Reverse Mortgages – Pt. 1 appeared in our last newsletter. See that article for information on Home Equity Conversion Mortgages (HECM), the only reverse mortgage that is insured by the federal government (FHA).
For those who did not see the prior article, unlike a conventional mortgage where the borrower makes payments to the lender for a lump sum loan, in a reverse mortgage the lender pays the borrower (a lump sum, a monthly amount, or some combination of scheduled and unscheduled amounts). The amount a borrower will receive from a reverse mortgage generally depends on the borrower’s age, the home’s value and location, and the cost of the loan. The loan does not have to be repaid until the borrower sells the house, moves, dies, or some other triggering event occurs. Reverse mortgages can be specific, to make home repairs or to purchase a home, or can be general to obtain cash to use for other purposes.
Banks, credit unions, and mortgage lenders can also offer their own reverse mortgage product (proprietary reverse mortgage) that is unique to them. Although the products may be similar, unlike a HECM, proprietary reverse mortgages are not insured by the FHA. Lenders wishing to offer a proprietary reverse mortgage product in Washington must be licensed under the Consumer Loan Act, chapter 31.04 RCW, or be exempt from licensing
pursuant to federal law, and receive approval from the Department to offer the product.
One potential benefit of a proprietary reverse mortgage product approved by the Department is that it may be made to a borrower who is at least 60 years old (as opposed to HECM’s requirement of at least 62 years old).
Similar to a HECM loan, the reverse mortgage’s principal or interest is only due when: 1) all borrowers cease occupying the home as a principal residence; 2) the home securing the loan is sold or title is otherwise transferred; or 3) a default event specified in the loan documents occurs.
If the borrower mortgaged 100% of the full value of the house, the amount owed will be the lesser of the home’s fair market value (minus sale costs) or the outstanding balance of the loan. If the borrower mortgaged less than 100% of the full value of the house, the amount owed by the borrower must not be greater than the lesser of the outstanding balance of the loan or the percentage of the fair market value (minus sale costs).