What is a Reverse Mortgage? Graham Law Offices P.A. Attorneys Boise Idaho

Susan Graham: Hello, I want to welcome you to this series on estate planning topics. I'm a certified elder law attorney in Idaho and my practice is limited to representing people in retirement. I help them protect their independence, their assets and their families.

I offer this program to help inform the public and my clients of a variety of ways to have greater personal protection.

Today, my guest is Larry Chariton. He is a reverse mortgage specialist with Wells Fargo Bank in Boise. He is here to help us understand reverse mortgages--what they are and who can benefit from them. Larry, what are reverse mortgages?

Larry Chariton: Reverse mortgages are similar, but not like, a normal mortgage on your home. The difference is that these loans are specifically made to persons who are over the age of 62, to use the funds any way they want, to take it out of the equity in their home. Like other traditional mortgages, they have a promissory note secured with a deed of trust. During the ownership, the loan process and the loan distribution, the customer is still in control of their home and the title of their property.

Susan Graham: After obtaining a reverse mortgage, the home stays in their name and, if they chose to sell the home, they could do that?

Larry Chariton: That's correct. They have full rights to continue to sell the home. The only time the loan ever becomes due is if all the parties on the loan either pass away, sell the home, or move out of the house on a permanent basis-permanent meaning more than one year-for illness or going into some kind of rehab or institutional residential setting. Then, the loan does become due.

Larry Chariton: Any person who is a homeowner and who is over the age of 62 is eligible for a reverse mortgage. The eligibility of the properties under most conditions, both conventional and FHA (which is the most common), can have a single family dwelling all the way up to a fourplex as long as you, in a multifamily unit, live in one of the units. The house doesn't necessarily have to be free and clear. A lot of the loans that I'm doing right now for customers have small home equity lines of credit or older and almost-paid mortgages. What you do need to do as part of the requirement is pay those off, if there are any. Then any funds that are left over become available to the customer for distribution. There is no income, employment or credit requirement on these loans. They are basically tied to the value of the property. I only obtain an initial credit report to look for simple things like tax liens, judgments and things that would normally constitute some kind of a lien against the property. Other than that, there is no credit requirement for these loans.

Susan Graham: When you get a loan, how much money can you actually get out of your home for a reverse mortgage?

Larry Chariton: There is a specific calculation that is used by all of the lenders. For general knowledge, the majority of these loans are FHA loans (called Home Equity Conversion Mortgages). There are a couple of different types but everyone does the same calculation for these loans. The calculation for the benefit to the borrower is based on the age of the youngest person who is going to be on the loan, the value of the property and the interest rate. From that we establish the loan amount. It is generally about 25% less than the full value of the house because this is a negative amortization loan that uses equity over the life of the loan, essentially, to pay the interest that's not being paid.

Susan Graham: So, if you had a $200,000 house here in Boise, Idaho, you're saying that you could borrow around $150,000?

Larry Chariton: If the person is over the age of 75, yes. It is a graduated scale. The younger you are-relatively speaking-at age 62, you're going receive less funds because the loan is going to potentially be in place longer. So, it's a type of actuarial calculation. If you were 65 years old, you'd probably only get around 55% of the equity. If you were 90 years old, you'd probably get 80% of the equity. It is an individual calculation for each person. When I talk with people, it is the first question that comes up, and the first thing I do is try to do a calculation. If you go to my website, there are actual calculators on the website where you can put in your age (your date of birth), the value of the property and your zip code to obtain a general number as to what's available for you.

Susan Graham: A person can go to that website and type in the variable information to get a rough idea of how much money they could get out of their home?

Larry Chariton: Yes. It also gives you a general idea of some of the costs associated with it.

Susan Graham: You said they could have a home that's used for a reverse mortgage and, if they have a second home, they can also get a mortgage against that home?

Larry Chariton: Generally, you can only get one reverse mortgage. There are some other conventional products out there that are proprietary products for certain lending institutions that have the ability to do a reverse mortgage on a second home. But most people won't opt for that. You are, really, only allowed to have one. Because, essentially, what you have to have is an owner-occupied situation (you have to livein the house for a certain period of time). I've had other people who have had free and clear homes in Boise. I did a reverse mortgage on a house, which required no payment. The borrowers turned around and bought a house in Arizona one free and clear. The result was that they owned two houses free and clear. Or with no payments, let's put it that way.

Susan Graham: They used the borrowed money from the Boise home to buy the home in Arizona, is that what you're saying?

Larry Chariton: Yes, again, there's no restriction on how you use the funds. You can use the funds for financial planning, trips, or purchasing cars. There are any numbers of different things for which you can use the funds. The most prudent, obviously, is to use it for your own income so that you can increase your cash flow and better your lifestyle. But you certainly can use it to purchase a second home if you want.

Susan Graham: Is there a maximum amount of money that can be borrowed using a reverse mortgage under this federal program?

Larry Chariton: The maximum amount of money is determined by the lending limit in your county under FHA. Right now in Ada, Canyon, and Gem County the amount is $230,850. So, what happens when you do the calculation, particularly if you use my calculator, you put in your zip code, which tells the calculator you are in Ada County. Even though your house may be valued at $250,000, the calculator will automatically determine that you are in Ada County and the maximum lending limit under FHA right now in Ada County is $230,850. That's the basis for the calculation, rather than the $250,000 value.

Susan Graham: Even if you have a $500,000 home then the limit would still be $230,850?

Larry Chariton: If you have a $500,000 home, you probably wouldn't use the FHA program. There are some other conventional programs out there that allow you to go higher than that--in fact all the way up into the millions of dollars if you wanted too--but those are very proprietary programs. Most people won't opt for those loans because the interest rates on those loans are generally pretty high and they establish the available funds the same way (age, interest rate and value of the home). If you're calculating that amount at a much higher interest rate, anything over $500,000 is probably going to be 7 to 7.5%, and the amount of funds that you would receive out of that transaction would be significantly lower. Most people I deal with, probably 95% of them, are doing the home equity mortgage conversions with FHA.

One of the things that's happening right now is the U.S. Congress is passing several pieces of legislation. The legislation went through the House about two weeks ago, and I noticed they came out of the Senate committee heading for the Senate floor--hopefully, this week. The legislation deals with both foreclosures and the stimulus package, but they include a FHA modernization bill that was attached it to the current bill. Within the FHA modernization bill there is additional specific legislation, having to do with reverse mortgages. One of the key issues: raising the lending limit to some fixed national limit that's probably going to be 40% or 50% higher than the current limits. That would help an awful lot of folks, particularly in the Boise Valley, to be able to get more equity out of the home if they wish.

Larry Chariton: Yes. Every county has its own limit, and it is a percentage of the median home value. For example, in Washington County, which is up around Payette and Weiser and around that area, it's $200,160. If you get into Blaine County, which is around the Sun Valley area, it's $369,000. So, each county is a little bit different, but primarily in southwestern Idaho we're all about the same. Owyhee County, Canyon County, Ada County, Gem County, and Elmore County all have that $200,000 limit.

Susan Graham: If someone has a farm and the house is sitting on 1,000 acres of farmland, does that make any difference?

Larry Chariton: Yes, it does. In fact, you and I talked about this a couple of weeks ago. Unfortunately, when dealing with rural properties (particularly farms), you run into situations where FHA only allows about 20 acres or less to be part of the mortgage. So, in a lot of cases, just a simple search of the title and information about the particular farm and the property itself could reveal that information. I'm working on a case where a gentleman in Shoshone has 25 acres, but only the three acres that surround the house (which is a manufactured home) will qualify and will be the deeded portions that I can use on the reverse mortgage. So, in his case, the other acres on the property will wind up free and clear, and I will only take a mortgage on the three acres and the house.

Susan Graham: Let's say you've gone through this process and you are approved for the maximum amount of $230,000. How do you access that money?

Larry Chariton: I have several different options to access the funds. The most obvious option would be to pay off any existing mortgages, which is considered an initial draw. You can also have a line of credit where you can draw on any available funds periodically. Or, you could structure the funds so that you have some kind of monthly payment, either for the rest of your life (which is considered a tenured payment), or some kind of term payment where you have five or ten years worth of payments on those funds. For instance, someone who has a free and clear home could avail themselves to any or all of those options or for combined distribution. They could take an initial draw of
$15,000-$20,000, have a line of credit set aside in the amount of $50,000-$60,000 and also have a monthly payment for the next five years in the amount of $750-$1,000 a month. Obviously, the more equity you have, the more flexibility you have to utilize in the program.

Susan Graham: If they have a "line of credit set aside," that means when they need money they can just write a check? Is there interest charged on that money?

Larry Chariton: No, not until the funds are drawn. It's just like any other line of credit. If you had a home equity line of credit, you'd get a line of credit for maybe $50,000 and as you draw or use those funds, the interest starts to accrue on the dispersed money. The money that is not dispersed, however, actually grows at what we call an "expected rate." There are two interest rates on a reverse mortgage. The first rate is the "initial rate," or the rate at which they pay the bank. The second rate is the "expected rate," or the rate at which any undispersed funds (no matter which ones they are, whether they are the line of credit, the monthly distributions which have been set aside, or even the service fee) are expected to grow. Right now that expected rate is about 5.5%.

Larry Chariton: The majority of these loans--not all of them but the majority of them--are adjustable rate mortgages. Right now all of the interest rates are fairly low on the FHA products, so we're looking at an approximate start rate of about 3.7%. That's very low and very close to what the historic lows have been for the last 20 years. The idea is that you can also get a fixed rate mortgage, although those rates right now are about 6.25% to 6.12%, which is comparable to what the current fixed rates are for a traditional mortgage. There are some restrictions associated with that program that usually become pretty unfavorable for borrowers because in a fixed rate program you have to take all the funds initially and you can't set aside any funds for a line of credit or monthly payments or anything like that. So, it restricts the borrower's ability to develop some good strategies in the money management process. The mortgage itself, if it were set at an adjustable rate mortgage, is also tied to a ten-year treasury note. Ten-year treasury notes are very, very stable in that they move very slowly. Over the last sixteen years the highest rate on these notes was about 7.5%. It's a lot more stable than most of the horror stories that you hear about with the problems going on right now.

Susan Graham: They don't have to pay back this money, do they, until the house is sold or they move into a nursing home?

Larry Chariton: That's correct. There are no payments on this loan. The only thing they need to budget for is their taxes and insurance. In a lot of cases, the taxes are not always the biggest issue for seniors because of their income and where they live. For example, in Canyon County or Ada County homeowners may qualify for the homeowner exemption as well as the circuit breaker. So, the amount of taxes they pay is substantially reduced if they make less than $28,000 a year. You have to apply for the exemption every year, but it is pretty simple. You go down to the county office and fill out the little form and show them a copy of your income statement and the county will accept that document.

Larry Chariton: Yes, it is. Like I previously stated, the most common of these loans are the FHA products. Even the other Fannie Mae loans, or what we would call "conventional products," are more regulated by Fannie Mae than they were back in the 70's and early 80's. There was a lot of abuse of the system back in those days. A lot of things that have stigmatized reverse mortgages came out of that era. For example, equity participation mortgages, accepting fees and collaboration between banks and insurance companies, and things like that were truly abuses of the system.

Larry Chariton: The majority of them are. FHA fixes the maximum amount origination fee that can be charged. Right now that's a maximum of 2%. Although, competitively, here in Boise, because of the number of lenders that are available, it's a little bit lower than that, usually down around 1.75% range. Costs and fees such as mortgage insurance premiums are regulated by FHA, fixed by FHA and paid to FHA. The mortgage insurance is expensive, but it makes the loan "non-recourse." What non-recourse means to most seniors is, if you take all the funds out of a house, you can continue to live there as long as you haven't passed away or moved out of the house on a permanent basis. However, if you take all of the money and the interest continues to accrue on the loan, you could potentially get into a situation where the value on your house is less than the loan balance. The mortgage insurance premium is set up to make the loan non-recourse meaning that no matter what price you sell the house for in the future, if the sale price is less than what's owed against the loan, the mortgage insurance premium kicks in and pays off the difference.

Susan Graham: The family is not responsible then for paying the shortage to the mortgage company?

Larry Chariton: Correct. There is no liability to either the individual who sells the house, his or her estate or the heirs of that estate because the mortgage insurance premium kicks in and pays off the balance.

Larry Chariton: It starts with some education. I spend a lot of my time working with seniors, talking to them about the product, how it can help them and the benefits. Together we go through a preliminary estimate of cost, discuss how it works, what their options are and I try to answer any questions. The next step is to refer that person to a third party counselor (usually an FHA approved counselor) who is generally part of a nonprofit organization (although there are some out there that do charge a fee). The counselor provides them a chance to get a second opinion, basically about the educational portion of the reverse mortgage and to make sure they understand all of their options, all of the obligations and all of the costs. After they have the counseling certificate in place, they complete an application form. The application process takes about an hour to go through all the documents and complete. I confirm they have copies of all of the documents once I start processing the application form and confirm they have signed all of the documents. We would also need to obtain or order: 1) an appraisal; 2) a credit report; and 3) a title policy. Obtaining those three documents would actually constitute the beginning of processing the loan itself.

The processing usually takes approximately three to six weeks depending on the complexity of the loan and any unique situation that arises in underwriting. For instance, the most common situation usually involves making home repairs to bring the home up to FHA standards. Although, the nice thing about reverse mortgages is they allow us to escrow those fees or costs of repairs so that the homeowner can close the loan and has funds available to do the needed repairs.

FHA underwriters do the final underwriting, and they will inform us of any special condition then has three days to review all of the documents and decide if the loan is absolutely what they want. On the fourth day we fund the loan, distribute the money to them and set up the loan for any other options that they've chosen such as a line of credit or monthly payments.

Susan Graham: They don't need to spend any of their own money to get this loan processed?

Larry Chariton: All the money for the closing costs comes out of the loan itself, there are no out-of-pocket costs. However, I do request a deposit on the appraisal in the amount of $300. The cost for the appraisal report is normally about $450 and what I am asking by requesting $300 is a good faith deposit. If they cancel during the rights of rescission period, then I give them back the $300. But, if they cancel for some other reason (the value of the home is lower than we're looking for to make the program work for them or for some reason they've decided not to complete the loan), I usually keep the $300 and give them a copy of the appraisal report.

Susan Graham: There is no income tax or capital gains tax on this money, right?

Larry Chariton: Yes. Wells Fargo has gone a step further, and I will not complete an application until my customers have gone through counseling. Until I have a counseling certificate in hand, or at least evidence of it through a fax or something like that, I cannot complete an application form from a borrower. Not all lenders do that, but I find it very prudent in that the borrower is not going to get any surprises from me after they go through counseling.

Larry Chariton: Right now there are three counselors in Boise, two of them work for Idaho Housing and one of them works for Neighborhood Services. A Spanish translator is also available. You can do the counseling session in person at the office at the Idaho Housing Association or you can do it over the telephone. In cases where someone isn't mobile or doesn't drive, we can certainly make arrangements for a counselor to make a house call, as long as they live within 50 miles of Boise. There are many options to get assistance with the counseling. The counselor will first try to set up an appointment and ask basically the same questions that I've asked (value of the house, age, ideas about distribution options), and then send the homeowner a packet of information in the mail. Once the homeowner receives the packet of information, the counselor will sit down with the homeowner (either on the telephone or in person) and go through the counseling. The counseling session takes about an hour to go through. There's no test or anything at the end. The counselor is just trying to make sure you have as much information about reverse mortgages as you need to make a rational decision.

Susan Graham: Larry, we're running out of time. Is there something else I haven't asked you or we haven't discussed that you think would be helpful for people to know about reverse mortgages?

Larry Chariton: Well, a really important point is that you are going to maintain ownership of the property. The only time the loan has to be repaid is if all the parties on the loan pass away. If one party passes away or enters extended care and the other party remains in the home, the loan continues. You have the option to leave the home on a temporary-care basis and, if you return to the home within a year, the loan continues--it is not due. Obviously, if you sell the house or move out of the house on a permanent basis, the loan becomes due. I certainly invite anybody out there to contact me and I'll be glad to answer any questions I can for them. All of my phone numbers and materials go to one place and I'm on my cell phone right now. I usually answer my cell phone on a regular basis and that number is area code (208) 602-2951. I also have a toll free number which is 877-274-2746, and that toll free number goes directly to my cell phone.

Susan Graham: If someone wants to set up a meeting with you, is there a charge for the meeting?

Larry Chariton: No. I have several customers who needed this loan yesterday and we can complete the loans in three or four weeks. I have other customers who take a long time to make a decision that's important to them, and that decision process could be six months to a year before they finally decide that they need to do it. But it never hurts to get the information about it and it certainly is an education process for most people. For most people, this is probably the last major transaction they will complete for the rest of their lives, so it's very important that the decision is made properly.

Susan Graham: You previously provided me with the two handouts that we put on our website. "Reverse Mortgage Information" and "The Process of Getting a Reverse Mortgage." In addition, you can go to his website which is http://www.reversemortageidaho.com/, to see more information including the reverse mortgage calculator where you can find out approximately how much you can borrow.

Larry Chariton: That's correct, yes. If you click on that link, it will take them right to the calculator. It is a generic calculator. Any information on the calculator is very conservative in terms of cost, interest rates and things like that, but it will give you a general idea of what's available to you.

Susan Graham: If you would also like to make an appointment with me to review your circumstances and determine if there are any steps that could be taken to improve your position, you can call my office at (208) 344-0375, to make an appointment. Also, if you go to my website which is http://www.graham-lawoffice.com/, you can find this transcript as well as Larry's handouts.

Larry, I want to thank you for sharing your expertise with us today. And I want to thank you, the listeners, for giving us the opportunity to share this information with you.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

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