Mortgage Options for Seniors in Financial Trouble
|Written by Chris Hawkins|
SeniorLiving.Org Expert on Senior Care & Assisted Living
Medical bills piling up? Need to lower your mortgage payment? Want to avoid foreclosure? You may find yourself in any one of these financial predicaments. And tapping into your mortgage may be your best and in some cases, last option.
Mortgage refinancing today is a little different than it used to be.
Because of the mortgage meltdown that affected borrowers and creditors, qualifying for a refinance or even a reverse mortgage can be more difficult. Seniors may find additional difficulty because of their limited, fixed income. In addition to traditional sources, there are a number of federal programs out there that can help.
So whether you need a lower payment, cash to pay bills, or just want to avoid foreclosure, we’ll show you some of your options.
Refinancing—whether to grab one of the super-low current interest rates, to cash out on equity for living expenses and bills or just to avoid foreclosure—is an attractive option for seniors. Refinancing may mean the difference between being able to afford your mortgage payment and having to find a cheaper place to live.
Used to be, refinancing was as easy as getting a credit card. Everyone was doing it in the Wild West of refinancing—late 90s and early 2000s. Balloons, 120% LTV, inflated values, no appraisal, no doc loans, fly-by-night mortgage brokers. It seemed nothing was out of the question.
And of course, that was the problem. These loose guidelines combined with an aggressive investor market for the risky loans (mortgage-backed securities) inflated and eventually burst the housing bubble.
Today, refinancing is a lot more difficult thanks to this mess. Banks are taking a more Scrooge-like approach with their lending. Seniors can be particularly effected by the tightening of the purse strings for several reasons.
First, retirees are typically on a limited income such as Social Security. And even though they may have thousands put away in retirement nest eggs, lenders don’t use these assets in calculating a person’s debt-to-income ratio.
If you are having trouble refinancing, here are some avenues to consider, depending on your needs and situation.
Start with Your Current Mortgage Holder. You have a history with this company. And they don’t want to lose your business to a competitor if you’ve been a good customer. Talk to a lender representative about what you want to do. It’s usually (but not always) easier to refinance with a company that already knows you.
If you’re having difficulty paying your mortgage, your current lender may be able to help with a loan modification program—making your mortgage more affordable to avoid foreclosure. It’s in their best interest to help.
Check out Hope Now, an alliance of mortgage companies and counselors created to reach out to homeowners in distress. Their goal is to help homeowners stay in their homes with support, guidance and referrals to programs that can help. Participating banks include Bank of America, Citigroup, HSBC, PNC Mortgage and Wells Fargo among many others.
These mortgages allow those 62 and older to borrow money against the equity in their home. And as the name implies, instead of the borrower paying money to a lender, the lender pays money to the borrower, reversing the payback. You pay off the loan when you die, move, or sell the home.
The money can be used for home improvements, medical bills, living expenses or any other way of your choosing.
The house title remains in your name. You repay the lender when the home is sold or from your estate. Additionally, the loan must be repaid if you fail to pay your property taxes or homeowner’s insurance or if you let the property’s condition deteriorate.
Repayment includes the cash you received, plus interest and fees. Any remaining equity belongs to you or your estate.
The concept of reverse mortgages has been around for over 50 years. But it wasn’t until the Federal Housing Authority (FHA) got into the act in 1988 that these mortgages gained popularity and a standard format. It was then that the FHA partnered with 50 lenders for a reverse mortgage pilot program.
Today, there are hundreds of lenders with most reverse mortgage loans insured by the FHA. Recently, though, the FHA has been tightening requirements and changing some of their products because of the high number of reverse mortgage loan defaults.
Before, if you could fog a mirror you could qualify for a loan. Now, the same factors (credit scores, income, debt, assets) used for regular mortgage refinancing will be assessed when looking at applicants for reverse mortgages.
The FHA calls their reverse mortgages a Home Equity Conversion Mortgage (HECM) and comes in several flavors: standard, saver, and purchase.
The HECM Standard includes a loan origination fee, third party fees (appraisal, title, etc.), FHA Mortgage Insurance Premium (MIP), servicing fee and interest. The MIP, which protects lenders in the event of borrower default, is a one-time 2% fee of the lesser of the appraised value or sales pric.
You’ll also be charged 1.25% MIP fee for each year that you have the loan.
The HECM Saver requires significantly less closing costs but also restricts the amount you can borrow. The initial MIP, for example, is just .01%.
The HECM Purchase allows you to purchase a new primary residence outright using the proceeds from a reverse mortgage. You may use funds from the sale of another home, cash, a retirement account and other types of retirement accounts.
According to HUD, “the program was designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs.”
Here are the current requirements for an FHA HECM reverse mortgage:
You must be 62, own your property free-and-clear, or have considerable equity, occupy the property as your primary residence, not be delinquent on any federal debt and you must speak to a HUD-approved HECM counselor.
You must live in a single family home or a 2-4 unit home with one those units occupied by you, or a HUD-approved condo project, or a manufactured home that meets FHA requirements.
Your income, debts, assets and credit history may be verified. Payment of real estate taxes and flood/hazard insurance payments may be verified for timeliness.
You can receive payments in the following way from your HECM:
- Tenure - equal monthly payments as long as at least one borrower lives occupies the home as their primary residence.
- Term - equal monthly payments for a fixed period of months.
- Line of Credit - unscheduled payments in an amount of your choosing until the line of credit is exhausted.
- Modified Tenure - a line of credit and scheduled monthly payments for as long as you remain in the home.
- Modified Term – a line of credit and monthly payments for a fixed period of months determined by you.
If you need advice on reverse mortgages, you can call HUD at 1-800-569-4287. You can also search for an approved advisor in your area by clicking here. Click here to search for FHA-approved reverse mortgage lenders.
*There may be comprehensive changes to reverse mortgages in late 2013 as Congress and the FHA revamp lending guidelines to protect the borrower from default and the federal government from losses.
FEDERAL MORTGAGE PROGRAMS
If you have no other option to lower your payment and/or save your home from foreclosure, check out www.makinghomeaffordable.gov. This HUD/Treasury Department-sponsored program may be able to help you lower your mortgage payment and save your home.
For example, the Streamlined Modification Initiative is a Federal Housing Finance Agency (FHFA) program designed to help people save their homes. Here’s how it works:
If you are delinquent, your mortgage company must send you a letter indicating the terms of the modification. You will be sent a letter if you meet the following criteria:
- Your loan is owned or guaranteed by Fannie Mae or Freddie Mac.
- Your mortgage is 90 days to 720 days delinquent.
- Your first mortgage must be at least 12 months old.
- Your loan-to-value ratio is 80% or greater.
If you make three payments on-time, your loan will then be permanently modified. Find out if Freddie or Fannie own your mortgage here.
The Home Affordable Refinancing Program (HARP) can help if you’ve “been unable to get traditional refinancing because the value of your home has declined.”
- The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
- The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
- The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
- The current loan-to-value (LTV) ratio must be greater than 80%.
- The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months
Owe more than your Home is Worth? The FHA Short Refinance program is for those are not behind on their payments but who are underwater on their home.
The catch is that your current mortgage servicer must agree to reduce the amount you owe to no more than 97.75% of your home’s current value.
- Your mortgage is not owned or guaranteed by FHA, VA or USDA.
- You owe more than your home is worth.
- Your mortgage payments are current
- You must be eligible for the new loan based on FHA guidelines.
- Your debts can’t exceed 50% of your monthly gross income.
- In the last 10 years, you must have no felony convictions for larceny, theft, fraud, forgery, money laundering or tax evasion in connection with a mortgage or real estate transaction.
Avoid Foreclosure & Move to More Affordable Housing. This is the idea behind the Home Affordable Foreclosure Alternatives (HAFA) program. You can do a short sale where your mortgage company lets you sell your home for less than what you owe. And in a Deed-in-Lieu (DIL) of foreclosure, your mortgage company lets you transfer the deed back to them.
- Must have a documented financial hardship.
- Your first mortgage is less than $729,750.
- You haven’t bought a new house within the last 12 months.
- You obtained your mortgage on or before January 1, 2009.
- In the last 10 years, you have not been convicted of felony larceny, theft, fraud, forgery, money laundering or tax evasion in connection with a mortgage or real estate transaction.
You may also be eligible for $3,000 in relocation assistance.
There are several other federal programs available. Go to www.makinghomeaffordable.gov for more information.
DO YOUR HOMEWORK
This is an overview of some of the mortgage options available to seniors so you’ll need to continue your research using other web sources, talking with friends and family, and mortgage counselors.
Here are some things to keep in mind as you begin your search:
- Get an idea of your home’s value. Use a site like Zillow.com to see what homes in your neighborhood are selling for. Many areas are seeing an increase in home values, albeit slowly. You’ll want to know what equity you have to work with.
- Carefully consider the total amount of mortgage you 1) need to meet your financial obligations 2) can afford 3) whether you’ll be able to pay if off before you die (i.e. terms).
- What are the fees such as points, origination, third-party fees, etc?
- Is there a pre-payment penalty if you paid the loan off early?
- What is the interest rate/APR? Is lowering your APR by 1%, 2%, etc. worth the costs of the refinance over the life of the loan?
- Is the APR fixed or variable? That low variable rate looks great now but what about when it goes up.
- Can you make extra payments on the principal thereby reducing the term and total amount of mortgage?
- What documentation is required from the lender?
- Will the mortgage be sold to another lender in the future?
- What is the reputation of the lender? Read reviews. Google is your best friend.
- How long is the approval process?
- Is the mortgage transferable/assumable? This option will allow you to transfer the mortgage deed and note to another party.
- Talk with a trusted family member or friend along the way. Bounce ideas off of them. And have them review any documents before you sign.
If all this seems confusing, you can take a quick survey to determine what option may be in your best interest. Check out the National Council on Aging’s www.homeequityadvisor.org.
And don’t forget to use HUD’s housing counselors found online here or by calling (800) 569-4287.
Take your time. Do your homework. And remember, if it sounds too good to be true, it probably is.
Updated: Aug 19, 2013