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Reverse Mortgages: Tell Me More

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Posted On: 06/03/2015

QUESTION:

I’d like more reverse mortgage information. Are all reverse mortgages backed by the Federal Housing Administration? Is there more than one kind of reverse mortgage? What happens if the newly established “financial assessment” is not affordable?

ANSWER:

According to the National Reverse Mortgage Lenders Association, virtually all reverse mortgages available today are backed by the FHA. In some states you may be able to get a jumbo reverse mortgage – financing above the current $625,500 loan limit – from a private company.

Historically, reverse mortgages have been asset-based loans where the borrower could get financing if they had sufficient real estate equity, regardless of income. This made some sense because with a reverse mortgage borrowers are not required to make monthly payments for principal and interest; however, they must keep up with such things as property taxes and homeowner’s insurance, otherwise they can be foreclosed. In the case of foreclosure with an FHA-backed reverse mortgage, the lender can then make a claim against the Department of Housing and Urban Development to cover losses.

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In recent years reverse mortgage foreclosures have become a bigger and bigger problem, and the result is that a new “financial analysis” requirement must show that the borrower has the credit and financial capacity to make non-mortgage payments. If not, the lender must take funds from the loan to assure future payments for such costs as taxes and insurance.

According to NRMLA, with a financial analysis “the lender will examine monthly income and expenses and the borrower’s credit history to determine if they have the willingness and capacity to pay future taxes, insurance, association fees and other mandatory obligations. If the borrower fails the assessment, the lender must create a set-aside to pay future taxes and insurance.”

If the lender is setting aside money to pay for taxes and insurance, and if there’s no requirement to make monthly principal and interest costs, then for selected borrowers a reverse mortgage is really a way to ease housing costs in the future. Alternatively, borrowers need to ask if the funding available from a reverse mortgage is sufficient for their needs and if they can really age in place. As an alternative, would it be better to sell the current home and use the proceeds for something more affordable?

The new financial analysis requirement is actually a form of consumer protection in the sense that it forces borrowers to look realistically at future economic options. If a review of borrower finances prevents foreclosures down the road, then that is good for property owners, lenders and HUD. Can the borrower elect to immediately designate part of the “life expectancy set-aside” to free themselves from a future financial burden? NRMLA says the answer is yes.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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