A new Federal Housing Administration, or FHA, reverse mortgage program can help senior homeowners relocate or downsize to a new home without giving up all their savings — and save them thousands of dollars in the process.

They don’t even have to sell their existing home first.

The program comes at a time when many financially strapped seniors are trying to boost their monthly incomes after being hit especially hard by the economic downturn: stock portfolio values plummeted, interest on investments shrank, and costs for health care and home repairs skyrocketed.

But help is now available through a new, but little known, FHA reverse mortgage program, known as the Home Equity Conversion Mortgage, or HECM, for Purchase Program which gives seniors new ways to use equity in their homes. HECM loans have been available for several years.

The FHA developed the program because it noticed seniors were selling their homes, buying smaller, more affordable homes and then taking out reverse mortgages on the new properties. That meant they were paying closing costs twice — first on the real estate closing, and a mortgage if they needed one to make the purchase, and then again when they switched to a reverse mortgage.

Program combines costs

But now, the new HECM for Purchase Program allows seniors to buy a home directly with a reverse mortgage — paying closing costs only once, says Bill Glavin, special assistant to the commissioner of the FHA. A sale of an existing home is not necessary and is not part of this transaction.

The new HECM program allows using a reverse mortgage to buy a single-family home, a condo or a small multifamily residence, and allows them to convert some of the equity in their existing home to cash. They never have to make a single payment. Instead, they would collect monthly payments out of the equity on a tax-free basis as long as the home serves as their principal residence. If they did not sell their previous home, they could get additional income out of renting that property.

Under the plan, you can choose to take the money either in monthly payments, as a lump sum, a combination of the two or even in a line of credit that you can access whenever you need cash.

Higher amounts this year only

What’s more, this year, seniors can access up to $625,500 — up from $417,000 last year. In 2010, the amount reverts to $417,000.

Eligible homes can be one- to four-units, a condo approved by the U.S. Department of Housing and Urban Development, or HUD, or a manufactured home that meets FHA requirements. You must agree to pay your taxes and make any necessary home repairs. No credit check or income verification is required — despite the current tight credit market.

To qualify for the program’s reverse mortgage, a senior, age 62 or older, must:

• Own the home outright or have enough equity to pay off any existing mortgages and equity lines with the proceeds from the reverse mortgage. Those with more equity may be able to access even more cash.
• Not be delinquent on any federal debt.
• Participate in a consumer information session given by an HUD-approved counseling agency or HECM counselor.

Most reverse mortgages range from 35 percent to 55 percent of the home’s equity. You can, however, take out a reverse mortgage as low as $10,000, though it is not recommended because of the costs involved, says Eric Bachman, CEO of Golden Gateway Financial, a firm specializing in matching lenders with borrowers. “Many times, seniors are just looking to pay off their forward mortgage and cover closing costs (usually less than $10,000) with a reverse mortgage, to get out from under monthly mortgage payments,” Bachman says.

Regardless of your income, the reverse mortgage pays you. The amount you can borrow depends on your age, current interest rates, and the appraised value of your home or FHA mortgage limits for your area, whichever is less.

How much you can borrow

Generally, three factors will affect the amount you can borrow:

• The value of your equity (the higher the better).
• Your age (the older the better).
• Interest rates (the lower the better).

Here are some hypothetical examples of how it can work:

• Julia is a 72-year-old who wishes to sell the home, worth $450,000, she owns free and clear in Ohio and wishes to downsize to a smaller home in Florida for $185,000, to be closer to her children and grandchildren. She decides to use the HECM for Purchase Program to buy her new home and will have more money leftover than if she used a straight purchase transaction. After she sells the house in Ohio, she can buy the Florida home using a $116,000 reverse mortgage and $69,000 cash. Now she owns the house in Florida and does not have to make any mortgage payment and has the $381,000 remaining from the sale of the Ohio home to invest, giving her extra income.
• Richard and his wife, both 75 years old, wish to move from their home in Georgia to a new home in New Mexico. Richard is concerned he won’t get a fair market price for his home because of declining home prices and wants to wait until prices rebound. They decide to use a HECM for Purchase Program reverse mortgage to buy the new home and retain the old home. This way they will not have to make mortgage payments on the new property, for which they paid $185,000. They also plan to rent out their current home as a way to generate additional income. They qualify for $116,000 reverse on the new property in New Mexico, so they pay the $69,000 difference from existing cash assets.

An additional benefit to the “for purchase program” is that you can’t outlive the loan because you can never owe more than the value of the home at the time you or your heirs sell the home. When you sell the home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees to the lender. Any remaining equity belongs to you or your heirs.

These government-backed “for purchase” reverse mortgages are “no-recourse” loans, meaning if the borrower defaults, the lender’s recovery is limited to the sale value of the house. For example, if real estate values have declined at the time the loan comes due, and the home no longer is worth as much as the amount loaned, the FHA pays the lender the amount of the shortfall.

HUD recently clarified that the borrower cannot choose between paying the loan balance or paying an amount equal to the value of the home. Instead, when the loan is due, the borrower must either pay the balance due or default on the loan, in which case the bank sells the house and uses the proceeds to satisfy the loan.

However, even if that happens, you or your heirs will never owe more than the value of the home.

HECM loans are available only through an FHA-approved lender.

There are numerous calculators on such sites as AARP and Golden Gateway Financial that can help you determine which reverse mortgage is best for you.

Further information, including a list of FHA-approved lenders, is available free from the FHA.

One added cost to a reverse mortgage is an extra insurance premium, usually more than a conventional mortgage, which has to be paid by the homeowner to insure the lender against the possibility the homeowner lives longer than anticipated, says Bachman.

The insurance guarantees you will never pay more than a stated amount despite increased borrowing costs over time. More than 90 percent of all reverse mortgages in the United States are also HECM loans insured by the federal government through HUD. The insurance applies to the FHA mortgages. This insurance is what makes a reverse mortgage more expensive than a conventional or straightforward mortgage.

On a positive note, interest rates on reverse mortgages today are similar to conventional mortgages. In addition, fees associated with a reverse mortgage cannot exceed 2 percent of the first $200,000 and 1 percent of the balance, with a maximum of $6,000.

There’s another potential upside to having a reverse mortgage. “If the house appreciates in value, you benefit from the appreciation and can refinance the reverse mortgage for a higher amount and benefit from a larger revenue stream,” Bachman says.

HUD Secretary Shaun Donovan today announced that the Federal Housing Finance Agency has authorized Fannie Mae and Freddie Mac to raise the Home Affordable Refinance Program’s (HARP) loan to value (LTV) ceiling from 105% to 125%.

The Home Affordable Refinance Program was designed to assist borrowers who have demonstrated an acceptable payment history on their existing Fannie Mae or Freddie Mac owned mortgage loan. Unfortunately due to rising unemployment levels and increasing foreclosure rates, demand for housing has weakened and property values have continued to decline, which has blocked many borrowers from utilizing HARP.

The expansion of Fannie Mae’s and Freddie Mac’s LTV guideline aims to expand qualified homeowner’s refinance opportunities. The underlying initiative is that lower monthly mortgage payments will raise real household incomes and therefore afford more spending power upon consumers. In a government press releases, Treasury Secretary Tim Geithner stated…

“By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly. It’s a crucial step in our broader efforts to get America’s housing market and economy on the path to recovery.”

Thus far the effectiveness of the HARP program has faced many barriers. Among these roadblocks: lenders adding underwriting overlays and guideline restrictions, lenders all together not participating in the program, difficulty determining if Fannie Mae/Freddie Mac own your mortgage because of addresses not exactly matching the original note, additional costs because of lender imposed risk based loan level price adjustments (on top of GSE LLPAs), the unwillingness of banks to subordinate second mortgages, reluctant mortgage insurers, and the Home Valuation Code of Conduct.

Kent Mikkola, a mortgage consultant from Roseville, Minnesota says “Overall, it is difficult to obtain a HARP approval. Furthermore,  it is even more difficult to find out why a seemingly eligible borrower has been denied”

Since the program was launched on April 1,2009 several updates have been made to counteract these roadblocks, however HARP remains unable to live up to the hype surrounding it. That said, today’s announcement, although appreciated, was broadly overlooked by skeptical mortgage professionals. John Rodgers, president of Prime Mortgage Lending in Apex, North Carolina, had this to say:

“It appears that the Obama Administration is aware of the constraints blocking borrowers from lower mortgage payments. Unfortunately, today’s update will likely prove ineffective in lowering those barriers. At this point granting appraisal waivers, allowing reduced documentation, and cutting loan level price adjusters appear to be the only way HARP will ever be effective. Otherwise HARP will turn out to be yet another loan program nobody can use, much like like FHA Secure and the Hope for Homeowners program.”

Nonetheless, borrowers who are in trouble with their mortgage should find out if they are eligible for a refinance or loan modification.

Thanks to Mortgagenewsdaily.com