Florida Mortgage Loans | Reverse Mortgages - are they all hype??

There have been many new commercials on TV with trusted actors/spokespeople who are adamant that the Senior Citizen public needs access to the equity in their homes via a Reverse Mortgage.  The commercials discuss Peace of Mind, Security, and Quality of Life.  What they do not discuss is the downsides to such a program in the short and long terms.

Note: This post is meant for debate as much as for informative purposes and I am sure it will ruffle some feathers... but it is better to ruffle those feathers now before more people choose to go down a path that they were sold on despite the fact that it may not fit their true needs.

There are very pronounced limits to the Reverse Mortgage that are not always outlined in advertisements or even by the Loan Originators that pitch these loans. 

I will start with the positives of this loan to show how it can help.

1. There is no problem with credit histories.  In fact, this is a good program to use in the situation when the homeowner has bad credit as opposed to using a hard money loan. 
   
   
2. Not determined by ability to repay
   
   
3. The borrower can stay in the property indefinitely.
   
   
4. This is a negative amortization loan but the borrower will never owe more than fair market value on the property if all the equity is lost to negative amortization.
   
   
5. Funds can be used in any way
   
   
6. Manufactured homes do qualify
   
   
7. Three options to receive funds: Annuity, Line of Credit or Lump Sum. 
   

Here are some of the negatives to ponder:

1. HIGH Interest Rates.   While the "Interest Rate" itself seems in line, the true accumulation of Negative Amortization is based on the TALC - Total Accumulated Loan Costs.  These costs can create an effective interest rate of 9.5% or more.  When appreciation in the property is low, the 9.5% negative amortization eats equity at a very fast rate.
   
   
2. The minimum age for qualifying for a Reverse Mortgage is 62 in the State of Florida.
   
   
3. At age 62, a borrower can only access roughly 40% of the value of the home.
   
   
4. The loan to value of this program is calculated based on a determination of approximately how long the borrower will remain in the property... i.e. a mortality calculation
   
   
5. Once a borrower takes out a Reverse Mortgage, they can never do it again.  The Reverse Mortgage cannot be refinanced.  If a need for more money arises, there is no way to get additional funds from the mortgage.
   
   
6. Having more than $2,000 in a savings account for an individual or $3,000 for a couple prohibits the borrowers from qualifying for Medicaid in the event of a medical emergency or catastrophic illness.
   
   
7. Residency is required.  The Reverse Mortgage requires that the borrower stay in the property.  An absence of more than 30 days will allow the lender to seek foreclosure. 
   
   This is especially important in Florida.  This means that snowbirds will have to make the reverse mortgaged home their primary/homestead and stay here full time.  This also means that a prolonged stay out of the property - i.e. to help with taking care of a new grandchild, to help in rehabilitation of a loved one, to seek treatment of the borrowers themselves, to travel - are all absences that can trigger default.
   
   
8. The Negative Amortization of this loan means that the house that Mom and Dad spent so much time and money building and paying off may belong 100% to the bank instead of having any value that can be left to their heirs.  In the case that the loan amount is 100% of the value of the property, the heirs still must dispose of the property or refinance it or they or the estate could be liable for the foreclosure. 

Now, while AARP and HUD both endorse this program for Seniors, AARP recommends and HUD requires at least two counseling sessions to make sure the borrowers know the positives AND the negatives of this program.  Both groups understand the potential damage that this loan program could cause and want to be sure that Seniors receive full disclosure.

My personal and professional opinion is that there are situations where the reverse mortgages do fit.  I think that some homeowners have certain goals which can be achieved through a reverse mortgage.  I think that it definitely fits a niche market.

That being said, I do not believe it is meant to work for the masses.  I believe it truthfully does not fit MOST potential borrowers.

If a borrower has:

• good credit,
• some income by which they can repay a mortgage,
• adequate equity,
• minimal debt,
• controlled expenses,
• affordable lifestyle,
• the need to continue growing wealth during retirement,
• the desire to leave an inheritance to their family/friends,

then I believe that a Conventional Mortgage - a "Forward" mortgage - and proper use of secure, liquid investments can offer the borrower more security and definitely more money over a longer period of time than a Reverse Mortgage.

With a cash out refinance and funding an annuity that can not-only pay or help pay the mortgage payments but can accrue interest to allow the borrowers to have a documented income, a Conventional Mortgage can create a better financial plan for future needs and emergency funds.

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More Florida Mortgage and Real Estate News You Can Use From
David A. Podgursky, MBA
The Mortgage Go To Guy!!
Your Source for Residential, Commercial, Investment and Relocation Mortgages in Florida

Florida Mortgage Loans | Pre-Approval vs Pre-Qualification - a lesson in industry semantics

When buying a home, it is very important to be Pre-Approved for your mortgage in advance. The reasons for this vary from calculating affordability to presenting a stronger contract. The issue is that the definition of this Pre-Approval varies depending on the context in which it is used. This guide should help you understand what Sellers are asking for when they advertised "Pre-Approved Buyers Only".

The phrase "Pre-Approved" brings up a question of semantics. The best way to further this discussion is to define the terms Pre-Qualification and Pre-Approval.

Pre-Qualification is a process whereby the buyer's income, credit and assets are analyzed. There are several factors that are measured which are important to lenders when they are underwriting your file. They are:

• Affordability - How much property you can afford?
• Credit Score and History - Have you paid your past debts?
• Ability to Repay - Debt Ratios = expenses / income
• History of Savings - Do you overspend every month?
• Stability of Income - Has your pay dropped or spiked this year?
• Stability of Employment - How long at your current job?
• Availability of Down Payment - How much can you put down?
• Adequate Reserves - Can you afford the mortgage without income for a certain amount of time? Can you afford to close?

It is essential that all of these factors are weighed to give you a legitimate chance of getting the loan approved.

The findings in the Pre-Qualification will also help you and your Realtor decide the home prices to search in the MLS. This prevents falling in love with a house just to find up that is $50,000 out of your price range.

Pre-Approval is a step PAST what you see above. It is actually only available after your complete loan file is submitted to a lender. The additional steps required to come up with a Pre-Approval are:

• Signing of Loan Application
• Collection of Bank and Asset Account Statements
• Collection of Tax forms and 1009s / W-2s
• Verification of Employment
• Verification of Business Owned if Self Employed
• Submission of all documents to Lender

At this point the lender will underwrite the loan file and come back with a Conditional Approval - a.k.a. a Pre-Approval. This is only a Conditional Approval because there will be conditions that the lender places on the loan that must be met prior to closing. These conditions will be:

• Receipt of satisfactory, fully executed sales contract
• Appraisal meeting or exceeding value of house
• Re-pull of credit if it takes longer than 30 days
• Updating of all bank statements and asset accounts

After these documents are reviewed and signed off on by the Underwriter, the loan should have Final Approval or Commitment and be Cleared to Close.

A Pre-Qualification is therefore very important. It is not a guarantee, though!

As you can see by the two descriptions, the Pre-Qualification is just a necessary step by the Realtor and Mortgage Originator in the homebuying process. It helps determine how much house a buyer can afford. It also helps outline how much of a payment the buyer can handle based on real numbers like income, savings, expenses and credit scores.

"Pre-Approved Buyers Only"

When trying to satisfy this Seller requirement, a buyer should realize that the difference in a Letter of Pre-Qualification and a Letter of Pre-Approval is much more than just semantics. It can take between a few days and a couple of weeks to get a pre-approval. It all depends on the particulars of the loan file and the lender itself. This is why it is important to get started on the loan application before shopping for the property

A Letter of Pre-Qualification should only detail that a buyer appears able to purchase a home at a particular price point based on the information they provided. The caveat to a letter of Pre-Qualification is that it should always say that it is not a commitment or promise of one in the future but instead a judgement based on the experience of the parties involved.

A Letter of Pre-Approval is the document that is actually prescribed by Realtors and desired by Sellers. This is proof that the lender has already approved the buyer for a loan and is just waiting on a property to put with the loan. This is the "Golden Ticket" that you will need need to have in hand to successfully move along the path to homeownership.

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More Florida Mortgage and Real Estate News You Can Use From
David A. Podgursky, MBA
The Mortgage Go To Guy
Your Source for Residential, Commercial, Investment and Relocation Mortgages in Florida

Florida Mortgage Loans | Foreign National Homebuyers: Seasoning Funds in US Banks

Foreign National Homebuyers typically purchase properties both Second Homes and Investment Properties in Vacation and Resort areas.

With the Florida real estate market being on a downswing but still chock full of new development, Foreign Nationals are finding now to be a great time to purchase their vacation homes in Florida. The weak dollar versus the Euro and British Pound makes this a great time for Europeans!

During the purchase transaction, most lenders require funds equivalent to closing costs plus six (6) to twelve (12) months of PITI (Principle Interest Taxes and Insurance) payments to be placed in a US bank account. The lender will require verification of the deposits for loan approval.

Based on the findings of some of my Realtor partners, some small local banks have some issues accepting and translating or exchanging checks from International Accounts.

To get around this hurdle, I suggest to Foreign Nationals that they choose to start an account in their home country with a large international bank, preferably with branches in the area near where they want to purchase.

Several banks come to mind that have International branches such as:

• Deutche Bank
  
• HSBC
  
• Citibank

When the Foreign National is in the loan process, monies can easily be transferred and verified at these banks. They may even create US based accounts for automatic monthly payment options.

High Net Worth Clients can also use the Private Wealth Management departments of these three International banks to get their accounts set up and verified.

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Read more about Foreign National Mortgage Planning in my previous posts:

• Florida Mortgage Foreign National Homebuyers: How to get your Loan Started!
• Florida Mortgage Foreign National Homebuyers: Europe has come calling!

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More Florida Mortgage and Real Estate News You Can Use From
David A. Podgursky, MBA
The Mortgage Go To Guy
Your Source for Residential, Commercial, Investment and Relocation Mortgages in Florida