Will my house qualify? You need to knowNelson A. Lockereverse mortgage, interest rate, classes of property, HUD
Many times, seniors consider a reverse mortgage as a viable way
of increasing their retirement cash flow, but sit and wonder if
their property will qualify. While they sit and wonder, rates are
fluctuating and, in some cases, moving against their interests. By
interests, I mean the amount of cash benefits they might derive
from a reverse mortgage. Usually, in the case of a reverse
mortgage, if the interest rate climate is one of increasing rates,
waiting is not in the senior's best interest. We will save that
discussion for our next bulletin, so let's go back to qualifying
property types.
This is really fairly simple. There are four or five classes of
property that you will encounter with your seniors they should fit
into one of these classes:
1. Single-family detached homes
2. Single-family attached homes (condos and townhouses)
3. Duplexes, triplexes and quads, where one unit is
owner-occupied
4. Manufactured housing built after 1976, to the U.S. Department of Housing and Urban
Development (HUD) standards with a HUD medallion on it,
permanently tied to the ground, double wide and able to pass a
heightened scrutiny type of inspection
5. Co-ops, but so far, only in a few states like New York
In all cases, the senior must occupy the home as their primary
residence. This means they call it home they eat Thanksgiving
dinner there and entertain their kids, you get the picture? There
is an originator running around Florida telling people that if they
occupy the house for one day of the year, that is sufficient. It is
not what that is is fraud. Your client must have the property as
their home stead; they must get utility bills there, keep clothing
there I hope this picture is coming through loud and clear. As more
and more of you forward originators get into this business, there
will be more and more attempts made at creative occupancy. Please
don't do that. This is a wonderful program, and it does wonderful
things for seniors. But the property is the only source of
repayment, and with the exception of a few private programs out
there, HUD and Fannie Mae
require that the subject property be the principal residence. I
think I have said enough.
Now let's talk about condition. Remember, the house does not
have to be perfect. There can be minor repairs that need to be
done, and most of the reverse mortgage programs will allow the loan
to close, holding back a portion of the benefits to fund the needed
repairs. You are probably used to having to complete repairs before
your client can close. This is different with most reverse mortgage
customers.
What about insurance and taxes? These will usually remain the
responsibility of your senior, so you must not think in terms of
escrows but rather in terms of impressing upon your client that
they need to set some of their cash aside to be sure to keep these
items current. If the senior fails to maintain property insurance
or fails to pay their property taxes, that is a maturity event
(meaning default) and can cause the servicer to inform the investor
and perhaps call the note. Look at it this way: You are probably
eliminating a big old mortgage payment for your client when they
close on their new reverse mortgage. A certain portion of that big
old payment was escrowed for taxes and insurance. Have them commit
to set that portion aside, so they won't come up short at the end
of the year. Remember, I have said repeatedly that if you explain
these things up front, you will avoid causing problems later.
Paying taxes and maintaining insurance is no exception.
Onto condos here we have a real conundrum. Let me describe the
perfect condo first. It will be listed on the HUD approved list,
which you can access at
https://entp.hud.gov/idapp/html/condlook.cfm. If it's on this list,
write the deal up as fast as you can!
If it's not, then you have to follow the Spot Condo procedures.
There is a questionnaire that is required and you should try to
obtain back-up documentation for the cash reserves information that
you obtain. Here's what to watch out for: If a condo has no
reserves, how is it preventing deferred maintenance? It might be
using fund accounting. If the condo has no reserves, ask for the
year-end financial statements and read the notes. Fund accounting
is sometimes acceptable to HUD in lieu of cash reserves because it
is basically a reserve by another name.
Look for law suits. If the association is involved in legal
action where it is the defendant, this will be problematic and you
will have some explaining to do.
Also watch for the percentage of units used as rentals rather
than as owner-occupied property. The intent of the HUD program in
particular is to invest in developments and homes that are owner
occupied, because owners usually take better care of the
collateral. Makes sense to me.
Watch for recreational leases. If they exist, they will need to
subordinate to third position behind the investor and HUD. Certain
condo developments are not acceptable to HUD at all because of the
nature of their relationships with the developer vis-à-vis the
recreation lease. So check it out before you do a ton of work.
Thanks for reading. Back at you soon!
Nelson A. Locke, CRML is a past president of the Florida Association of Mortgage Brokers,
a founding member of the National Reverse Mortgage
Lenders Association, the founder of the Association of Reverse
Mortgage Specialists Inc. and CEO of Value Financial Mortgage
Services Inc. He hosts the public television program "Ask Mr.
Mortgage," discusses reverse mortgages daily on AM radio and
designed the FAMB training course "Understanding Reverse
Mortgages." He may be reached at (800) 760-5363 or e-mail
[email protected].
