March 22nd, 2018 | What the HECM, Reverse Mortgage
Because the FHA lending limit is $679,650 nationwide, and the amount actually available to the homeowner less than that, depending on the age of the homeowner, most homeowners aren’t going to be able to get more than about $340,000. In this case, there are usually three possible options:
The non-FHA or “jumbo” reverse mortgage products are designed for higher value properties (typically over $1 million). Unlike FHA HECM reverse mortgages, the benefits come in only one form: cash to the homeowner for any eligible amount over the amount the homeowner owes. For example, if a homeowner has a home that is valued at $1.4 million and owes $500,000 he/she would not qualify for a HECM unless a very large check was written to reduce the loan balance. With a jumbo reverse, there would likely be enough loan proceeds to pay off the loan balance, but no additional funds would be available. If the loan balance was, say $375,000, the homeowner would achieve payoff of that loan and would receive a lump sum of approximately $125,000.
The current rate for this type of loan is fixed (unlike most HECMs, which typically adjust monthly or annually), currently at 5.99%. That rate sounds high but actually isn’t too bad when one considers the following:
Apart from the loan amount issue, is there ever another reason why someone would get a non-FHA reverse mortgage?
Yes, in some other cases the non-FHA reverse may be the better option:
1. Homeowner does not expect to own their home for more than 1-3 years: While the upfront costs of an FHA reverse are high, these costs may be worth it for homeowners who expect to be in their homes indefinitely (i.e. at least five years) because of the flexibility in how benefits can be used and the government guarantee. Many homeowners need immediate financial relief but do not expect to own their homes for more than 1-3 years because of health issues or other factors. In these cases, the lower upfront costs of non-FHA reverse mortgages may make this option more cost-effective.
2. Homeowner lives in a condo that is not FHA-approved: To get a HECM on a condo, the condo project must have been approved by the FHA. Securing condo project approval can be done, but the process can be expensive and time-consuming. Non-FHA reverse mortgage products require a project review to make sure the association is financially stable, etc., but this review is done by the loan underwriter, not the FHA, so it is much easier.
Best option for the consumer
When we get requests for reverse mortgages, we not only review the reverse mortgage options, but also consider traditional mortgages and non-mortgage
options. It is important that the homeowner talks to someone who is familiar with all of the possibilities. It sometimes falls to us to advise the homeowner that selling the home and moving to more suitable housing is the best option.