3 Convenient Ways to Utilize a Reverse Mortgage

3 Convenient Ways to Utilize a Reverse Mortgage

By Daniel Duffield

Reverse mortgages can be confusing for many borrowers, with many unique features that do not appear in other popular loan programs and the opposite function of a standard mortgage. While many understand that this transaction taps into home equity, many borrowers view these mortgages as disadvantageous due to the potential consequences and do not fully understand the utility of a reverse mortgage. To help senior homeowners to better understand the beneficial uses of this program, this article will examine three of the most convenient and advantageous uses of reverse mortgages.

1.       Influence heirs’ inheritance.

For many seniors, home equity comprises a large portion of the inheritance which they pass on to their heirs. While many seniors may be confident that this inheritance will be put to a beneficial use rather than squandered, most will not have any control over how the inheritance will be used. For instance, if a borrower’s granddaughter has wanted to use the money for unnecessary and expensive plastic surgery, seniors will be unable to prevent this misuse. However, reverse mortgages give seniors more control over what inheritance will be passed on.

For instance, by performing a reverse mortgage to tap the equity within a home, senior homeowners may apply this money toward a child or grandchild’s college education, even without having to sell or move from the home. Likewise, reverse mortgage borrowers may apply these funds in any way which they see fit and avoid any misuse of the inheritance.

2.       Take care of oneself.

With exorbitant health care costs draining many senior homeowners’ budgets, many borrowers secure a reverse mortgage in order to acquire additional income to pay off medical bills. If expensive procedures or care is required, senior homeowners may need these additional funds to avoid passing on debts to heirs.

Although family members may be willing to assist in caring for a senior relative, this can become complicated by a number of factors, especially if the senior lives some distance away from his or her heirs. With a reverse mortgage, senior homeowners can retain this independence and use these funds for self-care, thus avoiding becoming a burden. Whether hiring a caregiver or using the funds to purchase a long-term health care insurance plan, reverse mortgages allow these borrowers a degree of independence and peace of mind without inconveniencing family members.

3.       Avoid foreclosure.

While it may sound too good to be true to secure a reverse mortgage in order to avoid a detrimental foreclosure, this process is not only possible but an effective way to apply a reverse mortgage. With no reverse mortgage qualifications regarding borrower credit, senior homeowners can be undergoing foreclosure or completing a bankruptcy and still manage to qualify for and acquire a reverse mortgage.

In order to perform a strategic reverse mortgage to avoid foreclosure, a senior homeowner must have a sufficient amount of equity stored within his or her property. Essentially, this process benefits homeowners who cannot afford to finish paying off the original mortgage; by tapping into the accumulated equity, borrowers can apply these funds toward the remaining balance of the mortgage and collect the remaining equity.

Although these three applications can greatly benefit reverse mortgage borrowers, senior homeowners can benefit from reverse mortgages in a variety of ways, based on their unique circumstances. 

However, regardless of the situation, borrowers should learn as much as possible about reverse mortgages prior to making any commitments. Remember, a reverse mortgage affects not only the borrower but the heirs, so discuss this option with family before signing any papers.

Lender411 Featured Article: Reverse Mortgage Changes

Reverse Mortgage Information: Upcoming Changes

By Daniel Duffield

The FHA’s reverse mortgage program is due to change over the next several weeks.  Since the FHA fiscal year ended at the end of September, the final numbers should be released in the next few days.  Here’s the reverse mortgage information you have been searching for: what are the possible upcoming changes and why are they needed?

Reverse Mortgages

Reverse mortgages are used as a means of financing for those aged 62 and over.  The main principle behind reverse mortgages is that homeowners will utilize real estate equity to obtain a loan that can be used for anything.  What makes reverse mortgages so attractive is that the homeowner will receive cash without any monthly principal and interest costs.

Another way in which homeowners use reverse mortgage money is to pay their current mortgage payments.  If an individual has a pension or is receiving Social Security benefits, the monthly cost change could be huge.  What’s the catch?  While borrowers don’t have to repay the loan until they move, sell the house or pass away, they do have to pay for property taxes and insurance.  This just means that a monthly housing cost of $1,500 before a reverse mortgage loan could be reduced to a monthly housing cost of $300 after the loan.  In this current economic environment, many older homeowners haven’t been making these mandatory payments and have been losing their homes to foreclosure despite the fact that they no longer have monthly mortgage payments.

The majority of lenders are still in support of this program because they have one hundred percent coverage against any losses. 

Read on…

5 Simple but Effective Reverse Mortgage Tips

By Daniel Duffield

With the baby boomer generation retiring, reverse mortgages have become increasingly popular and many speculate that this loan program will be as popular as the commonplace IRA. However, with a fundamentally unique loan program such as the reverse mortgage, many homeowners misunderstand the function and consequences of the reverse mortgage; while tremendously beneficial in some circumstances, borrowers who misuse the program can find it extraordinarily expensive. To address this confusion, here are 5 reverse mortgage tips to help unfamiliar borrowers to understand and navigate the reverse mortgage process with minimal stress and cost:

   

1.       Do the research.

As previously indicated, one of the major sources of distress for reverse mortgage borrowers arises from the confusion caused by the unique facets of the program. Before making a decision, learn more about the reverse mortgages, in terms of the requirements, advantages and disadvantages, consequences, and alternatives. For instance, seniors considering a reverse mortgage should know how this will affect their inheritance and what their heirs will have to do once the mortgage debt becomes due. Without a full understanding of the program, homeowners cannot make an educated decision and may end up making a poor choice; after all, reverse mortgages are equally beneficial for everyone. Accordingly, before making any commitments always do the research.

2.       Discuss with family.

While securing a reverse mortgage is a significant decision for a borrower, doing so can also have implications for family members, especially any heirs who will inherit the property. As such, senior homeowners considering a reverse mortgage should discuss this with family for collective consideration, since the heirs will assume responsibility for repaying the loan once the borrower passes away. Although they cannot be held responsible for any additional debt caused by a decline in home values, managing the property is still a considerable responsibility that heirs will need to be prepared for.

3.       Utilize counseling.

In the process of obtaining a reverse mortgage, borrowers must attend a mandatory reverse mortgage counseling session with a qualified HUD counselor. This meeting is a tremendous resource, as the counselor will be able to answer any pertinent reverse mortgage questions and clear up any confusion regarding the program. Rather than begrudgingly attend, borrowers should utilize this counseling session and make full use of the available information. Furthermore, this counselor can help borrowers determine whether or not the reverse mortgage program is the optimal decision given the circumstances and will provide alternatives for those who would not benefit from the program.

4.       Determine the optimal type.

After determining the reverse mortgage as the best option, borrowers will need to consider the types of reverse mortgages; borrowers have three options: the standard Home Equity Conversion Mortgage (HECM), the HECM Saver, and the HECM for purchase. The standard HECM reverse mortgage provides borrowers with access to greater amounts of equity and funding but costs more to acquire. In contrast, the HECM Saver costs less than the traditional HECM reverse mortgage, but borrowers will not be able to access as much money through this option. Finally, borrowers who would like to purchase a home and obtain a reverse mortgage can secure a HECM Purchase, which allows borrowers to buy a property and tap the equity immediately.

5.       Gather documentation.

 Once a borrower has thoroughly considered a reverse mortgage and fully understands the program, he or she should prepare all of the necessary documentation before meeting with a lender. This generally includes loan documents for the original mortgage, as well as financial statements. Typically, borrowers will receive a packet from the lender or counseling agency prior to the counseling session, which will provide details of the necessary documents and any additional information.

A Brief Look at VA Loans with Bad Credit

By Daniel Duffield


Although having poor or damaged credit can impede the mortgage acquisition process, borrowers qualified to secure VA loans may often secure these loans, even after bankruptcy, short sale, or foreclosure. Essentially, the U.S. Department of Veteran Affairs (VA) guarantees mortgage loans, rather than originating or issuing them. With lenient credit requirements, these loans can be secured with a relatively low FICO score. Additionally, since the loan is insured, the lender assumes less risk when originating the mortgage and can thus approve riskier borrowers with less-than-perfect credit histories. Furthermore, the VA understands the various complications involved in homeownership while serving in the military and considers these factors when determining approval for loan applications.

No Credit History

One of the major reasons behind many VA borrowers having bad credit is that many have not established a sufficient amount of credit during their lifetime. If a veteran attends college, he or she is typically not forced to secure student loans, as the ROTC program covers a significant majority of college expenses for many military veterans. In addition, many veterans do not secure car loans, credit card debt, or other forms of debt, due to spending much time invested in active duty service.

Long Distance Billing

In addition to credit concerns, many VA-qualified borrowers find it challenging to keep current on debts, as paying bills during deployment abroad can be quite challenging. Although direct payment methods may be available through certain financial institutions to resolve this problem, these veterans may not have the time or means to discuss the issue with the bank. If an unexpected debt comes due while abroad, borrowers may not have any way to deal with the problem, and credit can plummet within only a few short months abroad.

Acquiring a VA Loan with Poor Credit

For these reasons and several others, returning from deployment with damaged credit is fairly typical, and the Department of Veteran Affairs seeks to address this issue. With an exceptionally low down payment requirement, VA loans are considered to be both the cheapest and most advantageous loan program available, although they can only be acquired by military veterans who fully meet VA Eligibility Requirements. While borrowers whose bad credit has arisen from less excusable circumstances, such as defaulting on a loan with no extenuating circumstances or holding too much debt, borrowers whose bad credit is related to military service will almost always qualify.

Click here for more information regarding Bad Credit VA Mortgages on Lender411.com

Lender411 Featured Article: Short Sale Guidelines Cheat Sheet

By Daniel Duffield

If you’re a borrower who is currently underwater, it’s probably a safe bet to assume that you’ve considered short selling your house.  The FHFA just announced that both Freddie Mac and Fannie Mae are implementing new short sale guidelines for mortgage servicers.  In essence, these new guidelines will fuse all existing short sale programs into one unified program. 

  These new rules will permit lenders to qualify individuals for short sales, and homeowners will be able to determine with more ease if they are eligible for a short sale. 

Here are some of the highlights of the new short sale guidelines for homeowners:

·         Fannie Mae/Freddie Mac borrowers will be allowed to do a short sale if they are current on their mortgage and have a documented hardship such as a divorce or job loss

·         Borrowers will be able to provide finances at closing so that the lender doesn’t pursue them for a deficiency judgment at a later time

·         Military personnel who have to relocate are automatically short sale eligible and won’t have to contribute financially to cover the difference between the home’s sales price and the outstanding loan balance

Read on…

The Significance of FHA Approval for Condominiums

By Daniel Duffield

With many borrowers unable to qualify for home purchase loans, an increasing number of buyers have turned to condominium purchase. With amenities, regular maintenance, and inherent security, condominiums have many advantages over typical home purchases; however, regardless of how a borrower funds a condo purchase, he or she should consider FHA-approval status when selecting the right condominium.

   

Rise of the FHA

In the last several years, the Federal Housing Administration (FHA) has claimed more and more of the mortgage market, picking up the slack left by the elimination of the sub-prime mortgage market. In 2010, statistics indicated that 40% of all newly originated mortgages were insured by the FHA, growing substantially from former levels and becoming one of the most popular among first time homebuyers. With such dominance of the mortgage market and so many property purchases being funded by FHA loans, this organization has a significant influence over the condominium demand and value.

FHA Approved Condominiums

With a vast majority of first time homebuyers funding their purchases through the FHA, FHA condominium approval has become a kind of commodity, especially in terms of condominiums; in order for a borrower to purchase a condo with an FHA loan, the condominium must be a part of a condo project which has received approval by the Federal Housing Administration. While the requirements for FHA condo approval are not exceptionally stringent, it does include a small fee, which many condo project managers are unwilling to pay.

FHA Condo Demand and Value

As previously mentioned, approval for FHA condominiums represents a commodity which adds value to the condo or lessens the value in the absence of approval. For instance, due to the expense of homeownership, many first time buyers choose to purchase condominiums. These buyers generally cannot afford the sizeable down payments which conventional loans require (especially in order to avoid paying for mortgage insurance); consequently, many condominium buyers secure FHA loans for 96.5% financing for a 3.5% down payment, one of the smallest available.

Accordingly, a condominium which does not have FHA approval severely limits the amount of borrowers who will be willing and eligible to purchase the property. With significantly less buyers, the condominium will most likely not be able to sell for its total asking price. Furthermore, even borrowers purchasing condominiums with conventional loans or other non-FHA loans will benefit from FHA approval, as it makes the property much easier to sell when necessary. Therefore, the value of condominiums decrease without FHA approval, as sale becomes much more challenging. Essentially, this phenomenon embodies the basic principles of supply, demand, and price; with a significantly reduced demand and a stable supply of FHA-approved condos, the price of non-FHA condominiums decreases noticeably.

The Bottom Line

If you are purchasing a condominium, ensure that the project has obtained FHA approval, as this will not only make the property easier to purchase but lessen the difficulty of selling it, thereby increasing its overall value and the profitability of the purchase.

Credit Score Factors in Flux

By Daniel Duffield

While credit reports have been employed for quite some time, the idea of the credit score is relatively new. With the various factors used to determine credit score, a numerical representation of a borrower’s risk can be calculated as an indication to lenders of reliability or of a lack thereof. Although most people would be familiar with this scoring procedure, many do not fully understand the underlying process or factors which contribute to a credit score.

Within the past several years, FICO, the leading organization in credit scoring technology, has worked with several other providers in order to provide borrowers with an education of credit fundamentals, such as the considerations which influence credit score and the methods of credit improvement. This education has developed further into online simulators which allow consumers to assess their credit under a variety of circumstances.

However, this transparency has created some issues and caused some concern that the process might be used for manipulative purposes. For instance, consumers have the ability to test the effects of paying off certain types of debt, as well as to compare the effects of various actions such as opening new lines of credit. According to Gordon Crawford, recently promoted vice president of Analytics for Dataquick, believes this phenomenon to be both advantageous and disadvantageous. With this access to the reasoning behind credit scores, consumers have been given more opportunity to attempt to “game” the system, and credit scoring companies have been forced to take this phenomenon into consideration when adjusting their credit scoring models. While Crawford endorses the idea that consumers should understand their credit scores and the ways which it can be raised, he also cautions that the potential for manipulation could undercut the validity of the scorer’s model.

As such, credit scoring cannot remain static and must fluctuate in order to lessen the potential for consumer misuse. However, credit scoring constantly shifts in accordance with the mortgage market, and the definition of acceptable credit scores has varied widely over the last decade. From 2002-2008, a FICO score of 700 would be considered adequate, although this decreased steadily to 660 and even down to 580, which is currently viewed as a bad credit score. In 2008, this trend reversed, with credit scores of 760 to 780 being considered only average. Currently, circumstances of the mortgage market are unique, as mortgage rates continue to decrease, hitting record lows, while credit requirements are tighter than ever. According to Crawford, current credit trends have been too strict, with lender expectations much too high.

Furthermore, credit considerations fluctuate from a lender standpoint. Crawford stated that the mortgage industry has been confronted with the problem of numerous vendors updating their scoring models in a system that is struggling to keep up. When it comes to credit scoring, everything essentially springs from the FICO model, with small tweaks being made when necessary. In addition, existing pricing models and underwriting standards rely on pre-existing systems for scoring, making replacement both costly and difficult. As a result, lenders would like to see noticeable changes to the structure of the system as well as quantitative benefits before assuming more risk and expense in order to train people to accommodate a new system.

One recent example comes from FICO’s release of a new credit scoring model which utilizes data from CoreLogic credit reports when assessing a borrower’s score, consequently putting more emphasis on information including property transaction data, landlord/tenant data, borrower-specific public data, and other alternative credit data. FICO has asserted that the newly updated model increases borrower scores, generally raising scores to allow approximately 3% more individuals to achieve scores greater than the latest median of 715,  and better assesses borrower risk by a factor of 7.5.

Speaking of these new updates, Crawford stated that these measures will provide more consideration for borrowers with slim criteria for risk evaluation. However, the formation of a new standard can be detrimental to a lender who could potentially risk losing common measures, being unable to transfer, service, or sell the loan due to the differing credit standards.

 According to Crawford, lenders are content with the current status quo of stringent underwriting practices. The proposed changes could increase uncertainty in the mortgage market and create various problems. As such, lenders will not expose themselves to additional risks without compensation or the promise of more comfortable circumstances.

However, lenders utilize a variety of factors aside from credit scoring when determining borrower approval and assessing borrower risk, such as appraisals, owner occupancy status, etc. Essentially, credit scores aim more to predict success with a loan, not specifically aiming at mortgage loans. Consequently, many lenders increase the weight of credit scores by including these considerations within the underwriting.