Pur­chas­ing a home with a ‘re­verse’

Home - Santa Fe Real Estate Guide - - MORTGAGEMATTERS THEREVERSEMORTGAGE - DIRK GRAY

Many peo­ple have been ex­posed to a re­verse mort­gage, but us­ing a re­verse to pur­chase a home has prob­a­bly not crossed their radar. Let’s re­view a few ba­sics of the re­verse mort­gage (RM) and then­move on to pur­chas­ing a home us­ing this ver­sa­tile fi­nan­cial tool.

First, the home must be the bor­rower’s primary res­i­dence and be owner-oc­cu­pied within 60 days of the loan clos­ing. The minimum age of the youngest bor­rower must be 62, and HUD re­quires that the bor­rower(s) go through third-party coun­sel­ing to en­sure that they are mak­ing an in­formed de­ci­sion. An RM is also govern­ment-in­sured by FHA, which is the in­surance arm of the U.S. Depart­ment of Hous­ing & Urban De­vel­op­ment. The bor­rower(s) will not be required to make a prin­ci­pal and in­ter­est pay­ment, but is ex­pected to con­tinue mak­ing prop­erty tax and in­surance pay­ments and to main­tain the home.

What op­tions are avail­able? HUD of­fers two types of re­verse­mort­gages: one with a fixed in­ter­est rate for the life of the loan, and an ad­justable-rate prod­uct that is tied to the LI­BOR (Lon­don In­ter-Bank Of­fered Rate) in­dex.

Who is a good can­di­date? There are two fac­tors that drive the amount of eq­uity you are able to ac­cess: the value of the home, and the youngest bor­rower on ti­tle. The value is de­ter­mined by an FHA ap­praisal. Your credit also plays a role in de­ter­min­ing if you will qual­ify, and how the RM will be struc­tured. In cer­tain in­stances a LESA (Life Ex­pectancy Set Aside) is set up and the lender will make the prop­erty tax and in­surance pay­ments on the bor­rower’s be­half. Re­verse mort­gages also re­quire resid­ual in­come, which is in­come left over after all the bor­rower’s ex­penses are fac­tored in.

What a re­verse mort­gage does, and does not do, for a se­nior home­owner. RMs are de­signed to be long-term loans due to up­front costs. The up­front FHA mort­gage in­surance re­quire­ment is 2 per­cent of the value of the home, and the mort­gage in­surance is required for the life of the loan. The loan be­comes due when the bor­rower moves out of, sells, or can no longer oc­cupy the home.

One of the real ad­van­tages of hav­ing a re­verse mort­gage is the flex­i­bil­ity it gives the bor­rower. Liv­ing a debt-free life im­proves the qual­ity of your ex­pe­ri­ence. Many se­niors will pay off debt or put aside money for long-term care. You make the de­ci­sions on how you want your money to work for you.

How a re­verse­mort­gage­may be used in a pur­chase trans­ac­tion. If you are con­sid­er­ing pur­chas­ing a home, whether down­siz­ing or up­siz­ing, the RM may hold the an­swer you are look­ing for. In most in­stances you will ap­prox­i­mately dou­ble your buy­ing power and have no prin­ci­pal and in­ter­est pay­ment. As an ex­am­ple, if you sell your home and net $150,000 and you do not want to make pay­ments, you may pay use the cash for your new home, or you may use the $150,000 as a down pay­ment, do a re­verse mort­gage for $150,000, and buy a $300,000 home, and you will not make prin­ci­pal and in­ter­est pay­ments.

The RM loan ap­pli­ca­tion is com­pleted based on your pur­chase agree­ment. The seller may pay a por­tion of your clos­ing costs. Be­fore youwrite a pur­chase agree­ment, it would be pru­dent to sit down with your Re­al­tor and your re­verse-mort­gage lender to struc­ture your con­tract. FHA re­quires the com­ple­tion of an ap­praisal, which will in­form the seller, buyer, and lender of the home’s value. The re­verse loan amount is based on the sale price of your new home or the ap­praised value, which­ever is less. If re­pairs are needed, they must be com­pleted prior to clos­ing.

Pur­chas­ing a home is al­ways an ex­cit­ing time, and us­ing a re­verse mort­gage to pur­chase has some dis­tinct ad­van­tages. Sit down with your mort­gage spe­cial­ist and ex­plore the op­tions avail­able to you.

Dirk Gray is a re­verse-mort­gage spe­cial­ist with Frost Mort­gage. He was ap­proved in 1989 by the New Mex­ico Real Es­tate Com­mis­sion as an ac­cred­ited in­struc­tor. Dirk may be reached at (505) 930-1953 or dirk_gray@frost­mort­gage.com.

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