Reverse mortgage credit line pays off hard money loan

“While reverse mortgages are much easier to qualify for than traditional loans, we still needed to show that [the client] had sufficient cash flow to pay property taxes, home insurance and a provision for basic living needs.”

Mortgage broker: John Holmgren, Holmgren & Associates.

Property type: Single-family home in Kensington.

Property value: $1.155 million.

Loan type: FHA HECM Adjustable Rate Credit Line.

Loan amount: $371,568.

Rate: 7.105%.

Backstory: My client inherited his home in Kensington several years ago. The home had a lot of deferred maintenance that needed to be remedied before he could move into it. This process all began in late 2019/early 2020. My client is employed in the field of events management, working primarily with tech conferences in San Francisco. Just as he was applying for financing to accomplish the repairs, the COVID-19 epidemic appeared and ended most of the events he was scheduled to work on. This prevented him from obtaining conventional financing for his project and forced him to resort to a private/hard money loan with a 36-month balloon payment.

The funds obtained were enough to complete the project, but with employment still sporadic and with employment income over the last three years greatly reduced from prior years, he was having cash flow problems in making mortgage payments along with other property and living expenses, and still couldn’t qualify for conventional financing. A friend suggested that he consider a reverse mortgage in lieu of a conventional loan, as it was uncertain when his employment would return to pre-pandemic levels.

With the imminent maturation of his hard money loan, he contacted me to learn about his options. The best option appeared to be an FHA HECM (home equity conversion mortgage), which would provide enough funds to pay off the hard money loan along with $30,000 of accumulated credit card debt, sill leaving a credit line of over $70,000 for potential future needs.

While reverse mortgages are much easier to qualify for than traditional loans, we still needed to show that he had sufficient cash flow to pay property taxes, home insurance and a provision for basic living needs. His small Social Security benefit, plus a modest pension and “imputed income” from his reverse mortgage credit line was just about enough to meet qualification cash flow requirement. To bridge the small cash flow gap that remained, we were able to document an improvement in his employment income in 2022 relative to the very low 2020-2021 pandemic years.

As his income is restored, he will have the option of making payments on the reverse mortgage if he wishes to do so, with the comfort of knowing that, god forbid, a pandemic or other event should occur that affects his employment, we have the backstop of not having to make a mortgage payment with a substantial non-cancellable credit line in reserve.