage.
In traditional mortgages, by buying up the interest rate, the Lender can utilize credits they receive from the “investor” by passing that along to the borrower. The borrower does have to be okay with the higher interest rate if they want to do a loan at zero points and/or not pay for any closing costs.
It is the same procedure with a reverse loan. The higher the rate, the lower the fees and sometimes that results in a “zero” cost loan. But again, the trade off is a higher interest rate. If a senior is sensitive about having a higher interest rate, that will result in a larger loan balance in the future, that may not be a good option for them.
Each borrower has their own personal situation and reasons why they are looking to apply for a reverse loan, and there isn’t any one answer for them as to whether or not to save on the loan costs by having a higher interest rate, or pay the costs through the new loan, and have a lower interest rate,.
They have to see their options and the details in a professionally prepared loan proposal for their consideration and to personally meet with a Reverse Loan Consultant before they apply for the loan.
Calculations for determining a loan amount on a traditional mortgage rely on a certain percentage of the appraised value of the subject property, and are referred to as the “Loan to Value” figure and can be as high as 100% of the appraised value of the property, but are generally less.
However, the calculation used to determine the loan amount for a reverse loan is completely different and can be confusing for the consumer and is called the Principal Limit and is the total borrowing power available to the borrower when they apply for the mortgage.
Just what are the steps in the calculation that is used to determine the reverse mortgage amount?
The adjusted property value of the property is multiplied by the “Principal Limit Factor (PLF) which is based on the age of the youngest borrower or non-borrowing spouse and increases for older borrowers.
The Maximum Claim Amount (MCA) is the lesser of the property’s appraised value or the National Lending limit for FHA which as of the writing, is $726,525.
If we were using the term “Loan to Value” ratio, the percentage will always be less than what can be gained from a traditional loan, because there are no required mortgage payments, thus the loan amounts will be smaller than on a traditional mortgage.
The life expectancy of the youngest borrower effects how much money the loan will provide and the younger they are, the less money they will receive and conversely, the older borrower will receive considerably more money due to the PLF because their life expectancy is shorter and there is less likelihood of the loan balance exceeding the value of the property in the future.
It is important to understand that “shopping” for a reverse mortgage and calling a multitude of different Lenders about their reverse loans, is a waste of time. Every Bank or Broker utilizes the exact, same method to determine the loan amount, as it is the methodology that is uniform to the reverse loan industry.
This is a brief explanation of how reverse loans are calculated and will be different for each person, but I hope this helps and takes away the confusion for seniors and their families.