Maturing With Mortgages

Baby Boomer Borrowers

Market research firm Morning Consult found that 55% of baby boomers plan to remain in their existing homes as they age, but just 24% are actually preparing those homes for aging. 

Furthermore, the older population is also slated to expand; the U.S. Census Bureau indicates that the 60-plus crowd will represent 32% of the total adult population in the next 10 years.

“I think right now you have a major opportunity for renovation loans to continue to grow over the next decade,” says Jeff Onofrio, SVP of renovation and construction lending and originating branch manager of the Onofrio Mortgage Group in Marlton, New Jersey. His company specializes in FHA’s 203(k) and Fannie Mae’s HomeStyle loans, helping borrowers to modernize their homes using future equity.  

“A lot of people don’t know these programs exist,” Onofrio says. “Every situation is different. If they’re buying a property and planning to make that their aging-in-place home, it makes potential sense for them to buy the home using a renovation loan.”

That way, he adds, buyers have a budget to make desired improvements before they settle into their new home. “Somebody moving into a 55-and-older community and they want to customize it their way, that could be a great option for them.”

Typically a bank will value a home based on the present market, but with renovation loans, appraisers wear rose-colored glasses.

“One of the key benefits is that we go off of future value – what the senior is going to do with their loan,” Onofrio explains. “As people get older and they’ve been in that home for 10, 20, 30 years…it becomes in disarray. The opportunity for them to have the work they need projected off the value of the updated home can be a really good opportunity.”

The down payment can be as little as 3.5% for the FHA renovation loan and 5% with the HomeStyle program. The Federal Home Loan Banks and government-sponsored enterprises provide consultants to oversee home projects, which can be helpful for people that don’t know the first thing about knocking down walls.  

“We have a HUD consultant who’s going to be the eyes and ears for the Baby Boomer,” Onofrio says. “If they’re not a contractor by trade, it’s good to have somebody there who’s going to be involved and who’s going to have their best interest in mind.”

Seniors 62 and older who qualify for reverse mortgages (in some states, it’s age 55) can make improvements to their homes with equity they’ve built up, remaining in those homes until they die with no financial obligation to anyone all the while.

It might come as a surprise, then, to learn that there are currently only about 200 Certified Reverse Mortgage Professionals (CRMP) in the U.S. 

“The way I think about it is on a regular mortgage, you put your money in through the bank window, the window closes and says, thanks. It doesn’t open back up. You can’t reach back in and get it unless you refinance somehow or maybe sell the home. But in reverse mortgages, that window stays open,” says Christina Harmes Hika, CRMP and president of Reverse Loan Solutions, a division of Amerifund Home Loans. 

She hosts a reverse mortgage mastery course every Wednesday from her home base in San Diego, educating loan officers on the intricacies of reverse mortgage loans. “It’s a really complex product,” she says. “There’s no DU system you can run the numbers through and have it tell you ‘all looks good’. It takes a little extra work, a little extra know-how.”

Reverse mortgages only apply to primary residences, so potential borrowers must certify that they live in the mortgaged property for more than half the year. 

“This is much more of a retirement planning tool than any other mortgage,” Harmes Hika says. “It’s not intended for people to be able to rent out a property that they’re not living in. It’s intended for seniors to be able to stay in their homes long-term.”

But, the reverse mortgage isn’t for everyone, even if they meet the minimum age and primary residence requirements. Some people don’t have enough equity to borrow against, for example. 

“There are people I tell today, ‘I’m so sorry, but this is not a financially-sustainable solution. You probably need to downsize.’ And they didn’t use to do that. They used to just get them into a reverse mortgage because they could,” Harmes Hika says. “Now we have to income- and credit-qualify. And they have to go to a third party, HUD-approved counseling session.”

If a life event caused a potential client to fall delinquent on a bill, that will show up on the now-mandatory financial assessment. Lenders must ensure the person has enough residual income to continue paying their taxes, insurance, utilities, and related costs.

If there are unpaid property taxes or insurance charges, the lender can enforce a Life Expectancy Set-Aside (LESA), withholding a pool of funds from the client’s total available reverse mortgage proceeds to pay for these throughout the estimated life of the loan. 

Overcoming Misconceptions

Borrowers who can benefit from reverse mortgages often don’t know they exist or that they qualify. Sometimes they have been warned against predatory reverse mortgage lenders. 

“People think that the bank’s going to take their home, or that they’re selling it somehow – they’re not,” Harmes Hika says. “It’s a mortgage just like any other mortgage, which is a lien on title. The difference is there’s no required monthly mortgage payment. So it gives you a lot of flexibility. And because the home appreciates, they will still have more equity in the future.”

Even if they live to be 120, the line of credit from the reverse mortgage cannot be frozen, she adds. “For a retired person on a fixed income, that could mean the difference between getting groceries that week or not. This is a highly misunderstood, but really amazing product when you find the situations it fits for. And it fits for a whole lot more situations than people think it does.”

Many older borrowers have misconceptions about reverse mortgages that pre-date consumer protections put in place over the past decade. 

“Prior to 2011, financial planners were not allowed to talk about reverse mortgages,” says Harmes Hika. “It meets a lot of needs, but they weren’t paid on it, so there was no protection for the risk. ‘You said I should get a reverse mortgage, I’m gonna sue you.’ So they put a law in place saying don’t talk about it at all. That law’s been lifted because it’s a really needed thing. I think in the future we’re gonna see people suing their financial planner because they didn’t bring up the reverse mortgage.”

Perhaps the most significant change was the addition of insurance protection to FHA’s Home Equity Conversion Mortgage (HECM). This protection ensures a borrower won’t lose their house in case of unforeseen circumstances. The most widely-used type of reverse mortgage, HECMs require a full appraisal, no waivers allowed. 

“If for some reason we have a 2008 market again, where everybody owes way more than their house is worth, FHA steps in,” explains Cicely Carda, a loan officer with Amerifund Home Loans in Denver. “If a servicing company goes out of business it automatically transfers and your loan continues on as it was. If my father passes away and for some reason his loan is a higher balance than what his home is valued at, that’s all forgiven. That’s a huge thing, that you’re not leaving your heirs with a big debt.”

Carda practiced selling a reverse mortgage on her father, a retired math teacher who didn’t think it would work for him – until the day it did, several years ago.

“About two weeks later he called me and said, ‘I’m going to do it.’ I was like, ‘What changed your mind?’ And he said, ‘Well, why would I make a payment on my house if I don’t have to?’ He wasn’t looking for additional income, but after the presentation, he wanted it.”

Hands clean of a mortgage payment and tapped into a new line of credit, Carda’s dad is now planning a trip to New Zealand.

“For a long time after we had done the loan he was still telling me how happy he was with it,” she continues. “He’s 73 now and still very happy with it.”

Traditionally, families aim to pay off their mortgage by retirement and pass the house down to the next generation. “That’s not the way the world works anymore,” Harmes Hika says. “They don’t all live on one big homestead. And the kids don’t want the physical home, they want the equity. They want the cash. And realistically, they want their parents to be taken care of.”

Her grandfather died after moving into a new apartment, falling and breaking his neck, so this is a matter close to her heart.

“A reverse would have been perfect for him,” she says. “If I can help one family not experience that because they get to stay in their own home…”

Mortgage insurance protects borrowers so that the lender can’t look to anything other than the property for repayment of the loan. The HECM can even protect a surviving spouse who is under age 62, allowing them to defer the loan until they sell or move. 

“There’s also a really cool provision we call the 95% rule, where the heirs could actually pay off 95% of the market value and get the home, and the rest is forgiven,” Harmes Hika adds.

This Loan, That Loan, Then Another?

LOs in their first reverse mortgage rodeo have much studying to do before jumping in the ring. 

“Loan officers don’t police themselves well enough in this space, and because there’s no extra licensing required to do a reverse they handle it really sloppy,” Harmes Hika says. “It’s much more of a financial planning tool and it needs to be taken with that gravity. You really are an advisor when you do this product and you need to be knowledgeable enough to be the advisor.”

CRMPs are accustomed to a client’s adult children, accountants, and even friends and real estate agents joining the conversation. 

Harmes Hika has a YouTube channel, a Facebook group, and over 1,600 LOs participate in her weekly class. It’s how she debunks misconceptions about reverse mortgages and how she ensures more seniors like her granddad don’t get steered into bad situations. 

Since doing reverse mortgages all day, every day, the first chat she has with potential clients is about setting goals.

“If they tell me they’re going to remodel their house and sell within a year or two, I say, ‘Okay, great. Why don’t you go get a HELOC?’ In that case, a HELOC is a better choice.”

Different companies offer jumbo reverse products that allow borrowers to access up to $10 million. That can subsidize the cost of at-home nursing care for ailing homeowners. 

“The reverse mortgage is paying for the care and their retirement portfolio is staying on track and has the opportunity to grow,” Harmes Hika says, giving an example of one such client.

Home equity lines of credit (HELOCs) are not only suited for wealthy borrowers or limited to helping those hard up for cash. Carda has a borrower considering buying a winter home in the Southwest with their equity.

“It’s not always out of a dire need,” she says. “Sometimes it’s just, I have $400,000 in equity that’s just sitting there. Might as well use it and not create additional debt for myself.”

Sometimes it behooves a consumer to look into their future, towards other potential borrowing opportunities. A renovation loan or a HELOC today, a reverse mortgage tomorrow.

A younger boomer still building their bucket list might renovate their home now, accumulate more equity, then draw against that equity with a reverse loan in their sunset years.

“I think it’s just a matter of where we catch the customer in their journey,” Onofrio says. 

When he does a renovation loan for an existing homeowner, it’s considered a refinance. 

“We’re taking your existing mortgage, paying that off, and then we’re setting you up with a new loan that includes the amount that you currently owe plus the renovation budget that you’re going to be using for the modernization of the home.”

LOs who have the know-how to do any of these loans can carve out a place for themselves in the senior borrower market.  

“I think becoming someone that really understands how to utilize these products makes you more valuable as a loan officer, so I think they need to try to embrace it and learn as much as they can,” Onofrio points out. “That will ultimately turn into more opportunities for additional sales and for creating better relationships with their agents.”

Property taxes have risen significantly around the country, and retired folks bear that burden particularly hard.

“They have all this equity, so why not use that to help them stay in their house?” Carda says.

People living on a fixed income don’t need unexpected rises in their monthly bills, which is what can happen when a mortgage amortizes and the payment jumps.

“HELOCs are not inherently bad, but what’s not great is when the wrong financial tool is put into a situation that it’s not a good fit for,” Harmes Hika says. “A 63-year-old is not in a better position to make a larger payment at age 73.”

She gets calls from LOs who did HELOCs or cash-out refinances with borrowers that left the borrower strapped for cash years later. 

“A lot of loan officers don’t know about the reverse and how perfect it is for people of retirement age, so they go to the tools they know. Had they, at that point in time, instead done a reverse mortgage, the person would have qualified. They had enough equity. But because they did a HELOC or a cash-out, now there’s not enough equity. So to even put a reverse mortgage in place, they would have to bring cash to the table, cash that they don’t have.”

An LO once asked her if it was ethical to do a reverse if a client qualified for another product. “I was like, ‘it’s not only ethical, but I think it’s your responsibility to disclose they have this option.’”

Considering the ideal loan products for seniors, Carda casts her vote for reverse.

“Without creating additional debt,” she says, “I don’t see anything that would be as beneficial to seniors as the reverse mortgage is.”