Reverse Mortgage MN - Reverse Mortgages SIDAC Reverse Mortgages Frequently Asked Questions

One must be 62 or older and own a home which is their primary residence and which has substantial equity. If one is 62 or older and moving to a smaller home they may also do a Reverse Mortgage. Single family, two- to four- unit properties, townhomes, and FHA approved condos qualify. Some manufactured/mobile homes also qualify. The home needs to be in reasonably good condition, meeting HUD minimum property standards. It may be possible to do some repairs after the closing of the Reverse Mortgage though restrictions do apply.

The amount borrowed, or maximum principal limit, is based on the program chosen, the value of the home or FHA or Fannie Mae's lending limit, the age of the youngest borrower, and the current interest rate. The loan fees and any current liens must be paid at the time of closing. They may be paid with the Reverse Mortgage proceeds.

FHA's lending limit or maximum claim amount varies by the county in which one lives ranging from $200,160 to $362,790. Fannie Mae's maximum claim amount is a national limit of $417,000. One can do a Reverse Mortgage with a higher valued home, but the maximum they can borrow is based on the lending limit of the program they choose. The equity above the lending limit is retained equity of the borrower or their heirs.

The interest rate depends on the Reverse Mortgage program one chooses. The initial rate is determined at the time of closing. The FHA interest rate adjusts monthly or annually, or can be fixed. The initial interest rate is based on the LIBOR (London Inter-Bank Offertory Rate) or the 1-year U.S. Treasury Index and the expected interest rate, used for projections, is based on the LIBOR SWAP or the 10-year U.S. Treasury.

The adjustable rate does not affect the amount of money received, but rather affects the amount that is required to be paid back when the loan is paid. Interest is only charged on monies that are withdrawn. Any money left in the line of credit has a growth rate.

July 18,2005 brought the long awaited approval of the "Rate Lock-in" or Principal Limit Protection for HECM Reverse Mortgages. This HUD policy reduces some of the uncertainty of the loan amount between the time of application and the closing date.

To understand the value of this, you need to know how the loan amount is determined: The loan amount, or Principal Limit, of a Reverse Mortgage is determined by the age of the youngest borrower, the home value or FHA lending limit, and the Expected Interest Rate. The Expected Interest Rate is based on the 10-year U.S. Treasury Bill and changes weekly for calculation purposes. Prior to the Principal Limit Protection, the Principal Limit could not be determined until the week of closing because the Expected Interest Rate changed weekly.

Now with the new policy, when the borrower closes, the Principal Limit can be calculated using the Expected Interest Rate at the time of application or at closing, whichever is lower. Sometimes the rate can change enough between the time of application until closing making a several thousand dollar difference in funds available to the borrower(s). Then, sometimes, at the time of closing we would find there wouldn’t be enough proceeds to achieve the goals of the borrower(s), such as using the reverse mortgage to pay off current liens.

For example: On a $230,000 home for a 73 year old borrower, if the Expected Interest at the time of application is 5.59%, the Principal Limit is $161,690. If at the time of closing the Expected rate is 5.74%, the Principal Limit would be $158,630. In this example, the rate at the time of application would be used making $3,060 more available to the borrower.

Now, we don’t have to wait until closing to determine if there will be enough funds. If there are enough proceeds at the time of the application, we can have an assurance that if the actual appraised value of the home is the same, or greater, as the estimate used at the time of application, the Principal Limit will be protected. The borrower will receive the higher maximum amount available.

The catch is the loan needs to be closed within 120 days from the date the FHA Case Number is assigned. This number is needed to order the FHA Appraisal needed to do a reverse mortgage. If the loan is closed on day 121, the Expected Rate at the time of closing would be used. It is important borrowers work with a lender, such as Reverse Mortgages SIDAC, that have the knowledge, experience, and reputation of processing reverse mortgage loans in 30 to 45 days.

What are the costs?

As with a regular mortgage, the costs associated with the Reverse Mortgage include the appraisal, origination fee, title insurance, escrow, and recording fees. The FHA plan includes a 2% initial mortgage insurance premium. This insurance protects the borrower from ever paying more than the value of the home. FHA also guarantees the funds are available to the borrower. The costs associated with a reverse mortgage can be financed so there are no up front fees. Click here to read the details of the reverse mortgage costs in Minnesota.

With my reverse mortgage I have had money that I have used for various things when I needed them.

Another cost is a monthly service fee. All loans whether conventional or a reverse mortgage have a servicing fee. With conventional loans, this fee is generally "invisible" because it is included in the interest rate. With the reverse mortgage this is not included in the interest rate, but separate. Since the borrower is not making monthly payments, at the time of closing, a calculated amount totaling anticipated charges is set aside or withheld (not an initial cost), reducing the amount available to the borrower. The set-aside amount is not a cost of the loan nor does it become part of the beginning loan balance. The borrower is charged ($30 to $35) monthly for servicing the loan at which time this monthly charge becomes part of the loan balance. Interest is accrued only on the amount when it added to the loan balance. This covers the record keeping, sending payments and loan advances, transferring insurance premiums, verifying taxes and insurances are paid, sending statements.

The money received from a Reverse Mortgage is considered a loan, not income so the generally not considered taxable income and Social Security and Medicare are not affected. It is possible to receive public benefits such as Medical Assistance/Medicaid, food stamps, SSI and do a Reverse Mortgage. So these benefits are not affected, the cash received from the Reverse Mortgage must be spent in the month it is received. Legal services should be consulted for a particular situation.

Payment of the Reverse Mortgage is not due until the borrower permanently leaves the home. As a non-recourse loan, the repayment amount cannot exceed the value of the home. The loan is generally paid through the sale of the home. If heirs wish to maintain ownership, the loan can be repaid with other liquid assets or by obtaining a conventional mortgage. In the case of joint borrowers, when one of them dies, the mortgage stays in place as long as the other borrower has the home as their primary residence.

The amount to be repaid includes the closing costs, cash advanced to the borrower over the length of the loan, and the accrued interest. Any remaining equity is retained by the borrower or their heirs.

Payments can be made during the time of the loan. The amount paid reduces the balance of the loan and increases the amount available in the line of credit. There are no prepayment penalties when the loan is repaid.

Borrowers are required to go through third-party counseling by a trained housing counselor. The counseling may be done in the counseling office, your home, or over the phone. Counselors are allowed to charge up to $125 per session. We can assist you in locating a counselor.