HUD’s mortgage for seniors

by Dan Krell
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Many people are blessed to live a long and healthy life. Unfortunately, the longer you live the higher the probability that you may run out of money in your old age. One solution for many senior homeowners is to tap into their home equity through a reverse mortgage. Although now a mainstream mortgage option, the reverse mortgage (sometimes known as an annuity mortgage) has had a rich and uncertain history.

According to the National Center for Home Equity Conversion (reverse.org), the first reverse mortgage was created in 1961. Over the years various forms of the annuity mortgage were developed and assessed through various studies conducted by savings and loans, non-profit organizations and the Federal government. The FHA reverse mortgage program was created in 1988 by President Reagan’s signing of the Housing and Community Development Act of 1987.

Although other sources for reverse mortgages existed in 1988, the FHA reverse mortgage program offered more benefits to borrowers and beneficiaries that most other programs did not. Presently, applying for the program is easy and has few qualifying restrictions. Additionally, when it’s time to repay the loan, if the loan balance exceeds the home value the FHA mortgage insurance will cover the shortage that is not met by your the selling of the home (which is not usually offered by other reverse mortgages). Repayment (by yourself or your estate) occurs when you no longer live in the home (for any reason).

While qualifying is easy, not everyone meets the underwriting criteria for a loan. Underwriting restrictions include a minimum age and home equity requirements. Applicants must be at least 62 years old as well as having the minimum equity requirements in the home you live in (meaning that your mortgage balance must be below a pre-determined percentage of the home’s value). Unlike traditional mortgages where you have to qualify for a monthly payment based on income and credit, the amount borrowed for a FHA reverse mortgage depends on your age, the amount of equity in your home (based on an appraisal), and prevailing program interest rates.

Unlike traditional mortgages that require a monthly payment, the FHA reverse mortgage does not require any payment at all while you reside in the home (although you must pay your real estate taxes, utilities and other home related items); and although you are not making payments on your FHA reverse mortgage, HUD will not foreclose.

The FHA reverse mortgage, also known as the Home Equity Conversion Mortgage (HECM), (offered through The Department of Housing and Urban Development; HUD.gov) is one of the most misunderstood mortgage programs available today. The equity conversion to annuity payments along with repayment responsibilities often gets mixed reviews due to the HECM’s affects on estates and other tax implications. Fortunately, HUD requires counseling for HECM applicants, to educate them of the implications of obtaining a HECM.

For more information about reverse mortgages, HUD recommends that you contact a HUD approved counseling service. Additionally, HUD will assist you in finding a HUD approved FHA reverse mortgage lender (this information is free of charge). HUD also recommends contacting the AARP (AARP.org) and the National Center for Home Equity Conversion (reverse.org) for more information on making an informed decision about obtaining a reverse mortgage.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 30, 2008. Copyright © 2008 Dan Krell.

Mortgage Guidelines Get Tougher

by Dan Krell
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Like bears awakening from their hibernation, home buyers are slowly emerging from the holiday season and begin to look for a home to purchase. Many home buyers will find that that the challenge of buying a home this year will be more than finding the perfect home, but finding financing. Many home buyers expecting the mortgage process to be quick and painless may find that it is neither quick nor painless; others, expecting to be approved with a sub-prime mortgage, will be turned down. In the recent past, most home buyers found a way to obtain financing; this year may be different as the mortgage crisis fallout has changed the way lenders underwrite their programs.

Ask anyone in the mortgage industry and they will tell you that the entire mortgage landscape has changed. Some popular mortgage programs are no longer available, while other programs have been significantly changed. It may be a challenge for home buyers to locate a lender that offers a reduced documentation mortgage. These programs still exist, but have more restrictive guidelines; reduced documentation mortgages are requiring more verifications, higher credit scores and larger down payments.

Self employed home buyers will find that the popular “No Doc” is no longer available. The “No Doc” loan required no documentation or verifications from the borrower, hence the name. Although the program typically required a higher credit score, the “No Doc” loan was popular with self employed borrowers because employment, income, or asset verifications were not required.

Home buyers who need a low or no doc loan will have to look hard for alternatives. Most “liar loans” are no longer offered, or are offered with some type of verification. If you come across a stated income mortgage program, be prepared to sign an IRS form 4506 that will allow the mortgage company to verify the stated income. You should also expect a higher down payment and a higher than average interest rate.

As a way to assist home buyers with less than perfect credit, Fannie Mae and Freddie Mac created their expanded criteria programs in the mid to late 1990’s. These programs offered these home buyers a mortgage with minimal down payment and a reasonable interest rate; however the interest rate varied on the borrower’s credit score. However, like other mortgage programs, these expanded programs have also changed their requirements which include, among other items, increasing credit score requirements.

As the sub-prime mortgage industry has all but dried up, the FHA mortgage (HUD.gov) has picked up the pace. But even the venerable FHA loan is changing; FHA approved lenders are also tightening up their lending guidelines (in anticipation of new FHA guidelines). Some of the changes include credit score driven approvals as well as variable loan pricing (the interest rate will vary based on the borrower’s credit score).

For home buyers considering purchasing a home this spring (or any other time), talking to a lender should be their first priority. The mortgage crisis has changed the way mortgage lenders operate, including how lenders view borrowers. Home buyers should be prepared to provide more documentation and information to their lenders, as well as a possible higher down payment.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 14, 2008. Copyright © 2008 Dan Krell.

FHA Comes of age

by Dan Krell

Congress recently passed H.R. 1852, The Expanding American Homeownership Act of 2007. The act is a move forward for a seventy-three year old program federal program called the Federal Housing Administration, also known as the FHA. The recent legislation was devised in the spirit of the FHA and looks to assist millions to obtain home ownership.

The FHA mortgage program (administered through the department of Housing and Urban Development since 1965) was created in 1934 when about only ten percent of Americans owned their home. At a time when home buyers needed a fifty percent down payment to obtain a three year balloon mortgage, the FHA’s progressive mortgage programs provided a spark for the nation’s stagnant housing industry (HUD.gov).

Through the years, the FHA provided progressive programs to assist those in need. The FHA took part in financing military housing in the 1940’s. During the 1950’s and 1960’s, the FHA made funds available for adult, handicapped, and low income apartments. When rising inflation and energy costs threatened many apartment buildings in the 1970’s, the FHA made emergency funds available to assist in keeping these properties operational. In the 1980’s, when lenders pulled out of oil producing states because of falling home prices, the FHA offered mortgages to those who could not otherwise buy a home.

H.R. 1852 comes at a time when the mortgage industry is in crisis and home ownership is threatened for those who need financing alternatives. The bill expands the mortgage program to offer more financing options as well as increasing FHA mortgage originators.

Reforming the FHA mortgage program will expand the program and allow home buyers who do not qualify for a conforming loan (Fannie Mae or Freddie Mac) have access to alternatives to sub-prime lending. The FHA mortgage program will be expanded by increasing loan limits, eliminating the three percent down payment requirement, and implementing a risk based pricing system.

When home buyers do not qualify for a conforming loan, they turn to a sub-prime lender. Unfortunately, many sub-prime mortgages have high interest rates and other possible unfavorable terms. By increasing FHA loan limits in high cost areas these home buyers would possibly be able to obtain more favorable mortgage rates and terms through FHA.

Additionally, many first-time home buyers do not have the funds for a down payment or closing costs. These home buyers are typically driven to the sub-prime mortgage market as well. However, eliminating the FHA three percent down payment requirement will allow many more home buyers to obtain a FHA mortgage as well.

Many credit worthy home buyers who do not qualify for conforming mortgages due to mitigating circumstances are also forced to use sub-prime lending. Implementing risk based pricing may allow many of these home buyers to obtain a more favorable mortgage through FHA.

Presently many mortgage brokers do not originate FHA mortgages because of the restrictions and rigorous qualifications. However, increasing mortgage broker participation by reducing broker requirements and eliminating mandatory auditing would increase home buyer access to the FHA program.

The expansion of FHA programs may seem counterintuitive in a time when the industry is in turmoil. However, these reforms to a venerable housing program are welcome by many as well as being reminiscent to its legacy of commitment to home ownership.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of May 14, 2007. Copyright © Dan Krell 2007.