Editor’s note: On Wednesday, Sept. 22, after this column was written, the Federal Housing Administration announced a new version of its Home Equity Conversion Mortgage Product. HECM Saver, the new reverse mortgage option, features lower upfront loan closing costs for those who want to borrow a smaller amount than is available through the original HECM option.
The upfront premium for the HECM Saver program is 0.01 percent of the property’s value, and the upfront mortgage insurance premium will be charged monthly at an annual rate of 1.25 percent of the outstanding loan balance. Borrowers will receive an estimated 10-18 percent less with the HECM Saver program compared to the standard program, the Federal Housing Administration announced.
A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 and up who own their home.
Funds obtained from the reverse mortgage are tax-free. The proceeds can be received in a lump sum, regular monthly payments, a line of credit or in a combination of those options.
Interest is charged on the amount drawn, adding to the original amount. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid.
The borrower makes no monthly payments and cannot owe more than the value of the home.
We have a friend — let’s call her "Sally" — who gathered all the reverse mortgage information she could find for her mother, now 97. Sally even attended the mandatory reverse mortgage counseling session on her mom’s behalf.
After two setbacks due to reverse mortgage program restrictions, Sally is still trying to find a way to tap the equity in the condominium that Sally’s mom owns free and clear.
Here’s what happened. Sally’s mom owns a home in a small development with 17 condominiums comprised of three different homeowners associations. That’s because the original builder put the buildings up in phases. Sally’s mom owns one of five units in the second phase.
According to the Department of Housing and Urban Development, at least 51 percent of the units in a condo association must be owner-occupied in order for any unit to qualify for an FHA-insured Home Equity Conversion Mortgage (HECM).
It turned out that only two of the five units were owner-occupied, so Sally’s mom’s home did not qualify for the HECM.
"I had the idea that maybe I could get the three separate associations to merge into one," Sally said. "This would eliminate the 51 percent owner-occupancy problem. Unfortunately, it uncovered another restriction."
Sally discovered that no owner could qualify for a HECM if any single individual or entity owned more than 10 percent of the total number of units in the association. Given that one man owned two of the 17 condos, Sally and her mom were rejected again on the "10 percent rule."
According to Sarah Hulbert, senior vice president and reverse mortgage manager at Seattle Mortgage, the only exception to the 10 percent rule is if the two units were owned by the original developer and never sold. That is not the case here.
Hulbert also said that HUD may soon be issuing guidelines relaxing some requirements specifically for smaller condo projects. However, there has been no specific definition for "smaller."
Since the economy slumped more than two years ago, the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) has become the only conventional reverse mortgage still available. More than 130,000 HECMs were originated last year. AARP reported that approximately 93 percent of applicants were satisfied with the process.
But some people — even those who desperately need the funds and whose homes are owned free and clear — have been unable to go through the process and have fallen between the cracks.
"My mom has about six months of resources left, unless we can tap the equity in her home," Sally said. "She really wants to stay in her home and is of sound mind and body."
What’s the next step?
"I have also considered trying to find someone who would be interested in buying her place as an investment and then renting it back to her, something like that …"
It would be easier if HUD could find a way to grant exceptions to seniors who simply want to age in place — especially those in their 80s and 90s who have no liens against their properties. After all, building departments seem to issue "variances" to some marginal developments. Why not a logical ruling for a person who has built her own nest egg?
Tom Kelly’s book "Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World’s Bargain Zone" was written with Mitch Creekmore, senior vice president of Stewart International, and Jeff Hornberger, the National Association of Realtors’ international market development manager. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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