In the post that I previously shared, I discussed the fees and costs the borrower pays when they originate a reverse loan, and I mentioned the fees were very similar to traditional mortgages with the exception of the Mortgage Insurance Premium.
This insurance fee is quite expensive and gives the reverse loan a reputation for having higher closing costs compared to more traditional loans and I agree. it is expensive, but it is important to understand why it is being charged and how it protects and benefits the borrower and their heirs.
A reverse mortgage or HECM is insured by the federal government and will be repaid in the future regardless of how long the borrower(s) lives or if the property value declines. It has a “non-recourse” feature and that means you can never owe more than the property is worth at the time the loan is repaid.
If for any reason all of the equity has been used over the years and now the loan balance exceeds the value of the property, the borrower and or the estate will not have to pay the difference between the two figures, as the MIP will cover the shortfall.
At the time of the loan application and Closing, the fee is currently 2% of the Maximum Claim Amount and an annual fee for the life of the loan at .50% that is charged upon the loan balance during the time the loan is active.
I don’t want to make my explanation too complicated or confusing, so, for now, I will conclude my comments but will discuss the fee further in my next post and why it’s such a great benefit to the borrower and their heirs.
I will explain what the Maximum Claim Amount is and also give a bit of information about what a “Principal Limit” is and why the “Expected Interest Rate” and not the Note rate is used to calculate the amount of funds an applicant may receive from their reverse mortgage.
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.