Many cash-strapped senior homeowners face a daunting dilemma.
With many on fixed incomes, there is scant “extra” money to pay off credit cards and other debt, take care of home repairs or perhaps pay out the ex in a silver divorce.
Because few want to touch their once-in-a-lifetime 3% first mortgage to pull cash out, home equity lines of credit or fixed-rate seconds are options worth a look.
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But those types of loans often come with rigorous income standards, which will prevent certain older Americans from qualifying for a second mortgage.
But there may be an easier way — a no-payment-required reverse second mortgage. The loan is the first I’ve found by a reverse lender, and full disclosure, it’s a company I do business with. I’m sure there will be similar reverse second mortgages in due time; there always are, in my experience.
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Here are some of the basics from Finance of America Reverse LLC:
—Qualifying is based on a complicated residual monthly income (what’s left over) formula, family size and region of the country. Regardless, it is certainly a lower threshold than a home equity line of credit or fixed second because there is no monthly payment to factor.
—Unlike the FHA reverse mortgage, the home equity conversion mortgage, all borrowers (husband and wife, for example) must be at least 55 years old. Like the standard reverse, the maximum loan amount is calculated, in part, based on the date of birth of the youngest borrower.
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—Borrowers never make a payment on the reverse second. But of course, nothing is free. The loan balance negatively amortizes, meaning it grows each month based on a fixed, 9.99% interest rate.
In other words, the balance of the reverse mortgage is still owed. Heirs likely would walk away from the property, since there is no recourse on the second loan. The first mortgage lender gets paid off first in a foreclosure sale. The reverse second bank or loan servicer takes the property back as a loss.
To be clear, there is an open question of whether the first lien has recourse. What if the sales price doesn’t clear the lien on the entire first mortgage balance along with the second? It’s best to speak with an estate attorney for clarity.
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FHA has a provision in its reverse mortgages in which the balance owed to the lender is 95% of the sales price, if the property is upside down (whatever the property sells for). The other 5% is to provide space for the heirs to pay real estate commissions and closing costs.
For example, let’s say a senior outlives the actuary table estimate. The reverse loan balance is $1 million, but the property sells for $900,000. The FHA lender would be owed $855,000 to clear the lien. The FHA mortgage insurance fund would absorb the $145,000 balance.
—The minimum loan amount is $50,000 and the maximum is $4 million.
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—The more equity (property value minus the first mortgage) the bigger the opportunity to pull out cash. This program recognizes property values up to $10 million, minus the first mortgage loan balance.
In contrast, the FHA first lien reverse maximum property value can never exceed $1,149,825.
Owners of expensive properties may be better off leaving their existing first in place (with its required payment) and getting a reverse second instead of refinancing into an FHA reverse.
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To qualify, the minimum middle FICO for all borrowers is 600
Single-family residences, condos and even two-to-four-unit properties are eligible so long as it’s the borrower’s primary residence and will always be their primary residence.
A HUD-approved independent pre-application counseling agency class is mandatory. Generally, it’s a 45-minute phone call with all borrowers. The cost is anywhere from zero to $150.
Here is one example: The youngest borrower is 56 years old with excellent FICO scores. The home is worth $1.475 million. The existing low-rate first mortgage balance is $538,000. The borrowers can receive a maximum reverse second of $113,425 and never make a payment on the second for the rest of their lives.
Freddie Mac rate news
The 30-year fixed rate averaged 6.64%, 1 basis point higher than last week. The 15-year fixed rate averaged 5.9%, 4 basis points lower than last week.
The Mortgage Bankers Association reported a 3.7% mortgage application increase compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $261 less than this week’s payment of $4,916.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.625%, a 15-year conventional at 5.5%, a 30-year conventional at 6.125%, a 15-year conventional high balance at 6.125% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year high balance conventional at 6.5% and a jumbo 30-year fixed at 6.75%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.
Eye-catcher loan program of the week: A 10% down, 30-year fixed rate with no PMI to $1.5 million loan amount, 8.125% rate with 1 point cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com.