Can you make money with reverse mortgages?

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🤑 Deep Dive: Reverse mortgages explained.

Deep Dive- Reverse Mortgages

In this newsletter, I will discuss in detail reverse mortgages and compare them to traditional mortgages. First, to clarify the nomenclature…a reverse mortgage is also know as a Home Equity Conversion Mortgage (HECM) in the lenders world. So you will see reverse mortgage referred to as a HECM loan.

What is the major difference between traditional mortgage and reverse mortgage?

A mortgage and a reverse mortgage are both types of loans, but they have some fundamental differences, particularly in terms of eligibility, repayment, and purpose. Here are the major differences between a mortgage and a reverse mortgage:

1. Borrower: In a traditional mortgage, the borrower is typically a homebuyer who needs financing to purchase a property. In contrast, a reverse mortgage is designed for homeowners aged 62 and older who have significant equity in their homes and want to access that equity without selling the property.

2. Repayment: With a mortgage, the borrower makes regular monthly payments to the lender, which include principal and interest, with the goal of eventually paying off the loan over a specified term. In contrast, a reverse mortgage allows the homeowner to receive loan proceeds from the lender, converting a portion of their home equity into cash. The homeowner does not have to make monthly payments on a reverse mortgage as long as they live in the home, but the loan is typically repaid when the homeowner sells the property, moves out permanently, or passes away.

3. Loan Balance: In a traditional mortgage, the loan balance decreases over time as the borrower makes monthly payments. In a reverse mortgage, the loan balance increases over time as the homeowner receives loan proceeds and interest accrues on the outstanding balance. This means that the equity available to the homeowner decreases over time in a reverse mortgage.

4. Purpose: A traditional mortgage is used to finance the purchase of a home or refinance an existing mortgage. It enables the borrower to become a homeowner or access funds by leveraging the property. On the other hand, a reverse mortgage is primarily used to provide financial flexibility for seniors who want to supplement their retirement income, cover healthcare expenses, or address other financial needs while remaining in their homes.

5. Homeownership and Obligations: With a traditional mortgage, the borrower retains full ownership of the property and are responsible for property taxes, insurance, and maintenance. In the case of a reverse mortgage, the same is true where the homeowner retains ownership of the property and the homeowner must still meet obligations such as property taxes, insurance, and maintenance to avoid defaulting on the loan.

What are the documentation differences between a reverse mortgage and a traditional mortgage?

Obtaining a reverse mortgage typically involves specific documents that are not part of a regular mortgage. These additional documents are required to meet the unique requirements and guidelines associated with reverse mortgages. While the exact documentation may vary based on the lender and jurisdiction, here are some common documents typically involved in the reverse mortgage process:

1. Reverse Mortgage Counseling Certificate: Before applying for a reverse mortgage, borrowers are usually required to undergo counseling from a HUD-approved reverse mortgage counselor. The counseling certificate serves as proof that the borrower has received the necessary counseling.

2. Age and Identity Verification: Since reverse mortgages are available only to homeowners aged 62 and older, lenders typically require documents such as a driver's license, passport, or birth certificate to verify the borrower's age and identity.

3. Homeownership Documentation: Borrowers must provide documentation proving their ownership of the property, such as a copy of the deed or title insurance policy.

4. Financial Information: Lenders generally require borrowers to provide financial information to assess their eligibility and determine the loan amount. This may include bank statements, tax returns, proof of income or retirement benefits, and information about other assets and debts.

5. Property Appraisal: To determine the current market value of the property, an appraisal is typically conducted by a licensed appraiser. The appraisal report is an essential document in the reverse mortgage process.

6. Loan Application and Disclosures: Borrowers will need to complete a loan application specific to reverse mortgages, including disclosures and forms related to the loan terms, costs, and potential risks involved.

7. Occupancy Verification: Lenders may require proof that the borrower intends to occupy the home as their primary residence. This can be demonstrated through documents such as utility bills, voter registration, or other residency-related paperwork.

8. Documentation: Typically, a borrower has to sign a note and mortgage when getting a traditional loan. With a reverse mortgage, there is an additional doc called a Home Equity Conversion Loan agreement. If you ever buy a HECM loan (reverse mortgage) you want to make sure and get this doc (shown below) since many attorneys will require it to foreclose.

Is the default and foreclosure process different for a reverse mortgage versus a traditional mortgage?

1. Repayment: In a regular mortgage, the borrower is required to make monthly mortgage payments to the lender. If the borrower fails to make these payments, the lender can initiate foreclosure proceedings to recover the outstanding debt. However, in a reverse mortgage, the borrower typically does not make monthly payments. Instead, the loan becomes due when the borrower sells the home, moves out permanently, or passes away. So a foreclosure with a reverse mortgage generally occurs when the borrower fails to meet other obligations, such as paying property taxes or insurance. Also, if a borrower passes away, sells the home, or moves out then the lender can initiate foreclosure to get their money back.

2. HUD Guidelines: Reverse mortgages are often insured by the Federal Housing Administration (FHA) under the Home Equity Conversion Mortgage (HECM) program. As a result, foreclosure processes for HECM loans must adhere to specific guidelines outlined by the U.S. Department of Housing and Urban Development (HUD). These guidelines include providing options to eligible non-borrowing spouses and establishing certain protections for the borrower.

3. Non-Recourse Feature: Reverse mortgages typically have a "non-recourse" feature, which means that the borrower, or their heirs, are not personally liable for repayment of the loan amount exceeding the value of the home. If the loan balance exceeds the home's value, the lender can only claim the property as collateral and cannot pursue the borrower or their estate for the difference. This helps protect borrowers and their heirs from assuming excessive debt.

In general, the foreclosure process itself is very similar for both the tradition and reverse mortgages. It all depends on the specific terms and conditions outlined in the loan agreement and may vary depending on the lender and the HECM program chosen. Some HECM loans are foreclosed judicially and some non-judicially. Also each state has it own rules. For example, in Texas, the most common type of foreclosure with purchase money loans is non-judicial foreclosure. However, judicial foreclosure is required for home equity loans, reverse mortgages, property owner’s associations, and property tax situations. So make sure you get a good attorney in the state where the property resides.

Why would a note buyer want to buy a reverse mortgage instead of a traditional mortgage?

First, I would only buy a HECM loan (reverse mortgage) that was in default due (i.e. borrowers deceased and house vacant). This is a great way to get to the property itself and maybe take it back and fix/flip, or keep as rental or possibly sell to end buyer with owner financing. Yes, sometimes I look to sell the property at auction sale by starting the opening bid low and make a quick hassle free profit. What I like most is that the exit strategy is clear (foreclosure) and I don’t have to worry about the borrowers filing bankruptcy or fighting the foreclosure. With all that being said, I still prefer to buy a non-performing traditional loans where the property is occupied and work with the homeowner to get them repaying through some type of loan modification and then keep the cash flow. However, that is not possible with deceased borrowers.

POP QUIZ…What does tolling mean with respect to statute of limitations?

ANSWER: Tolling refers to the pausing or delaying of the running of the period of time set forth by a statute of limitations, such that a lawsuit may potentially continue even after the statute of limitations has run. For example, bankruptcy could toll the statute of limitations for a foreclosure lawsuit.

Tolling ensures that individuals are not unfairly prohibited from seeking legal action due to circumstances beyond their control or that prevent them from acting within the prescribed time limits.

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