When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you – a kind of advance payment on your home equity. The money you get usually is tax-free. Generally, you don’t have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan.
There are three kinds of reverse mortgages: single purpose reverse mortgages – offered by some state and local government agencies, as well as non-profits; proprietary reverse mortgages – private loans; and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs).
single purpose reverse mortgages
proprietary reverse mortgages
federally-insured reverse mortgages (also known as Home Equity Conversion Mortgages (HECMs).
If you get a reverse mortgage of any kind, you get a loan in which you borrow against the equity in your home. You keep the title to your home. Instead of paying monthly mortgage payments, though, you get an advance on part of your home equity. The money you get usually is not taxable, and it generally won’t affect your Social Security or Medicare benefits.
When the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence, the loan has to be repaid. In certain situations, a non-borrowing spouse may be able to remain in the home.
THE LOAN MUST BE REPAID
When the last surviving borrower dies
sells the home
no longer lives in the home as a principal residence
THE LOAN MUST BE REPAID
Here are some things to consider about reverse mortgages:
There are fees and other costs. Reverse mortgage lenders generally charge an origination fee and other closing costs, as well as servicing fees over the life of the mortgage. Some also charge mortgage insurance premiums (for federally-insured HECMs).
You owe more over time. As you get money through your reverse mortgage, interest is added onto the balance you owe each month. That means the amount you owe grows as the interest on your loan adds up over time.
Interest rates may change over time. Most reverse mortgages have variable rates, which are tied to a financial index and change with the market. Variable rate loans tend to give you more options on how you get your money through the reverse mortgage. Some reverse mortgages – mostly HECMs – offer fixed rates, but they tend to require you to take your loan as a lump sum at closing. Often, the total amount you can borrow is less than you could get with a variable rate loan.
Interest is not tax deductible each year. Interest on reverse mortgages is not deductible on income tax returns – until the loan is paid off, either partially or in full.
You have to pay other costs related to your home. In a reverse mortgage, you keep the title to your home. That means you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. And, if you don’t pay your property taxes, keep homeowner’s insurance, or maintain your home, the lender might require you to repay your loan. A financial assessment is required when you apply for the mortgage. As a result, your lender may require a “set-aside” amount to pay your taxes and insurance during the loan. The “set-aside” reduces the amount of funds you can get in payments. You are still responsible for maintaining your home.
What happens to your spouse? With HECM loans, if you signed the loan paperwork and your spouse didn’t, in certain situations, your spouse may continue to live in the home even after you die if he or she pays taxes and insurance, and continues to maintain the property. But your spouse will stop getting money from the HECM, since he or she wasn’t part of the loan agreement.
What can you leave to your heirs? Reverse mortgages can use up the equity in your home, which means fewer assets for you and your heirs. Most reverse mortgages have something called a “non-recourse” clause. This means that you, or your estate, can’t owe more than the value of your home when the loan becomes due and the home is sold. With a HECM, generally, if you or your heirs want to pay off the loan and keep the home rather than sell it, you would not have to pay more than the appraised value of the home.
Types of Reverse Mortgages
As you consider whether a reverse mortgage is right for you, also consider which
of the three types of reverse mortgage might best suit your needs.
Single-purpose reverse mortgages are the least expensive option. They’re offered by some state and local government agencies, as well as non-profit organizations, but they’re not available everywhere. These loans may be used for only one purpose, which the lender specifies. For example, the lender might say the loan may be used only to pay for home repairs, improvements, or property taxes. Most homeowners with low or moderate income can qualify for these loans.
Proprietary reverse mortgages are private loans that are backed by the companies that develop them. If you own a higher-valued home, you may get a bigger loan advance from a proprietary reverse mortgage. So if your home has a higher appraised value and you have a small mortgage, you might qualify for more funds.
Home Equity Conversion Mortgages (HECMs)are federally-insured reverse mortgages and are backed by
HECMs and proprietary reverse mortgages may be more expensive than traditional home loans, and the upfront costs can be high. That’s important to consider, especially if you plan to stay in your home for just a short time or borrow a small amount. How much you can borrow with a HECM or proprietary reverse mortgage depends on several factors:
the type of reverse mortgage you select
the appraised value of your home
current interest rates, and
a financial assessment of your willingness and ability to pay property taxes and homeowner’s insurance.
In general, the older you are, the more equity you have in your home, and the less you owe on it, the more money you can get.
Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. Some lenders offering proprietary reverse mortgages also require counseling.
The counselor is required to explain the loan’s costs and financial implications. The counselor also must explain the possible alternatives to a HECM – like government and non-profit programs, or a single-purpose or proprietary reverse mortgage. The counselor also should be able to help you compare the costs of different types of reverse mortgages and tell you how different payment options, fees, and other costs affect the total cost of the loan over time. You can visit HUD for a list of counselors, or call the agency at 1-800-569-4287. Counseling agencies usually charge a fee for their services, often around $125. This fee can be paid from the loan proceeds, and you cannot be turned away if you can’t afford the fee.
With a HECM, there generally is no specific income requirement. However, lenders must conduct a financial assessment when deciding whether to approve and close your loan. They’re evaluating your willingness and ability to meet your obligations and the mortgage requirements.
BE AWARE OF THIS
Based on the results, the lender could require funds to be set aside from the loan proceeds to pay things like property taxes, homeowner’s insurance, and flood insurance (if applicable). If this is not required, you still could agree that your lender will pay these items. If you have a “set-aside” or you agree to have the lender make these payments, those amounts will be deducted from the amount you get in loan proceeds. You are still responsible for maintaining the property.
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accompanying rules (WAC 208-660) to ensure familiarity and compliance.
The checklist below includes requirements for a Washington Mortgage Broker application. It is critical for a mortgage broker Seattle.
to provide every applicable item with your initial application to Washington DFI.
A complete Washington Mortgage Broker application consists of items which fall into 4 categories:
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Abstract of Title A written record of the historical ownership of the property that helps to
determine whether the property can in fact be transferred from one party to another without any
previous claims. An abstract of title is used in certain parts of the country when determining if there
are any previous claims on the subject property in question. Mortgage Broker In Seattle Acceleration A loan accelerates when it is paid off early, usually at the request or demand of the
lender. An acceleration clause within a loan document states what must happen when a loan must be
paid immediately, but usually it applies to nonpayment, late payments, or the transfer of the property
without the lender’s permission.
Adjustable Rate Mortgage Seattle A loan program where the interest rate may change throughout the
life of the loan. An ARM adjusts based on terms agreed to between the lender and the borrower, but
typically it may only change once or twice a year.
Alternate Credit Items you must pay each month but that won’t appear on your credit report.
Alternate credit accounts might include your telephone bill. In relation to mortgage loans, while such
items aren’t reported as installment or revolving credit, they can establish your ability and
willingness to make consistent payments in a responsible manner. Sometimes called nonstandard
Alt Loans Alternative loans, so-called because they’re not conventional or government loans but
step outside the lending box and establish their own lending criteria.
Amortization Amortization is the length of time it takes for a loan to be fully paid off, by
predetermined agreement. These payments are at regular intervals. Sometimes called a fully
amortized loan. Amortization terms can vary, but generally accepted terms run in five-year
increments, from 10 to 40 years.
Annual Percentage Rate The cost of money borrowed, expressed as an annual rate. The APR is
a useful consumer tool to compare different lenders, but unfortunately it is often not used correctly.
The APR can only work when comparing the same exact loan type from one lender to another.
Appraisable Asset Any item whose value can be determined by a third-party expert. That car
you want to sell is an appraisable asset. If the item can be appraised, then you can use those funds to
buy a house.
Appraisal A report that helps to determine the market value of a property. An appraisal can be
done in various ways, as required by a lender, from simply driving by the property to ordering a fullblown
inspection, complete with full-color photographs of the real estate. Appraisals compare similar
homes in the area to substantiate the value of the property in question.
APR See Annual Percentage Rate.
ARM See Adjustable Rate Mortgage.
Assumable Mortgage Homes sold with assumable mortgages let buyers take over the terms of
the loan along with the house being sold. Assumable loans may be fully or nonqualifying assumable,
meaning buyers take over the loan without being qualified or otherwise evaluated by the original
lender. Qualifying assumable loans mean that while buyers may assume terms of the existing note,
they must qualify all over again as if they were applying for a brand-new loan.
AUS See Automated Underwriting System.
Automated Underwriting System A software application that electronically issues a
preliminary loan approval. An AUS uses a complex approval matrix that reviews credit reports, debt
ratios, and other factors that go into a mortgage loan approval.
Automated Valuation Model An electronic method of evaluating a property’s appraised value,
done by scanning public records for recent home sales and other data in the subject property’s
neighborhood. Although not yet widely accepted as a replacement for full-blown appraisals, many in
the industry expect AVMs to eventually replace traditional appraisals altogether.
AVM See Automated Valuation Model.
Balloon Mortgage A type of mortgage where the remaining balance must be paid in full at the
end of a preset term. A five-year balloon mortgage might be amortized over a 30-year period, but the
remaining balance is due, in full, at the end of five years.
Basis Point A basis point is equal to 1/100 percent. A move of 50 basis points would cause a 30-
year fixed mortgage rate to change by 1/8 percent.
Bridge Loan A short-term loan primarily used to pull equity out of one property for a down
payment on another. This loan is paid off when the original property sells. Since they are short-term
loans, sometimes lasting just a few weeks, usually only retail banks offer them. Usually the borrower
doesn’t make any monthly payments and only pays off the loan when the property sells.
Bundling Bundling is the act of putting together several real estate or mortgage services in one
package. Instead of paying for an appraisal here or an inspection there, some or all of the buyer’s
services are packaged together. Usually a bundle offers discounts on all services, although when
they’re bundled it’s hard to parse all the services to see whether you’re getting a good deal.
Buydown Paying more money to get a lower interest rate is called a permanent buydown, and it is
used in conjunction with discount points. The more points, the lower the rate. A temporary buydown
is a fixed-rate mortgage that starts at a reduced rate for the first period, and then gradually increases
to its final note rate. A temporary buydown for two years is called a 2–1 buydown. For three years
it’s called a 3–2–1 buydown.
Cash-Out A refinance mortgage that involves taking equity out of a home in the form of cash
during a refinance. Instead of just reducing your interest rate during a refinance and financing your
closing costs, you finance even more, putting the additional money in your pocket.
Closer The person who helps prepare the lender’s closing documents. The closer forwards those
documents to your settlement agent’s office, where you will be signing closing papers. In some
states, a closer can be the person who holds your loan closing.
Closing Costs The various fees involved when buying a home or obtaining a mortgage. The fees,
required to issue a good loan, can come directly from the lender or may come from others in the
Collateral Collateral is property owned by the borrower that’s pledged to the lender as security in
case the loan goes bad. A lender makes a mortgage with the house as collateral.
Comparable Sales Comparable sales are that part of an appraisal report that lists recent transfers
of similar properties in the immediate vicinity of the house being bought. Also called “comps.”
Conforming Loan A conventional conforming loan is a Fannie Mae or Freddie Mac loan that is
equal to or less than the maximum allowable loan limits established by Fannie and Freddie. These
limits are changed annually.
Conventional Loan A loan mortgage that uses guidelines established by Fannie Mae or Freddie
Mac and is issued and guaranteed by lenders.
Correspondent Banker A mortgage banker that doesn’t intend to keep your mortgage loan, but
instead sells your loan to another preselected mortgage banker. Correspondent bankers are smaller
mortgage bankers, those perhaps with a regional presence but not a national one. They can shop
various rates from other correspondent mortgage bankers that have set up an established relationship
to buy and sell loans from one another. They operate much like a broker, except correspondent
bankers use their own money to fund loans.
Credit Report A report that shows the payment histories of a consumer, along with the
individual’s property addresses and any public records.
Credit Repository A place where credit histories are stored. Merchants and banks agree to store
consumers’ credit patterns in a central place that other merchants and banks can access.
Credit Score A number derived from a consumer’s credit history and based upon various credit
details in a consumer’s past and upon the likelihood of default. Different credit patterns are assigned
different numbers and different credit activity may have a greater or lesser impact on the score. The
higher the credit score, the better the credit.
Debt Consolidation Paying off all or part of one’s consumer debt with equity from a home. Debt
consolidation can be part of a refinanced mortgage or a separate equity loan.
Debt Ratio Gross monthly payments divided by gross monthly income, expressed as a percentage.
There are typically two debt ratios to be considered: The housing ratio—sometimes called the frontend
or front ratio—is the total monthly house payment, plus any monthly tax, insurance, private
mortgage insurance, or homeowners association dues, divided by gross monthly income. The total
debt ratio—also called the back-end or back ratio—is the total housing payment plus other monthly
consumer installment or revolving debt, also expressed as a percentage. Loan debt ratio guidelines
are usually denoted as 32/38, with 32 being the front ratio and 38 being the back ratio. Ratio
guidelines can vary from loan to loan and lender to lender.
Deed A written document evidencing each transfer of ownership in a property.
Deed of Trust A written document giving an interest in the home being bought to a third party,
usually the lender, as security to the lender.
Delinquent Being behind on a mortgage payment. Delinquencies typically begin to be recognized
as 30+ days delinquent, 60+ days delinquent, and 90+ days delinquent.
Discount Points Also called “points,” they are represented as a percentage of a loan amount. One
point equals 1 percent of a loan balance. Borrowers pay discount points to reduce the interest rate for
a mortgage. Typically each discount point paid reduces the interest rate by 1/4 percent. It is a form of
prepaid interest to a lender.
Document Stamp Evidence—usually with an ink stamp—of how much tax was paid upon
transfer of ownership of property. Certain states call it a doc stamp. Doc stamp tax rates can vary
based upon locale, and not all states have doc stamps.
Down Payment The amount of money initially given by the borrower to close a mortgage. The
down payment equals the sales price less financing. It’s the very first bit of equity you’ll have in the
Easement A right of way previously established by a third party. Easement types can vary but
typically involve the right of a public utility to cross your land to access an electrical line.
Entitlement The amount the VA will guarantee in order for a VA loan to be made. See also VA
Equity The difference between the appraised value of a home and any outstanding loans recorded
against the house.
Escrow Depending upon where you live, escrow can mean two things. On the West Coast, for
example, when a home goes under contract it “goes into escrow” (see also Escrow Agent). In other
parts of the country, an escrow is a financial account set up by a lender to collect monthly
installments for annual tax bills and/or hazard insurance policy renewals.
Escrow Account See Impound Account.
Escrow Agent On the West Coast, the escrow agent is the person or company that handles the
home closing, ensuring documents are assigned correctly and property transfer has legitimately
FACTA See Fair and Accurate Credit Transactions Act.
Fair and Accurate Credit Transactions Act The FACTA is a new law that replaces the Fair
Credit Reporting Act, or FCRA, and governs how consumer information can be stored, shared, and
monitored for privacy and accuracy.
Fair Credit Reporting Act The FCRA was the first consumer law that emphasized consumer
rights and protections relating to credit reports, credit applications, and privacy concerns.
Fannie Mae See Federal National Mortgage Association.
Farmers Home Administration The FmHA provides financing to farmers and other qualified
borrowers who are unable to obtain loans elsewhere. These loans are typical for rural properties that
might be larger in acreage than a suburban home, as well as for working farms.
FCRA See Fair Credit Reporting Act.
Fed Shorthand name for the Federal Reserve Board.
Federal Funds Rate The rate banks charge one another to borrow money overnight.
Federal Home Loan Mortgage Corporation The FHLMC, or Freddie Mac, is a corporation
established by the U.S. government in 1968 to buy mortgages from lenders made under Freddie Mac
Federal Housing Administration The FHA was formed in 1934 and is now a division of the
Department of Housing and Urban Development (HUD). It provides loan guarantees to lenders who
make loans under FHA guidelines.
Federal National Mortgage Association The FNMA, or Fannie Mae, was originally
established in 1938 by the U.S. government to buy FHA mortgages and provide liquidity in the
mortgage marketplace. It is similar in function to Freddie Mac. In 1968, its charter was changed and
it now purchases conventional mortgages as well as government ones.
Federal Reserve Board The head of the Federal Reverse Banks that, among other things, sets
overnight lending rates for banking institutions. The Fed does not set mortgage rates.
Fee Income The closing costs received by a lender or broker that are outside of the interest rate or
discount points. Fee income can be in the form of loan processing charges, underwriting fees, and the
FHA See Federal Housing Administration.
FICO FICO stands for Fair Isaac Corporation, the company that invented the most widely used
credit scoring system.