The property market is very vast and as such there are very many different products tailored for different people with different needs. When it comes to mortgages, there are various types and plans of mortgages including reverse mortgage for seniors. Many people neither know what a reverse mortgage is nor how the product relates to California laws. This article will explore what a reverse mortgage is and the California laws that relate to reverse mortgages for seniors.
What is a reverse mortgage?
So first things first, let us get a basic understanding of reverse mortgage. Reverse mortgage is a loan facility for seniors aged 62 years and above. This facility allows seniors to turn the equity you have on your home or piece of real estate into cash.
The home equity acts as collateral for the loan. The total maximum amount of money a borrower can receive in reverse mortgage is determined by the maximum limit of lending in California, the property sale price, the youngest borrower’s age, prevailing interest rates and the lesser of the home’s appraised value.
So who is eligible?
The Federal Housing Administrations (FHA) requires that to qualify for the reverse mortgage, the interested party should be at least 62-years old. The borrower also needs to own the property or a home. In the event that home is not owned free and clear, then any mortgage on the property must be paid off using the proceeds of the reverse mortgage. In addition to that, the borrower should also meet the financial eligibility criteria laid down by the HUD.
Referred to Counseling
It may be a bit difficult to understand reverse mortgages with all the taxes and interests that come up during the lifetime of the loan. The older generation for who the product is intended may have a challenge in understanding all the details of reverse mortgages. It is required under California law that the lender provides a list of counselors that can discuss the ramifications of a reverse mortgage. These counselors are required to operate from a nonprofit arrangement. The lender is therefore not allowed to accept any applications for reverse mortgages without ascertaining that the borrower has received counseling in line with the requirements of the law. This helps reducing misunderstandings and claims of lenders taking advantage of borrowers.
Does it differ from a Home Equity Loan?
The HECM is quite unlike the Home Equity Line of Credit in that the HECM doesn’t require the borrower to make monthly payments and the existing mortgages must be paid off by the proceeds of the reverse mortgage loan. The other thing is that reverse mortgage cannot be reduced at any point in any way by the lender. Another major difference is that with traditional mortgages, the borrower is required to make monthly payments while the reverse mortgage is technically not due as long as the homeowner is still using the home as their primary residence or is paying the homeowners insurance and the home is being maintained in line with FHA requirements. Failure to meet those obligations may attract a foreclosure on the grounds of a loan default.
Whenever the reverse mortgage loan becomes due, the heir has options of either put the home up for sale to repay the loan or pay off the loan and keep the home. In the event that the home sells for a value that is higher than the balance of the loan, the excess goes to the heir of the home.
And in the event that the home sells for a value that is less than the loan balance, the estate or heir is not required to pay anything more than the value of the home at the time of the loan repayment.
The reverse mortgage loan arrangement is a non-recourse arrangement. This means that if you put the home up for sale to repay the loan then the heir will not owe more than the value of the property or the loan balance or whichever is less. It also means that no asset other than the home can be used to pay for the loan.
How is the borrower paid?
The borrower is usually paid in any of these four different ways;
- Term payment which is defined the amount of money every month for a set amount of time.
- Tenure payment which occurs when a certain amount is remitted to the borrower until they finally move out of the home or pass on.
- A line of credit which can be more or less like an expense account that is used until it runs out.
- Lump sum; a lump sum of cash which is given at closing and is only available on the fixed rate loans
- These different ways of payments can also be combined and tweaked to fit the context of the borrowers need.
What if I change my mind?
It is expected that some borrowers can change their mind within a few days of making the decision. The federal laws in California provide provision to protect borrowers in the event of such an occurrence. The borrower usually has a three day grace period within which he can call off the deal.
It is easy to see that the reverse mortgage structure is highly attractive to the eligible borrower. It offers you an opportunity to supplement your retirement nest egg. In the event you need money for mediation or any other such thing then the reverse mortgage facility is available to give you access to the money you need. The other thing that is obvious is that California law is out to protect and inform the borrower to ensure that they make informed decisions. Since reverse mortgages are a new type of loan, lawmakers are also working to make legislation related to it fair to all the stakeholders.
© 2018 Lee Ann Stein - Home Loans