Avoiding Reverse Mortgage Scams
With a product as potentially lucrative as a reverse mortgage and a vulnerable population of borrowers who may have cognitive impairments or be desperately seeking financial salvation, scams abound. Unscrupulous vendors and home-improvement contractors have targeted seniors to help them secure reverse mortgages to pay for home improvements in other words, so they can get paid. The vendor or contractor may or may not actually deliver on promised, quality work they might just steal the homeowners money.
Relatives, caregivers, and financial advisors have also taken advantage of seniors by using a power of attorney to reverse mortgage the home, then stealing the proceeds, or by convincing them to buy a financial product, such as an annuity or whole life insurance, that the senior can only afford by obtaining a reverse mortgage. This transaction is likely to be only in the so-called financial advisors best interest. These are just a few of the reverse mortgage scams that can trip up unwitting homeowners.
How Life Estate Deeds Differ From Other Property Transfer Processes
Most are familiar with the traditional form of leaving property to descendants in a will which goes into effect after a person has died. In a life estate deed, however, the grantor and the remainder beneficiary are viewed as co-owners of the property.
However, its not a co-ownership the way we normally understand it, with two people having the right to live and work on a property at the same time. In a life estate deed, the future owner is just thatthe future, not current, owner of the property. He or she do not have any legal rights to possess the property.
You may have seen reverse mortgages advertised on daytime television. Life estate deeds are similar, except the property is transferred all at once to the beneficiaries, and money is not usually exchanged. Even though the property is co-owned by the remainderman, he or she may live there, but may not sue to establish a right to do so.
Since the grantor is living on the property, he or she is responsible for its upkeep. While he or she legally may not be removed from the property, he or she must still pay the mortgage in full. Any repairs to the property are still the responsibility of the original homeowner. Perhaps most importantly, the life tenant must continue to maintain home insurance and property taxes as if he or she still owns the property outright.
Can You Have A Tenant With A Reverse Mortgage
You can have a tenant that rents a second unit or bedroom, but you cannot rent the entire home out and move from the property. If the home is not your primary residence, the lender will call the loan due and payable and if you are unable to repay the loan at that time, they would initiate a foreclosure action.
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When The Loan Has To Be Repaid
With a HECM, the loan typically has to be repaid when one of the following events occurs:
- the borrower dies
- the home is no longer the borrower’s principal residence
- the borrower sells the home or transfers title, or
- the borrower defaults on the loan terms, like by failing to keep up with insurance premiums or property taxes.
Is A Reverse Mortgage A Good Idea
A reverse mortgage can be a help to homeowners looking for additional income during their retirement years, and many use the funds to supplement Social Security or other income, meet medical expenses, pay for in-home care and make home improvements, Boies says.
There are also flexible ways to receive the money from the reverse mortgage: a lump sum, a monthly payment, a line of credit or a combination.
Plus, if the value of the home appreciates and becomes worth more than the reverse mortgage loan balance, you or your heirs may receive the difference, Boies explains.
The opposite, however, can pose a problem: If the balance exceeds the homes value, you or your heirs may need to foreclose or otherwise give ownership of the home back to the lender.
There are also potential complications involving others who live in the home with the borrower, and what might happen to them if the borrower dies. Family members who inherit the property will want to pay close attention to the details of what is necessary to manage the loan balance when the borrower dies.
There are provisions that allow family to take possession of the home in those situations, but they must pay off the loan with their own money or qualify for a mortgage that will cover what is owed, McClary says.
Additionally, while not all reverse mortgage lenders use high-pressure sales tactics, some do use them to attract borrowers.
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Rent Reviews In Commercial Leases
A variety of clauses to suit different situations
Negotiating commercial leases can involve significant crystal ball gazing particularly when some leases can last decades. As recent times have shown, the landscape at the start of a lease can be miles away from the situation at the end of the lease. One area where the shifting sands can bite for long-term leases is the rent figures. Without appropriate rent review clauses to adjust the rent, any landlord could find themselves with a vastly undervalued rental as the lease progresses.
Types of rent review
Not all rent review clauses are alike and there are various methods of calculating changes to rent.
: This review adjusts the rent so that it reflects the current market value of the lease. It allows the rent review to take into account the general market conditions and factors specific to your property such as zoning and the desirability of your propertys location.A market rent review can be particularly helpful if you have a gross lease given the market value of the property will affect some of the operating expenses you must cover as landlord, such as insurance and rates.One risk of market rent reviews is they can lead to a dispute about the quantum of the actual market rent. You and your tenant may have to bear the cost of valuations or, in a worst case scenario, legal action to settle the appropriate rent.
There are two different types of ratchet clauses:
Timeframes for rent review
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Reverse Mortgage: Whats It Really All About
These days, because the costs of living seem to be higher than ever before, a record number of senior homeowners are considering reverse mortgage loans that convert their home equity into available asset. Although reverse mortgages may provide an affordable way to obtain needed funds, they can sometimes turn out to be much more expensive than standard home loans.
Types of Reverse Mortgages
Home Equity Conversion Mortgage was established by HUD in 1987 under the Housing and Community Development Act and is the original form of reverse mortgage created by the act. The Home Equity Conversion Mortgage is a loan designed for seniors that allows them to access a portion of their homes value using that home as collateral and is insured by HUD, offered by the Federal Housing Administration and provides consumers increased protections. In 2008, the reverse for purchase was rolled out. Significant changes regarding financial assessment and non-borrowing spousal protection have since been adopted to strengthen and protect the viability of the HECM program.
- Providing financing for non-FHA approved condos
- No 60% limit for accessing funds in the first year
- Pay-off of unsecured debt at closing for qualifying
- Some proprietary lenders make loans to borrowers as young as 55
- Fixed and adjustable-rate products with hybrid lines of credit.
REVERSE MORTGAGE VS CONVENTIONAL MORTGAGE
Loan Proceeds and Interest Rates
Fees and Costs
HECM Non-Borrowing Spouses
How Much Does A Reverse Mortgage Cost
The closing costs for a reverse mortgage arent cheap, but the majority of HECM mortgages allow homeowners to roll the costs into the loan so you dont have to shell out the money upfront. Doing this, however, reduces the amount of funds available to you through the loan.
Heres a breakdown of HECM fees and charges, according to HUD:
- Mortgage insurance premiums There is a 2 percent initial MIP at closing, as well as an annual MIP equal to 0.5 percent of the outstanding loan balance. The MIP can be financed into the loan.
- Origination fee To process your HECM loan, lenders charge the greater of $2,500 or 2 percent of the first $200,000 of your homes value, plus 1 percent of the amount over $200,000. The fee is capped at $6,000.
- Servicing fees Lenders can charge a monthly fee to maintain and monitor your HECM for the life of the loan. Monthly servicing fees cannot exceed $30 for loans with a fixed rate or an annually adjusting rate, or $35 if the rate adjusts monthly.
- Third-party fees Third parties may charge their own fees, as well, such as for the appraisal and home inspection, a credit check, title search and title insurance, or a recording fee.
Keep in mind that the interest rate for reverse mortgages tends to be higher, which can also add to your costs. Rates can vary depending on the lender, your credit score and other factors.
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How Much Can You Borrow
The proceeds youll receive from a reverse mortgage will depend on the lender and your payment plan. For a HECM, the amount you can borrow will be based on the youngest borrowers age, the loans interest rate, and the lesser of your homes appraised value or the FHAs maximum claim amount, which is $765,600 as of Jan. 1, 2020.
You cant borrow 100% of what your home is worth, or anywhere close to it, however. Part of your home equity must be used to pay the loans expenses, including mortgage premiums and interest. Here are a few other things you need to know about how much you can borrow:
- The loan proceeds are based on the age of the youngest borrower or, if the borrower is married, the younger spouse, even if the younger spouse is not a borrower. The older the youngest borrower is, the higher the loan proceeds.
- The lower the mortgage rate, the more you can borrow.
- The higher your propertys appraised value, the more you can borrow.
- A strong reverse mortgage financial assessment increases the proceeds youll receive because the lender wont withhold part of them to pay property taxes and homeowners insurance on your behalf.
The amount you can actually borrow is based on whats called the initial principal limit. In January 2018, the average initial principal limit was $211,468 and the average maximum claim amount was $412,038.The average borrowers initial principal limit is about 58% of the maximum claim amount.
How A Reverse Mortgage Works
With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner gets to choose how to receive these payments and only pays interest on the proceeds received. The interest is rolled into the loan balance so the homeowner doesnt pay anything up front. The homeowner also keeps the title to the home. Over the loans life, the homeowners debt increases and home equity decreases.
As with a forward mortgage, the home is the collateral for a reverse mortgage. When the homeowner moves or dies, the proceeds from the homes sale go to the lender to repay the reverse mortgages principal, interest, mortgage insurance, and fees. Any sale proceeds beyond what was borrowed go to the homeowner or the homeowners estate . In some cases, the heirs may choose to pay off the mortgage so they can keep the home.
Reverse mortgage proceeds are not taxable. While they might feel like income to the homeowner, the IRS considers the money to be a loan advance.
Alternatives To A Reverse Mortgage
If youre not sold on taking out a reverse mortgage, you have options. In fact, if youre not yet 62 , a home equity loan or HELOC is likely a better option.
Both of these loans allow you to borrow against the equity in your home, although lenders limit the amount to 80 percent to 85 percent of your homes value, and with a home equity loan, youll have to make monthly payments. With a HELOC, payments are required once the draw period on the line of credit expires.
The closing costs and interest rates for home equity loans and HELOCs also tend to be significantly lower than what youll find with a reverse mortgage.
Aside from a home equity loan, you could also consider:
My Will States That My Home Goes To My Daughter When I Die What Effect Will Taking Out A Reverse Mortgage Have On That Provision
A reverse mortgage will become due upon the death of the last borrower. Your daughter will be given an opportunity to pay of the balance of the reverse mortgage. However, if the balance of the loan is not paid off, the property will go into foreclosure and eventually be auctioned off. The proceeds of the auction will go toward paying off the loan balance. New York is a non-recourse state, which means that even if the proceeds from the sale of the home do not cover the loan balance, your lender cannot go after you or your estate for the remaining loan balance. If, on the other hand, there is money left over after the loan is paid off, your heirs will be given an opportunity to claim the surplus.
How Do You Pay Back A Reverse Mortgage
If you die before youve sold your home, those you leave behind are stuck with two options. They can either pay off the full reverse mortgage and all the interest thats piled up over the years, or surrender your house to the bank.
So, it might seem like a reverse mortgage is a helpful cash-flow option for people in their retirement, but these mortgages put seniors and their heirs at financial risk.
Are There Any Reverse Mortgage Companies That Are Insured
Proprietary reverse mortgages: These loans are not insured by the federal government and are offered by private lenders for those with high home values. Single-purpose reverse mortgages: These loans are not insured by the federal government and can be offered by state and local governments or non-profit organizations.
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How Heirs Pay Off A Reverse Mortgage
What happens when the last reverse mortgage borrower dies? How do the borrower’s estate or heirs immediately pay off the reverse mortgage balance, and how will they know the amount of the payoff? Here is the four-step payoff process:
Upon the borrower’s death, the estate executor notifies the reverse mortgage lender. Reverse mortgage lenders generally track borrower deaths through public records and take action to terminate a loan when the last borrower dies. If the borrower was receiving monthly checks from the reverse loan at the time of death, the lender ceases making payments. If the borrower had a line of credit at the time of death, the lender closes the line of credit.
Within 30 days of notifying the borrower’s estate or heirs, the HECM lender dispatches a HUD-approved appraiser to the property. The appraiser evaluates the home and assigns an appraised value, which the lender uses to determine the loan amount that is due and payable. This amount is the lesser of the reverse mortgage balance or 95 percent of the appraised value of the property.
Six months to satisfy the debt
Heirs can request up to two 90-day extensions to sell or refinance the property. To receive approval for the extension, they must prove that they are arranging the financing to keep the house or that they have it listed for sale.
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You Have Medical Bills
Seniors plagued with health issues may obtain reverse mortgages as a way to raise cash for medical bills. However, they must be healthy enough to continue dwelling within the home. If an individual’s health declines to the point where they must relocate to a treatment facility, the loan must be repaid in full, as the home no longer qualifies as the borrower’s primary residence.
Moving into a nursing home or an assisted living facility for more than 12 consecutive months is considered a permanent move under reverse mortgage regulations. For this reason, borrowers are required to certify in writing each year that they still live in the home they’re borrowing against, in order to avoid foreclosure.
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Do I Have To Complete In
The answer depends on the type of reverse mortgage loan for which you are applying. In New York, in order to get a proprietary reverse mortgage loan , the borrower must either complete in-person counseling or waive such requirement in writing. In order to get a HECM reverse mortgage loan , a borrower may not waive the counseling requirements but he or she may opt to complete the required counseling either in person or over the telephone. You can find a list of non-profit housing counselors on the Departments website.