Reverse Mortgages

My limited experience with reverse mortgages has convinced me  that the upfront costs of acquiring such a mortgage,  are steep, making this financing mechanism unaffordable to most. The homeowners who desire such a mortgage, in my experience,  have usually been retired seniors who are at the point of needing cash for medical funds or home health care. These are people who want to stay in their homes, despite declining health,  in order to age “in place”. The FHA promises to help make this program more affordable with a product called Home Equity Credit Mortgage Saver, which will reduce it’s upfront fee to .01% of the property’s total value, but will this create significant demand for this product? Will this product become more available to seniors in the future? We would love to hear your experience with Reverse Mortgages.

The article below, by Jacob Gaffney and published by Housing Wire, outlines some of the proposed improvements to this program, which, in theory, helps Seniors stay in their homes.

The Federal Housing Administration (FHA) will modify its Home Equity Conversion Mortgage (HECM) product to provide a more affordable reverse mortgage for seniors looking to tap the equity of their homes, according to the National Reverse Mortgage Lenders Association (NRMLA).

An HECM is a reverse mortgage loan insured by the federal government, used by seniors to cover gaps in living expenses. The outstanding balance is not due until the last borrower leaves the home, sells or dies. With an HECM, if the balance due upon settlement of the loan exceeds the value of the home, the FHA insurance covers the difference.

According to the NRMLA, seniors often find the fees associated with a traditional HECM to be too high. The new “HECM Saver,” will provide seniors with a reverse mortgage option that significantly lowers upfront costs by virtually eliminating the upfront Mortgage Insurance Premium that is required under the standard HECM option.

Housing and Urban Development Deputy Assistant Secretary Vicky Bott reported accompanying changes intended for the existing HECM product, which will now be referred to as a “HECM Standard.” The introduction of the HECM Saver and changes to the HECM Standard are expected to be effective shortly after the new federal fiscal year begins this October.

According to HUD, under the HECM Standard option, the upfront mortgage insurance premium (MIP) will remain at 2% of the value of the property, or 2% of the maximum FHA loan limit of $625,500, if the property has a value greater than that. HECM Saver will have an upfront MIP of only .01% of the property’s value, significantly reducing upfront costs.

This cost savings in upfront fees is able to be achieved because the amount of money available to a borrower, an amount known as the “principal limit,” under an HECM Saver will be reduced, substantially lowering the risk to the FHA insurance fund. Borrowers will receive approximately 10% to 18% less under the HECM saver option, than they would under the HECM Standard option.

Buyer Tip: Know your Deeds

Buyer Tip: Know different forms of Deeds
August 26th, 2010 11:15 AM

There are three types of deeds that exist under current Washington State Law: The Statutory Warranty Deed, the Bargain and Sale Deed and the Quit Claim Deed. Each type is described below.

The Statutory Warranty Deed conveys all of the Grantor’s (seller) right, title and interest in the property. It also creates, at the time of delivery, the following statutory warranties in favor of the Grantee (buyer):

a. that the Seller owns an indefeasible estate in fee simple (a FEE SIMPLE ESTATE is  A form or ownership, or holding title to real estate. It is the most complete form of title, having an unconditional and unlimited interest of perpetual duration)

b. that the Seller (Grantor) has the complete right and power to convey the estate

c. that the estate is free from all encumbrances

d. that the Seller(Grantor) is entitled to quiet and peaceful possession of the premises

e. that the Seller (Grantor) will defend the title against all persons who may lawfully claim the same title.

If there are any encumbrances against the title, they must be called out as special exceptions from the warranties contained in the deed, otherwise, the Grantor would be liable for breach of warranty. This is why most sellers obtain title insurance, as protection, prior to selling a property. Title insurance will often cover the cost to clear up encumbrances and make the title “marketable”. Common types of special exceptions, or claims against the title, to look for when you purchase a property  are: adverse possession, prescriptive easements and zoning violations.

Once your offer is accepted by the seller you, as buyer, will receive a copy of a preliminary title report within a few days of mutual acceptance.  It’s important to review this document with the title officer, real estate broker and an attorney, if necessary.

Bargain and Sale Deed is also referred to as a Special Warranty Deed or Limited Warranty Deed. It conveys all the Seller’s (Grantor’s) right, title and interest in the property. It also creates, as of the date of delivery, only the following warranties in favor of the Buyer (Grantee)

a. that the Grantor owns in indefeasible fee simple estate in the property described

b. That there are no encumbrances arising by or through Grantor, and that the Grantee (buyer) will enjoy quiet and peaceful possession against the Grantor and Grantor’s heirs and assignees.

a Bargain and Sale (Special Warranty or Limited Warranty) Deed differs from the Statutory Warranty deed in that the Grantor limits the scope of warranty so that they only include encumbrances created, permitted or suffered by the Grantor (seller) and not those of prior owners. The Bargain and Sale Deed is typically given by an Estate, Trustee in Bankruptcy or a Lender who has acquired title through foreclosure.

Quit Claim Deed. The Quit Claim Deed conveys, without warranty, all of the Grantor’s right, title and interest in the described property. In short, it conveys whatever interest the Grantor held, which could be no interest at all. My clients have used quit claim deeds when, for instance, they are married, but husband or wife wants to purchase a property as sole owner. If wife wants to own, the husband, signs a quit claim deed which conveys his ownership to his wife.

If you, as a buyer, are thinking of purchasing a property, where you take title in anything other than a Statutory Warranty Deed, I recommend meeting with an attorney experienced in these issues, prior to starting your property search.

I have learned a great deal from two local Law Groups, who I would highly recommend:

Galvin Law Group, Dale Galvin principal 425-248-2163

Triad Law Group, Chuck Greenberg, principal 425-329-4337

Top 10 Reasons Sales Fall Through

This April 11 Seattle Times Article outlines the 10 “red flags” that may indicate that a sale will fall through.  A number of these  “deal breakers” can be dealt with  ahead of time by studying the Form 17, Seller Disclosure of the home, others by obtaining  a Pre-inspection of the home by a licensed home inspector. Out of the 10 reasons for sale failure, outlined in the article,  I would say that

#1.  The Buyer has an existing home to sell – is one of the most prevalent. Often, when a sale falls l through after being “off the market” for the amount of time required to sell the buyer’s home, the re-listed (or Back on Market) price will tend to be much lower than the original list price. Some of these sales, however, are successful, so a seller should not necessary rule out a “Contingent” (on the buyer selling their home) offer.

The #2 reason, in my opinion, and not listed in the article, is that lenders are taking a long time to respond to short sale offers and, as a result, buyers tire of waiting and find another home. Because the seller owes more than what the home is worth, the lending institution needs time to make a decision on how much of a loss to take and one really can’t determine which lenders will respond faster than others A short sale negotiator helps the process, simply by keeping everyone informed of what is happening or why it’s not happening yet.

#3 (#9 in the article) a change in the terms of the mortgage, is the third most common reason that sales fail, in my opinion. At lender interviews,  buyers should obtain three good faith estimates: estimated loan costs and monthly payment amounts, from three different lenders. They should be loan pre-approved by a second lender, in case the first loan falls through during the transaction, but prior to closing. Lenders can change their terms and frequently do, so make sure to get pre-approved versus pre-qualified.

Finally, buyers should  think carefully  about how the good faith estimate figures fit into their Big Financial Picture.Any life changing “what ifs” should be considered at this time, like job loss, costs associated with having children, divorce, etc. Will they be able to sell the home, if forced to, for more than what they paid for it or at least break even? Our team can help you, even at this initial stage of deciding whether it’s time to purchase or sell a home.

This blog is a reprint from April 2010

Would you like to share your “sale fail” story?