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How a Reverse Mortgage Works Continued………
What if there aren't proceeds at the end? What if more money is owed than the house is actually worth?
Reverse mortgages in Texas, as well as the rest of the country, are known as "non-recourse" loans, meaning if under the circumstance more is owed to the lender than the home is worth, and the loan is due based upon death, sale, or vacating the premises for 12 months, the maximum amount the heirs are required to pay the lender is the value of the home at the time of repayment. The bank cannot come after the family ("non-recourse") for the difference.
At death the home is willed to the heirs who most often sell the property to pay back the bank. Any money left over goes to the family. If there isn't money left over, the bank is forced to write that off as a loss.
Naturally, banks don't want to put themselves in this position, which is why, in the state of Texas, they will lend typically between 50% to 75% of the value of the property, for values up to $417,000. For homes valued above $417,000, Texas reverse mortgage lenders lend progressively less money, as a percentage of the value of the home, the more the value of the home exceeds $417,000.
What determines how much a lender will lend to you?
This is calculated based upon a combination of three important factors:
- Age of the youngest person whose name will be attached to the mortgage. Naturally, the younger the borrower the greater the likelihood the borrower will be in the home for an extended time. Therefore the lender will lend less money. The person who needs to bring in the greatest down payment, as a percentage of the value of the home, is the person who just turned 62.
- Value of your home, determined by a formal appraisal conducted by a FHA licensed appraiser.
- Interest Rate: The lower the interest rate, the greater amount a lender will lend.
People often ask, "what percentage will a lender lend to me?" There is no fixed answer. It is a combination of all three of the factors named above.
Closing costs for the reverse mortgage:
Closing costs are more expensive than traditional forward mortgages. The reason is this: FHA insures these mortgages and charges a 2% upfront mortgage insurance fee. Additionally, the lender's origination fee is typically .5% to 1% higher than a traditional mortgage. Additionally, the costs are based upon the value of the home, not necessarily the initial loan amount.
Example Cost Scenario:
Sale Price: $200,000
- Loan Origination Fee: $4,000
- FHA Mortgage Insurance: $4,000
- Appraisal: $375
- Survey: $425
- Escrow Fee $350
- Title Insurance: $1,500
- Lawyer Doc Review: $200
- Miscellaneous: $200
How do these costs get paid? Traditionally, the costs have been financed into the loan for reverse mortgages. However, this is done out of necessity rather than strategy. Those purchasing a home typically opt to pay out of pocket for closing costs. By doing so, the origination fee may be deducted for tax purposes.
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