5 Questions to Ask a Lender Prior to Moving Forward with
Application for a Reverse Mortgage
Is your company a Mortgage Broker or a Bank?
This is an important question when evaluating reverse mortgage companies as it may give you some indication of the level of service and consultation advice you will receive from the loan officer and his or her associated company. A very common misconception is that one should obtain a Texas reverse mortgage from a bank rather than a mortgage broker because by going direct to the source of money (the bank) you will get a better deal on closing costs, interest rate, or both. In Texas, this is simply not true when obtaining a reverse mortgage. If this were the case no mortgage brokers would be in existence. If you compare costs and interest rates between banks and mortgage brokers you will find them to be roughly equal. From a service perspective a Texas reverse mortgage broker may actually offer you a better total service experience than a bank. This is why: Brokers can pick and choose which financial institution to fund your reverse mortgage in Texas.
Since the broker does not get paid unless you go forward with him or her for your reverse mortgage he is incentivized to work through the best financial institution for you particular situation. Additionally, banks are always going through some form of reorganization, or in current times, financial trouble, which may dramatically change the processes by which your loan is processed and funded. A bank that offered excellent service and pricing last month may not be nearly as strong this month. Since a broker works with multiple banks to pick and choose where to send your loan for funding, he can avoid placing you with an institution going through turmoil as just described, thereby saving you money, time and unnecessary stress.
How is the loan officer compensated?
Loan officers are compensated in three different ways: Salary, salary plus commission, and straight commission. Generally speaking, in Texas, reverse mortgage loan officers with more experience tend to migrate toward a straight commission compensation package. All things being equal your chances of getting a more experienced, knowledgeable reverse mortgage consultant will improve if you work with a loan officer paid on a straight commission basis.
You may ask the loan officer this question. It may give you some insight, without knowing anything else about that person, as to the quality of the information and advice you will receive throughout the transaction.
Does the Loan Officer specialize in reverse Mortgages?
You may want to phrase the question in this way... "What other types of mortgages can you do other than reverse mortgages?" You want to know whether or not your lender specializes in Texas reverse mortgages. If the lender does other types of loans, he or she has to keep up his or her knowledge base about the reverse mortgage along with the other types of mortgages. Don't forget, the rules and guidelines are always changing in the mortgage business. To keep up with all of the changes and to master each area of the mortgage business is a very tall order. Most people cannot keep up.
Let's use an analogy that may make sense. If you were going in for major heart surgery, would you go to a general practitioner or a heart surgeon? Naturally, you would choose the heart surgeon, the specialist. The same principle applies, although the consequences are not so dire, for whom you choose to work to help you get your reverse mortgage in Texas.
When it comes to your reverse mortgage, you may be better served, as far as knowledgeable, intelligent consultation, with reverse mortgage specialist rather than a lender who does many types of loans, including Texas reverse mortgages. The costs are the same, either way you go. You may want to choose the specialist.
Does your company have centralized processing or in branch processing?
Many reverse mortgage lenders have moved to a centralized processing system. This means the lender designates one or more locations, somewhere in the U.S., in which the processing of your loan shall occur. It's not just your loan being processed here. Hundreds, if not thousands of other loans, other than Texas reverse mortgages, are processed here as well. Many large financial institutions migrated to this system because it is a great way to cut down on costs. The question is, have they sacrificed service for this lower cost method of doing business?
Unfortunately, communication between the loan officer, who is generally in State, and the processor of your loan may be compromised because the two people do not have face to face, day to day communication. As a result, your service experience may be compromised as well. Delays in processing and duplicate phone calls often occur because one hand doesn't know what the other is doing. Furthermore, the larger institution often hires processors at a pay rate determined by management who, all too often, have no idea of the importance and value of this area of the mortgage origination process. As such, you may be stuck with a lower level of competence in centralized processing units.
On the contrary, when working with local processing, many times the Texas reverse mortgage loan officer has a say in the hiring of the processor, and in some cases actually hires and pays his or her processor. Since the loan officer's business and general happiness is someone based upon the competence of his or her processor, you can surmise the local processing may perform better for the processing of your mortgage rather than a centralized processing unit.
Can the loan officer produce some form of written proof of satisfied customers?
This is important as it may give you insight as to what level of advice, information and pricing you can expect from the Texas reverse mortgage loan officer. First, if a loan officer actually takes to the time and effort to gather testimonials or sends out surveys to customers, this is an indication of the seriousness this individual treats his or her business. This individual is monitoring service levels, which is a very good indication of professionalism. Also, this gives you a chance to read real life examples of people who actually worked through this person to get the reverse mortgage in Texas.
Articles From the Texas Reverse Mortgage Education Center
May 18, 2009: What if One Borrower is Younger than 62
We see many instances where the couple wants to go forward with a reverse mortgage but the younger spouse is younger than 62. The rule for the reverse mortgage is the youngest person on the mortgage must be at least 62 years of age.
The key here is the words "youngest borrower on the mortgage". If the couple understands the consequences of their actions they can choose to disclaim the younger spouse and use the elder spouse as the sole borrower. This is done by disclaiming the younger spouse from the note and deed of trust. It is easy to do and any escrow company can do it for the couple in no time flat.
The consequences have to do with the nature of the reverse mortgage. The reverse mortgage is an open ended mortgage. It has no definitive ending except upon certain triggers. The three main triggers are: death of borrower, sale of property, and borrower leaving the property for at least 12 consecutive months.
When a property sells clearly the mortgage company is paid back immediately. In the other two instances the mortgage company will give the borrower or the borrower's heirs about one year to sell the home before foreclosing.
When disclaiming a spouse the big concern is, if the borrowing spouse dies or must be placed in a long term care facility, the mortgage company will force the surviving spouse to either pay the mortgage back, out of pocket, or to sell the home. For those that have serious reservations about leaving their home the reverse mortgage may not be the best options if they must disclaim in order for the mortgage to work.
On the other hand many spouses have no intention of staying in the home after their spouse passes on and disclaiming from the loan is a viable solution.
May 8, 2009: Reverse Mortgage Closing Costs Explained
The biggest hurdle to entry into a Texas reverse mortgage is the fact that closing costs are higher than one might typically expect when obtaining a traditional home mortgage.
The main reason for the higher costs is that reverse mortgages are FHA insured. What this means is FHA backs the mortgage lender in the event of financial loss. Of course the money to insure mortgage companies must come from somewhere and that somewhere is you, the borrower. As part of the initial closing costs the borrower will pay an upfront "mortgage insurance premium" equal to 2% of the value of the home up to $625,500. Homes valued over $625,500 do not pay more for mortgage insurance.
All other closing costs involved in the reverse mortgage are similar to regular forward mortgages except the origination fee. The origination fee is generally 2% of the value of the home up to $200,000 and 1% over $200,000 up to $400,000. HUD caps the maximum origination fee at $6,000.
This is bit different than typical forward mortgages. If you go to traditional lender to purchase a home or refinance you will probably get a 1% origination fee regardless of value. The reason the origination fee for reverse mortgages, at least for average valued homes, is higher than traditional mortgages stems from the fact that reverse mortgage lenders don't make much or any money elsewhere in the mortgage. Traditional mortgage lenders do. Traditional mortgage lenders earn additional income from what is known as a "yield spread premium". This is money built into the interest rate. It won't come directly out of the borrower's pocket but the borrower will receive a slightly higher interest rate in order to create this additional income for the lender. Either way lenders, be them forward or reverse, make about the same on each loan.
So, what can you expect at different home value levels:
$100,000 - Costs: $6,400
$200,000 - Costs: $11,000
$300,000 - Costs: $13,500
$400,000 - Costs: $16,000
$500,000 - Costs: $18,500
$600,000+ - Costs: $21,000
April 16, 2009: How are Reverse Mortgages Non-Recourse Loans?
There are two possible equity scenarios when a reverse mortgage finally ends: equity will be left over for the borrower, surviving spouse, or heirs; or the home will be in a negative equity position in which the loan amount exceeds value.
The natural instinct is to assume the mortgage company will come after the borrower or heirs for the difference. This, however, is not the case. Reverse mortgages are known as "non-recourse loans". What this means is the borrower is not responsible for any deficiencies. The financial obligation of the borrower or heirs is to pay back the mortgage company that which the borrower owes up to the amount at which the home sells minus closing costs.
In other words, if the borrower owes $250,000 and the home is only worth $200,000 the mortgage company and FHA are on the hook for at least $50,000. It is at least $50,000 because even though the home will sell for $200,000 the net proceeds will actually be less. Don't forget there will likely be realtors involved in the sale, and there will be customary closing costs to sell the property through the escrow company.
The borrower is truly obligated to pay back the mortgage company the net sale price rather than gross. A net sale price is the sale price minus closing costs.
It is the mortgage company's responsibility to safeguard itself from this occurrence. This is the reason they typically lend between 45% and 75% of the value of the home. Mortgage lenders use actuarial tables and historic evidence of interest rates to determine how much equity cushion is necessary in that 45% to 75% spectrum. If the plan fails and more is actually owed than can be recovered by selling the home FHA steps in and reimburses the mortgage company for loss.
April 8, 2009: Reverse Mortgage and Trusts in Texas
We've been surfing the internet to find what Texas reverse mortgage websites have to say about trusts and the use of a reverse mortgage while the trust maintains ownership of the home. We found that many sites address this issue, however most are wrong. We found Q&A sections which ask the question, "Can I refinance the home while the trust maintains ownership?" Most websites answered "Yes", you absolutely can do this.
In states outside of Texas this would be a true statement, but it simply is not true for the state of Texas. One may not obtain a reverse mortgage in a trust in the state of Texas. One may not get a reverse mortgage in their name and then later put the ownership of the home into the trust either.
Texas has few nuances that don't translate into other states. This is just one of them and many purveyors of reverse mortgage information do not know this.
March 20, 2009: What is the Reverse Mortgage Process?
Like any mortgage the reverse mortgage process has a series of steps for the borrower to go through before finally getting to closing and the end result. The first and most important step is to contact a reputable reverse mortgage specialist to discuss your financial situation and whether a reverse mortgage may be the answer. Many lenders exist. The reverse mortgage has its own set of rules the average mortgage loan officer does not know. Do what you can to contact a reverse mortgage specialist.
After the initial phone or in person meeting with the loan officer you will take a loan application in which the loan officer will go over a full packet of reverse mortgage disclosures with you. Many reverse mortgage loans are originated at a distance. If the lender sends a packet do not fill it out without going over each page with the loan officer. It is bound to elicit questions.
You are required to have a counseling session with an approved reverse mortgage counselor. This is typically done after loan application but can be done anytime. Remember, counseling certificates have a six month lifespan. If you go forward with a reverse mortgage after the certificate expires you will have to go through it again.
After HUD counseling the lender is free to go forward on ordering your appraisal through licensed FHA appraiser. The appraiser's services are for the lender. The lender needs to know the true value for the security for its investment.
After the appraisal (and survey if necessary) the loan is submitted to the lender for underwriting approval. This is typically a multi-step process. More often than not the underwriter sends the loan back to the broker with conditions that must be met prior to funding the loan. The broker then meets those conditions and resubmits the package to the lender.
It is then the lender gives the green light to fund the transaction. The title company draws loan closing documents and sends them to your home with a notary for your signature. Once signed you have a 3 day waiting (right of rescission period) and the lender funds the loan.
Seniors borrowers can expect their reverse mortgage experience to last anywhere from 30 to 90 days. The range is pretty wide because borrowers and lenders seem to move at their own speed. As a broker working with multiple lenders I can say with all truthfulness that each moves differently and they have their own timelines. Depending on which reverse mortgage product you choose and its associated lender will have a lot to do with the length of time it takes to close on your reverse mortgage.
March 8, 2009: Fixed or Adjustable.. Which Way Should You Go?
The reverse mortgage gives the borrower a choice between a fixed or adjustable rate option.
The fixed rates offers obvious security. In the current mortgage cris people's first instinct is to go with the fixed rate.
The fixed rate reverse mortgage does have its shortcomings. The biggest one is the fact that the borrower is required to take out the entire allowable loan at close of escrow. The lender will determine how much it will lend to you based upon the interest rate, borrower's age, and the value of the home. This max loan is what the borrower must take at close escrow if choosing the fixed rate.
Whether the borrower needs all of that money or not he has to take it. Now interest is accruing against the equity of the home based upon the entire loan. This may not be such a great deal if the borrower doesn't need all of that money. Most borrowers don't need it all which is why most borrowers choose to go with the ARM for the reverse mortgage.
Although the ARM interest rate is not predictable like the fixed it does allow the borrower to pull money out on an as needed basis using a line of credit. The big benefit to the borrower is interest accrues only on the money's taken out rather than the whole loan amount.
Particularly for those using the reverse mortgage as supplemental income the ARM is pretty much the only way to go. It's much more of a coin toss when the borrower takes out a large lump sum. At this point the ARM and Fixed options are fairly equal. The ARM may get the borrower more money but the fixed will offer the security many borrowers require.
Feb 24, 2009: Reigning-In Opinions of Value
We're seeing a rash of appraisals coming in lower than the senior borrower's expectations. Some of this is due to simple human nature in that people have a higher opinion of their own home than may be warranted.
The other part of the equation is people believe certain upgrades or features to their own home add value, when in fact these items add very little in the way of value.
Most importantly, when trying to determine the value of your home is to look at what other similar home sold for in your immediate vicinity. From a sold comparable angle, the word "similar" means within 200 to 300 square feet in total livable area, built in the same era, and of similar architecture. A property that fits this mold and sells in your neighborhood within the last six months is exactly what an appraiser will use to determine the value of your home.
The appraiser will give your home credit for having granite countertops, new fence, wood floors, etc, etc., but the comparables form a basis for what your home is really worth. Additionally, homes on the market do not matter. Just because a home is listed does not mean it will sell for the list price. Appraisers use sold comps.
If you plan on putting money into the home and want to get it back out one day focus on the floors, kitchen and bathrooms. These areas of the home give the biggest bang for the buck.
Feb 18, 2009: REVERSE Interest Rates Heading North
With as much talk about low interest rates it's a bit disconcerting that they are actually heading up. In a financial world struggling to create liquidity it does come as somewhat of a surprise.
The fact is there are more factors associated with the interest rates than most people think. The force driving rates up is coming from the MBS (mortgage backed securities) market. Mortgages are generally funded by people like you and me purchasing MBS to add to our bond portfolio. The problem is people just aren't buying them right now.
How does Fannie Mae make them more appealing to the investors? They simply raise the lender's margin which in turn increases the interest rate. This effectively increases the investor's yield making the MBS more appealing to the market.
Who knows where this market goes from here but we don't expect a mortgage backed security purchase frenzy to happen anytime soon. Look for the opposite in the near future and rising rates.
Jan 29, 2009: Using the Reverse Mortgage with Care
We are getting many questions asking if the reverse mortgage is the right answer.
The fact is the reverse mortgage is purely situational. It is not something a Texan should go blindly into.
Most people applying for the reverse mortgage do not have tons of money in stocks, bonds and savings. They have very little and need money, which is the reason for the query.
Some have low fixed incomes and others still have jobs.
A concern all Texas borrowers should have is for the worst case scenario. If someone really ran into a major financial need, like a medical issue, would they be able to handle it?
Let�s face it life happens and we have to be ready for it. That means we have to be financially ready.
Along these lines we'd like to see prospective borrowers use the mortgage intelligently to increase their disposable income and to use that income in the proper places.
The reason is the house is going to be the biggest store of cash for any of these individuals. If that is floundered away they could be in a real bind later on when something big comes along.
The point here is to use it as a last resort. If it is possible to keep making mortgage payments on a current mortgage it may be best to keep doing so and wait to pay it off with a reverse mortgage.
If there is no mortgage we'd like to see folks use the line of credit option and use their proceeds sparingly. By using proceeds this way interest accrues minimally against the equity of the home.
Additionally, the unused funds in the line of credit will accrue interest for the borrower�s favor. The net effect of this is increased borrowing power over time.
The whole point here is to be conservative with your biggest asset. If you need to take a trip or use a bit for fun money, do so. Life is for living, but use the rest frugally.
Jan 19, 2009: Stay Away from Know it All at Coffee Shop
Myths and perceptions exist in many businesses, but it is amazing how pervasive they are when it comes to reverse mortgages.
People commonly associate reverse mortgages with a financial tool that allows a senior to tap into the equity in the home as a source of supplemental income. Each month the lender cuts the borrower a check.
Although this is one way the reverse mortgage get's used by seniors it is by far not the most common way.
But first I should eliminate another common myth about the reverse mortgage. In Texas some would have you believe that you can only get a reverse mortgage if you own the home free and clear.
Absolutely not true. What you need to know about the reverse mortgage is that it is just a mortgage, like any other mortgage.
Reverse mortgage companies like other mortgage companies are out to make money. How do they do this? By charging interest, of course.
So, the bank wants the Texas reverse mortgage customer to borrower as much as they can, as fast as they can, so the bank can start charge as much interest as it can.
The mortgage companies like their borrowers to pull out large lump sums in the beginning of the mortgage.
What's a good reason to take out a large lump sum? To pay off a mortgage. Remember the myth about owning the home free and clear? Hogwash.
Mortgage companies like paying off the borrower's forward mortgage and replacing it with the reverse mortgage. It get's the interest money making machine off to a running start.
That being said, the number one reason borrowers are getting a reverse mortgage is to pay off a forward mortgage.
Why? Because the cost of living is eating them alive and the monthly mortgage payment is typically their biggest monthly expense.
The reverse mortgage pays off the current mortgage, allowing the borrower to completely eliminate the monthly payment, effectively freeing up needed money for other important life expenses.
If you are listening to the layman, down at the Texas coffee shop, tell you all about reverse mortgages, you may want to talk to a professional.
There is a good chance the guy at the coffee shop has no idea of what he's talking about.
Jan 12, 2009: How the Reverse Mortgage Affects Equity
Reverse mortgages allow the borrower to take out a loan without having to pay back the lender on a monthly plan. However, this is not without its shortcomings, and equity can get eaten up.
At the end of the Texas reverse mortgage is when the lender recoups the investment and makes a profit. Interest simply compounds on to the principal loaned to the borrower.
As a potential borrower one thing to be naturally concerned about is the interest accruing to such an extent that all of the equity in the home vanishes.
Many things are going on in this process, and borrowers should take heed of this. Some factors consume equity while others grow equity.
Certainly the accruing interest cuts into the borrowers equity. Conversely, real estate appreciation has an inverse affect on this process.
In most cases normal real estate appreciation adds to the homes equity, even with the accrual of interest against the home from the Texas reverse mortgage.
Reverse mortgage borrowers are eligible for a specific monetary amount based on value, age and interest rates. Most do not use this entire amount. The reason is by leaving unused money in the line of credit the unused portion is not accruing interest against the equity.
For example, the house in question is worth $200,000, and the borrower qualifies for a $130,000 loan. In our example the borrower will take out and use all of the cash at once.
Right away, there is interest accruing on one hundred and thirty thousand dollars. Do the numbers and you will see that accruing interest will quickly eat away at the equity in the home.
With a 6.125% fixed rate (very close to the current rate) accruing interest against the home, and 4% national average house appreciation, it takes over twenty years for the loan to accrue enough interest to eat away at all of the homes equity.
Continuing the example above, lets say the borrower only used one hundred thousand dollars right away. Twenty years from now, there would still be equity of over $100,000.
When looking at the math associated with a Texas reverse mortgage many people don't take into consideration how powerful home appreciation can be, especially when looking at the negative side of the reverse mortgage.
Jan 8, 2009: New Reverse Mortage Lending Limits a Boon to Many
The Housing and Economic Recovery Act, signed by President Bush on July 30, most notable for its mortgage bailout provisions, also included raising the FHA national reverse mortgage lending limit to $417,000.
The former limit for most areas of Texas for the reverse mortgage was $200,160. As of November 6, 2008 reverse mortgage lenders began funding reverse mortgages with the new lending limits.
The new law allows homeowners, 62 years and older, in Texas, to borrow using the reverse mortgage as much as twice the amount as formerly possible. Additionally, the law provides for a relative reduction in closing costs for homes valued above $200,000.
For homeowner Sherri Henson, a part owner in a struggling commercial flooring company, the cavalry arrived just in time. At 64, her business was humming along until the commercial market slumped at the beginning of 2008. Now, jobs are harder to come by and she struggles to pay her monthly bills. Like most Americans, Mrs. Henson's mortgage payment is her largest bill. Her $220,000 mortgage eats up close to $1,500 of her monthly take home income.
With many unknowns in the commercial marketplace, she is unsure when her income will return.
With that in mind Mrs. Henson exercised the option to completely eliminate the burden of her mortgage payment by refinancing her Texas home with a reverse mortgage.
A perception exists in the marketplace that the typical reverse mortgage customer owns their home free and clear and gets a reverse mortgage to supplement income.
The facts paint a different picture. Even before the new law came into effect most Texas customers were getting reverse mortgages to pay off an existing mortgage. In effect the reduction in mortgage payment is a net increase in income.
The new law comes as a boon to many 62+ homeowners with mortgage amounts in excess of the former lending limits. Now, these same homeowners can use a reverse mortgage in Texas to pay off their mortgages to free up much needed monthly income for other life expenses.