Reverse Mortgages Made Simple

When I was in the mortgage business there was one division that no one really new much about except the only two people in the group. We all had our own ideas but no one knew the truth about Reverse Mortgages.

What is a Reverse Mortgage? A reverse mortgage is a low interest loan for seniors that uses the homes equity as collateral. The loan amount is a percentage of the homes value determined by the age of the youngest homeowner.

So when does it have to be repaid? The loan does not have to be repaid until the last surviving homeowner either moves out permanently or passes away. At that point the estate has twelve months to repay the mortgage or sell the home to do so. The estate is not liable if the home does not sell for high enough to cover the amount owed. Any remaining equity is given to the estate.

Am I eligible? To be eligible for a HUD reverse mortgage the FHA (Federal Housing Administration) requires the homeowner be at least sixty-two years of age and the must be free and clear or have a loan balance that is not more than sixty-five percent of the homes value.

What types of homes are eligible? Most any type of home is eligible, including mobile homes built within the last thirty years. The mobile home must be on a permanent foundation and the owner must also own the land it rests on.

What is the difference between a Home Equity Line of Credit and a Reverse Mortgage? A HELOC has a strict guidelines for income and creditworthiness, and the homeowner must make monthly payments on the loan. A reverse mortgage has no credit requirements and no monthly payments are required. Instead the homeowner receives monthly checks.

The older the homeowner the lower the interest rate, and the more valuable the home the higher the loan amount will be. Unlike a traditional loan the reverse mortgage does not ever come due as long as the homeowner lives. A reverse mortgage cannot be outlived and one can never owe more than the value of the home. You will never be upside down in your mortgage.

Estate Inheritance: In the event of death, or the event that the home is no longer the owners primary residence the owner can convert the loan into a traditional loan to keep the home. Any remaining equity belongs to the heirs.

What about the loan limit? Loan size is determined by three factors; age, current interest rate and appraised value of the home.

Money distribution:

• Lump sum at closing

• Equal monthly payments as long as the homeowner lives in the home

• Equal monthly payments for a fixed term

• Line of credit. Homeowner can withdraw out any amount until the sum is exhausted.

You also have the option to mix and match the above choices.

So there you have it. Reverse mortgages made simple. Call your mortgage specialist and have them run some numbers to see if you are eligible. I would try to talk to a specialist in this field because may mortgage professionals do not do them and may not be able to assist you.

This is a volatile real estate market and the days of assuming that you qualify for a loan or expecting a guaranteed closing are long gone. You better make sure that the mortgage company or broker you're dealing with can take you to the closing table and ensure you don't leave it without the keys to your new home. Your best bet is to interview multiple lenders and compare fees and services BEFORE you allow anyone to pull your credit score. Why? Because each time your credit score is pulled it may cost you a points.

With that said, here are some questions that you (or your Realtor) should ask your loan officer before you sign on the dotted line.

• What is your prequalification process, how long does it take, and what documentation is required?
  • A prequalification just provides you with an estimate of how much home you can afford based on your income.
• What is required to obtain a preapproval?
  • A pre-approval means the lender has verified your credit, income, and assets and has probably submitted your application through automated underwriting and received an approval. As such, your loan will be finalized pending a satisfactory appraisal and provided your financial circumstances do not change significantly before you go to settlement.
• Do you charge any fees for prequalification or preapproval? Are there any application fees?
• How long will it take to process my loan application?
• When is my credit report pulled? Is there an associated cost?
• When do I receive my Good Faith/Truth-in Lending Estimate? How accurate is it? Under what circumstances might there be a significant change?
• When can I lock my interest rate and for how long? How much would it cost to request an extension?
• Do you offer any service guarantees if we don't settle on time?
• How will we conduct our communications? Fax, email, phone, office visits?

Homeowners frequently ask me if now is the right time to sell or whether they should wait until the market picks up. Well, I thought long and hard about it. At the end of the day there are two truths in real estate: first, unless you have the psychic ability of Dionne Warwick, it's difficult to time the market, particularly in a volatile one such as the one we're in right now; secondly, anytime is the right time to sell if your house is in good condition, shows well, and is priced right.

But if I was considering selling my house today, here are some things I'd consider...

Am I serious or just testing the waters?

A homeowner should always understand why they're selling and what their timeline is. Are you listing your home just because you want to see how many offers you can get or how much the offers are worth? If so, don't even bother. You're probably not in the right mindset to conduct the kinds of negotiations that might require certain concessions on your behalf in order to make the sale. And in a buyer's market, you'll have to make concessions. So, at the end of the day, there are a few good reasons to sell in a market like this.

• If you're relocating or being transferred.
• If you're threatened with foreclosure and need to do a sale or short sale
• You buying or bought another home and need to sell your current one to qualify for your loan
• You're in a good financial position and want to take advantage of the buyer's market

These are the circumstances under which I'd sell right now.

Do I have to do work on the house before I put it on the market?

In short--yes. If you want to sell your house in this market, if you want to get top dollar for it, then you are absolutely going to have to do some work on the house if it's not in model condition. If you don't want to put in the effort to do the work, then you'd better be prepared to get some seriously low-ball offers on your property. It's that simple. Housing inventory is high, which means competition is high. In this market, your house has to be the best buy in TOWN…not just on the block.

Let’s see… Your son, the six-year-old wannabe Picasso, has decorated your walls with Crayola artistry unseen since the 60s and that means you’ll have to paint--which you don't have time for. You probably should get the Yabba Dabba Do Berry Kool-Aid stains out of the carpet--which you don't have the money to pay someone to do. You probably ought to rake the leaves from the rainforest in your backyard and mow the lawn--but you don't have the time or patience for that either. Oh and by the way, the shutter on the front window is falling off, the garage door won't open, you probably should have rethought the striped, floral, burgundy and green wallpaper. Oh, and beige really ISN’T the “new black” in appliances – stainless steel is.

Well, if you're not willing to put the time in to get your house into tip-top shape then you may as well forget putting it on the market. Otherwise, your house will sit on the market for a long long time. So, you're either going to fix it up OR be prepared to reduce the asking price by the amount of the fix-up costs. If you're forced to sell because of foreclosure or relocation, then you’ve got to dig in and do the work no matter what. So, what's most important?

• Paint and carpet. Call Stanley Steamer, rent the Rug Doctor, lose the wallpaper, and call in a few favors from your family and friends to get the lawn mowed and leaves raked. Paint in neutral, earthy colors. Buyers have to be able to imagine their things in your home, and that lime green paint and barney purple carpet you adore tends to be distracting to them. If they can't visualize themselves in your home, they WILL move on to the next one.
• Kitchens and bathrooms. Update the appliances and countertops, buyers want granite and stainless steel. If you can't or it isn't cost effective, then be prepared to accept a lower price than what you expect. As for the bathrooms, if the ceramic is wearing off your tub and tile and you can't afford to replace them, get them refinished. Nothing will kill a sale faster than a dingy bathroom.
• Manicured lawn. If you don't do anything else outside the house, mow the lawn and trim the bushes. Nice curb appeal will pull buyers in. Paint, carpet, kitchens and bathrooms will keep them in and make them more willing to accept your asking price.

Did someone mention price?

Let’s talk price. Well, if you don’t want to do the work fix up your house, how can you expect top dollar? In a buyer’s market no less? Well, you can’t. Sometimes, your home can be in pristine condition and you still might not get the price you expect. Why? Because an asking price, is just that…an ASKING price. Contrary to popular belief, Ask and Ye Shall Receive does not always apply in real estate. Moreover, and very importantly, your Realtor does not determine the market price, and neither do you – the buyer does. Realtors give educated guesses based on past sales, sometimes we're right on, sometimes not so much. It depends on market volatility. So if you don’t have any flexibility in price because you've got a home equity line of credit to pay off and you can’t get your house in tip top shape, then save yourself time and aggravation and hold onto it until you're in a better position. If you have to sell, then you have to be flexible on price or buyer incentives like closing costs – no ifs, ands, or buts about it.

So there you have it! Those are the major considerations I would think about when considering whether to sell my home in today’s market. Whatever you do, make sure you hire a good, honest Realtor who is willing to tell you like it is and will conduct an honest evaluation of your home and explain what work needs to be completed before placing it on the market. Hiring someone who only tells you what you want to hear may get them the listing, but it won’t get your home sold.

THE APPRAISAL

Home Values

part one

It is my hope in writing this series you will be made aware of a number of things in the appraisal that can kill your loan, and how to avoid them. This series is based on years of trial, and lots of errors, in the mortgage business. Hopefully this will save you the heartache of a loan killed, when it could have been avoided.

From the side of the loan officer, there is nothing worse than losing a good loan because of an appraisal. I am not talking about a bad appraisal or a bad appraiser, but often due to a lack of communication between the homeowner and the lender, the loan gets turned down. Had some key questions been asked and honesty answered, the loan could have moved forward and funded. So, what are some of the issues that can ruin a good loan? Most of my experience in the industry was with refinance loans so that is what I will focus on in this article.

Home Value: In my experience this has been the number one killer of the deal. Everything else can be perfect, then you get the appraisal back and it comes in sixty thousand less than what was expected. The key here is, 'what was expected?' Make sure you and your borrower are speaking the same language. You may both be talking about comps (comparable sales) and in his mind he is thinking a out houses for sale, and you are thinking about houses that have sold. Most lenders what to see a bracketed value based on homes that have sold recently, as in three to six months. Most lenders are reluctant to use comps from homes that are still for sale. By bracketed I mean that there is are two sales less than a mile from your house, in the same neighborhood, where one sold for a little less that your house and one sold for a little more. Your house falls in the middle somewhere.

And what about, like neighborhoods? If you live in a normal neighborhood and there is a private gated community of upscale homes nearby, you cannot use those home values on your appraisal. Those homes are not truly comparable to yours. Believe me, I have been caught on this before.

“But Mr. Underwriter, that house was a block away from my borrower.”

“Yes but is your borrowers house in the multi million dollar secluded private, celebrity neighborhood?”

A little exaggeration there, but you get my point. The house has to be LIKE yours. Hopefully the size of the lot is too, although that may not be a deal breaker. Your house will just be marked down a little due to having a smaller lot. There are limits though. If your house sits on a lot and a half, while the nearest comps houses are in two to five acre properties, yours is not comparable. Now you may think I am going overboard here, and this is common sense, but I assure you these are common issues. When in great need borrowers and mortgage professionals will go to just about any length to fund the loan.

Then I used to get the, “But I just put in a twenty thousand dollar pool, so my house has to be worth twenty thousand more.”

If every house in the neighborhood has a pool, therefore that is the norm, a pool is not going to elevate your house above your neighbors. You may get a few thousand more that you would have without the pool though.

If your wonderfully modern, fabulously big, house is in the middle of lot of humble one and two bedroom ramshackle homes your home value is going to be much less. Location, location, location.

So how do you figure out what your home is worth? There are a number of places you can go to see what your home may be worth. You should also get your mortgage guy to do some of the leg-work here as he will have access to resources that are not available to you.

One of the places you can go is Yahoo Real Estate. Just go to the yahoo home page and click on Real Estate. Next click on the home values tab at the top of the screen. A new page will open up and there will be a field for you to put your home address in, then hit the search tab. This will give you two tabs, one for recent sales and another for houses for sale. Click on the recent sales tab and you will see a number of homes and all the pertinent information: sales price, sales date, square ft., bed,bath, and distance.

There are numerous websites that can provide information on the value of your home. One such site is www.HomeGain.com. If you have a friend who is an Escrow Officer at a title company, they can get great info on home sales in your area. If you know an appraiser you may be able to get him/her to do a little research for you. Some people use the tax assessed value, however that is not always a good indicator for your homes value and I use that as a last resort.

After you and your loan officer have put your heads together and determined that you have enough equity in your home to refinance, you can move on to the next part of the appraisal.

HOPE NOW REPORTS 25 PERCENT SURGE IN LOAN WORKOUTS DURING JUNE

HOPE NOW, the private sector alliance of mortgage servicers, investors, mortgage insurers and non-profit counselors, announced today that in June the mortgage lending industry helped 310,000 homeowners complete workout solutions to stay in their homes – a 25 percent increase over May.

In June, HOPE NOW members and the mortgage lending industry modified

96,000 mortgages compared to 101,000 in May, a 5.1 percent drop and initiated 214,000 repayment plans up from 148,000 in May, a 44.9 percent increase. Since January, 2009, more than 1.5 million homeowners have been helped through mortgage workout plans.

For a second straight month, HOPE NOW’s participating servicers in June reported a slight drop in modifications and a significant increase (over 40%) in repayment plans. This increase is primarily attributed to servicer participation in the Obama administration’s Home Affordable Modification program (HAMP).

“I am proud of the continued progress made by HOPE NOW Servicers and am confident that they are aggressively and proactively using HAMP, as well as other successful foreclosure prevention programs, to help as many homeowners as possible,” said Faith Schwartz, Executive Director of HOPE NOW Alliance. “We continue to work with the administration on the successful implementation and outcome of HAMP for at-risk homeowners. These efforts are in the best interest of consumers as well as the U.S. economy overall.”

There were 93,924 foreclosure sales in June, an increase of more than 13% from the prior month. For the first time since HOPE NOW began collecting data, prime foreclosure sales in June outpaced subprime sales by two-to-one. HOPE NOW survey data suggests a peak in subprime foreclosure sales occurred a year ago, Q2-2008. The largest gain in reported prime loan foreclosure sales occurred in the recently ended second quarter of 2009 at 154,108.

As HOPE NOW reported last month, the drop in the number of modifications and increase in repayment plans from May is largely attributed to the industry’s implementation of the Obama administration’s home retention program. Under the government requirements for the Home Affordable Modification program (HAMP), loans are subject to a three month trial period before a modification can be completed. Therefore, a number of workouts that will end up being modifications can currently only be reported as repayment plans or trial modifications. Many of these trial modifications will result in formal reporting of modifications after 90 days.

'The unique partnership between the mortgage servicing industry, investors, mortgage insurers, non-profit groups and the administration is productive and offers a great deal of hope and promise for the growing number of borrowers facing hardship,” said Schwartz. “As we all work together to help Making Home Affordable a success, servicers are using new technologies and partnerships to better streamline the process.

The HOPE NOW June data shows:

• 1.5 million homeowners have been helped with workouts since January, 2009

• Modification and repayment plans increased to 310,000

• 60 day plus delinquencies increased from about 3.0 to almost 3.1 million.

• Foreclosure starts decreased slightly from 257,000 in May to 254,000 in June.

• Completed foreclosure sales increased from 83,000 in May to 94,000 in June.

HOPE NOW consumer outreach events have helped over 15,000 consumers since January 2009. Last week, HOPE NOW and its partners hosted an outreach event with administration and local officials in Las Vegas to help more than 1,500 at-risk homeowners meet directly with lenders and non-profit counselors to identify programs to address each homeowner's unique situation. The next outreach event will take place in Phoenix July 31 and August 1.

HOPE NOW is the industry-created alliance of mortgage servicers, investors, counselors, and other mortgage market participants that has developed and is implementing a coordinated plan to help as many homeowners as possible prevent foreclosure and stay in their homes. For more information, go to www.HopeNow.com.

The Homeownership Preservation Foundation, a HOPE NOW member, created and operates the Homeowner’s HOPE™ Hotline, which is available 24 hours a day, 7 days a week, and 365 days a year. The Homeowner’s HOPE™ Hotline received 1.1 million calls in 2008. There is no cost to homeowners for contacting a nonprofit counselor by calling 888-995-HOPE.

# # #

BORROWER LOAN WORKOUT PLANS

2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 Jun-09 Jul 2007-Jun 2009

('Life to Date') Totals

Repayment Plans 357,900 348,531 314,453 302,565 335,152 345,078 340,384 502,595 214,756 2,846,658

Prime 154,383 160,127 148,814 141,840 179,864 203,752 215,778 342,534 143,587 1,547,091

Subprime 203,517 188,404 165,639 160,725 155,288 141,327 124,606 160,061 71,170 1,299,567

Modifications 72,773 133,467 170,216 220,349 256,188 314,602 370,436 318,044 96,046 1,856,076

Prime 29,714 36,634 48,148 56,202 70,503 92,125 121,011 128,093 40,316 582,429

Subprime 43,058 96,833 122,068 164,147 185,685 222,477 249,425 189,951 55,730 1,273,646

Workout Plans 430,673 481,998 484,669 522,914 591,340 659,680 710,820 820,639 310,803 4,702,733

Prime 184,097 196,761 196,961 198,042 250,367 295,877 336,788 470,627 183,903 2,129,521

Subprime 246,575 285,237 287,708 324,872 340,973 363,803 374,032 350,012 126,900 2,573,213

FORECLOSURE SALES

2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 Jun-09 Jul 2007-Jun 2009

('Life to Date') Totals

Foreclosure Sales 153,408 168,213 203,503 246,192 263,326 201,603 201,314 239,303 93,924 1,676,862

Prime 60,699 64,958 83,352 108,202 130,700 101,519 113,309 154,108 62,603 816,849

Subprime 92,709 103,255 120,151 137,990 132,626 100,084 88,005 85,196 31,321 860,014

(Workout Plans = Repayment Plans + Modifications)

Repayment Plans: A plan that allows the borrower to become current and catch up on missed payments that are appropriate to the borrower’s circumstances, which involves deferring or rescheduling payments but the full amount of the loan is expected ultimately to be paid.

Modifications: A modification occurs any time any term of the original loan contract is permanently altered. This can involve a reduction in the interest rate, forgiveness of a portion of principal or extension of the maturity date of the loan.

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending July 24, 2009. The Market Composite Index, a measure of mortgage loan application volume, was 495.4, a decrease of 6.3 percent on a seasonally adjusted basis from 528.9 one week earlier. On an unadjusted basis, the Index decreased 6.0 percent compared with the previous week and increased 16.1 percent compared with the same week one year earlier.

The Refinance Index decreased 10.9 percent to 1862.1 from 2089.7 the previous week and the seasonally adjusted Purchase Index remained unchanged from one week earlier at 262.0.

The four week moving average for the seasonally adjusted Market Index is up 2.6 percent. The four week moving average is down 0.5 percent for the seasonally adjusted Purchase Index, while this average is up 5.2 percent for the Refinance Index.

The refinance share of mortgage activity decreased to 52.6 percent of total applications from 55.5 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 5.5 percent from 4.8 percent of total applications from the previous week.

The average contract interest rate for 30-year fixed-rate mortgages increased to 5.36 percent from 5.31 percent, with points decreasing to 0.93 from 1.18 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.75 percent from 4.80 percent, with points increasing to 1.14 from 1.03 (including the origination fee) for 80 percent LTV loans.

The average contract interest rate for one-year ARMs increased to 6.66 percent from 6.50 percent, with points decreasing to 0.09 from 0.11 (including the origination fee) for 80 percent LTV loans.

**SPECIAL NOTES**

Beginning August 5, the index values will not be included in MBA's Weekly Applications Survey press release, only the percentage changes. If you would like to subscribe to MBA's Weekly Applications Survey, please contact MBA Research at (202) 557-2830 or mbaresearch@mortgagebankers.org or click here.

Media inquiries should be directed to Carolyn Kemp at (202) 557-2727 or ckemp@mortgagebankers.org.

The survey covers over 50 percent of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. Base period and value for all indexes is March 16, 1990=100.

Who hasn't gotten behind on a bill in their lifetime? I know I have – I think I hear my phone ringing now. It is something that happens to the best of us if you live long enough. Everyone is prone to go into avoidance mode, right? Stop answering our phones, stop opening our mail and just shutting ourselves down until we can afford to deal with it--or until things are so bad we don’t have a choice but to deal with it. This solution may work termporarily for a credit card or cable bill. But when it comes to your house, your home for your kids, your shelter – and for many people the largest single investment they will ever make – the situation is very different. Not dealing with it means eventually losing your home. So if you ever receive a notice of default from your lender, the most important piece of advice that I could give you is – no matter how difficult things may seem at the moment – don’t avoid dealing with it. The earlier you start to explore your options the better.

A few things to keep in mind.

1. In most states, it can take anywhere from 6 to 9 months--and potentially up to one year--to foreclose on any given property. That gives homeowners a long time to fix their financial problems.
2. It will cost a lender more money in legal fees and time to go through foreclosure proceedings and resell your home than to work out a payment plan with you. Lenders are not in the business of buying and selling real estate – they loan money to make money. They know – and you should know – it is better for them to work out a solution with you than to foreclose.
3. You have all the way up until the minute your home goes for sale on the court house steps to pay your late payments and fees as established by the lender and save your home. Like I said before – that can take up to a year.

So what are your options?

Did you know roughly 50 percent of homeowners who enter into foreclosure never contact their lender—the party most able to help them stay in their homes? And we wonder why the foreclosure rate is so high. One of the key things you have to do is talk to your lender or loan servicer. (A loan servicer is usually a company who gets paid to collect payments and deal with collection issues on behalf of the lender). In talking with your lender/servicer, the following are some options you may want to consider.

§ Forbearance – If you call early enough your lender may let you make a partial payment, skip a payment, or add your late payment(s) to the end of your loan. The key is having a plan to catch up. If you are like many of us waiting on that tax return, let your lender know. You may be able to protect your credit score by speaking with your lender while waiting on Uncle Sam.

§ Repayment Plan – The lender may also work out a repayment plan in which they may divide the overdue amount over –for example 6 months - and let you pay the overdue amount in increments with your regular payments.

§ Loan Modification – The lender may agree to change the terms of your mortgage to help you avoid foreclosure. They could switch you to a fixed rate loan, give you more years to pay off your loan or even forgive part of your loan. They could even add your missed payments to the loan and increase your monthly payments to cover the larger loan. Or they could do some combination of these options. Knowing what you can ask for so you can best find a solution to suit your situation is key.

§ One of the least viable options if you are in a cash crunch is Reinstatement – where you pay all past due payments in a lump sum by the end of the forbearance period worked out with your lender. If you can borrow from a friend or family member or you come into unexpected cash, this may be an option.

§ Finally, there is “Deed In Lieu of Foreclosure.” In this option, you vacate the premises and give the deed to the lender. The major drawback is obviously that you lose all of the equity you have built in the home. That’s a tough pill to swallow. But the upside is that it saves you from having a foreclosure on your credit report, making it MUCH easier to get a loan and buy a new home once you get your finances straightened out.

§ Last but certainly not least is the option to sell your home. Selling your home may allow you to recover some of your equity so that you can move into a less expensive home with a more affordable mortgage in a year or two. But what if you bought your home over the past one to two years and the value is less than what you owe? That's where we get into what is called a Short Sale. Your Realtor can negotiate a price with the lender where the lender will accept LESS than what you owe. And do you remember what I said about the comfort of “avoidance”? Well, your Realtor can help you avoid almost every aspect of personally dealing with the transaction while at the same time providing a solution for your dilemma. Once you list your home with a real estate agent and give him or her permission to work with your lender, aside from gathering documents and responding to inquiries, your work is pretty much done until it is time to accept a contract and go to settlement.

So that’s the long and the short of it. If you would like free, anonymous counseling call 888-995-HOPE. Many major lenders such as Bank of America, Sun Trust, Wells Fargo, Wachovia, etc., are working in partnership with HUD to help homeowners avoid foreclosure but you have to have the courage to ask for help!