REVERSE MORTGAGE HISTORY
Before we discuss the setup of a Reverse Mortgage, let’s take a look at the history of Reverse Mortgages. Reverse Mortgages have been around for decades in the United States. The Reverse Mortgage Federal Housing Authority insurance program was signed into law in 1988. Under this law, the federal government initiated a Reverse Mortgage pilot program with the guidance of the AARP. Fifty Lenders Nationwide were chosen to participate in this program and in 1989 the first government-insured Reverse Mortgage was given. The program was such a success that in 1998 it was expanded to all lenders throughout the country. As of today, more than 1,000 lenders have written over 500,000 Reverse Mortgages.
REVERSE MORTGAGE NON-RECOURSE FEATURE
Reverse Mortgages have a feature known as non-recourse. This means that the home is the only asset which may be used to pay off the loan. Additionally, the borrower can never owe more than the appraised value of the home at the time of repayment. If the bank defaults, the government will step in and provide benefits due to the borrower under the terms of normal Reverse Mortgage agreement. The non-recourse feature is provided by payment of the FHA mortgage insurance premium, or MIP. This is charged both initially at closing and monthly to the borrower.
If an heir inherits the property, the heir may choose to sell the property or refinance the loan as they do with other mortgages.
Our goal at Colorado Mortgage Group is to educate you about Reverse Mortgages. With a Reverse Mortgage the borrower maintains ownership of the home. The lender does not take control of title. The lender’s interest is limited to the outstanding balance of the loan and the loan only becomes due when a maturity event takes place.
WHAT IS A MATURITY EVENT?
A maturity event is an event that makes the loan become due and payable. In the case of a maturity event, the estate must notify, serve and inform the lender of their intentions of the property to either keep it or sell it.
The following list provides some examples of maturity events:
- The home is sold
- The home is vacated
- The home is abandoned
- The last surviving borrower passes away
- Changing title to the property either in full or in part
- Failing to uphold any of the borrower responsibilities
Along with these maturity events there are a few borrower responsibilities to be aware of.
Securing a Reverse Mortgage will eliminate a borrower’s required monthly mortgage payment. However, the borrower still has certain responsibilities, and they must meet these responsibilities to remain compliant with a Reverse Mortgage loan agreement.
Responsibilities are the following:
- Pay the property taxes
- Maintain homeowners insurance on the property
- Make any repairs necessary in accordance with the repair Rider
- Maintain the property
Failure to fulfill these responsibilities could result in a maturity event.
FHA MORTGAGE INSURANCE
Let’s talk a bit more about MIP mortgage insurance. This is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage. FHA mortgage insurance safely allows the lender to make a loan to a borrower without fear of incurring a loss due to declining property value or a payout exceeding the value of the home. In addition, FHA insures borrowers against bank or lender default. In the event of a default, the FHA will step in and justify the terms of the loan and FHA would continue to make payments to the borrower as required. Government backed loans offer stability to the borrower.
The Upfront mortgage insurance premium is calculated at 2% of the maximum claim amount, or MCA. The monthly mortgage insurance calculated by taking the annual Insurance of 0.5% and dividing it by 12 and applying it to the principal loan balance.