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What do I do if I don’t qualify for an FHA reverse mortgage?!!!!

March 22nd, 2018 | What the HECM, Reverse Mortgage

The overwhelming majority of reverse mortgages are FHA HECMs (home equity conversion mortgages). Even if a homeowner qualifies for other reverse mortgage offerings they usually get the FHA product for several reasons:

  • Flexibility to obtain funds in a variety of ways (lump sum, monthly cash flow, line of credit)
  • The non-cancellable line of credit (unlike traditional equity lines)
  • Government guarantee that future benefits will be paid
  • Alternative loan products are usually designed for high-value properties

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:

  • Pay down the mortgage balance to the level that will qualify for the FHA HECM. Most homeowners do not have the resources to do this or they wouldn’t be asking for a reverse mortgage!
  • Use a non-FHA reverse mortgage. More on this option below.
  • Use an “equity release” product to obtain cash from equity without making payments on that cash release.

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:

  • No upfront mortgage insurance is required, unlike FHA loans. This cost can be as high as $12,000
  • No ongoing mortgage insurance is required, unlike FHA loans. This cost is 50 BPS.
  • The rate is fixed

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.

 

Holmgren and Associates

DBA of Finance of America
1900 Mountain Boulevard
Oakland, California 94611
Phone: 510-339-2121
NMLS 0910184/1071
 

Holmgren & Associates is a branch of Finance of America. We are a full service mortgage banker with an experienced staff offering expertise in residential mortgage lending, with primary focus on loans for home purchase, refinance, and reverse mortgages.

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