Reverse Mortgages

The Classics: Cars or Senior Citizens?
by Robert Trommler

In California, an automobile can -officially sport vintage license plates if 25 years have passed since it was manufactured. That vintage auto might be considered a classic if the model has some treasured attributes, such as chrome side trim, running boards, and a gleaming hood ornament. “Classic” takes on a completely different meaning in the world of seniors, particularly when it comes to how this generation looks at financial matters.
When considering stocks and bonds or reverse mortgages, seniors usually have a classic profile: they are financially conservative to a fault, are risk averse, make decisions slowly, and can be selfless and focused on others, almost to a fault.

These can be admirable characteristics can spell trouble for seniors, especially if looming health issues slow the movement of finances when no living trust or power of attorney has been established.
The reverse mortgage is a popular subject and most seniors have opinions about it. The industry is maturing at warp speed and bringing many welcome developments by introducing new loan programs and improving existing ones. The stigma is dropping away as more is understood about reverse mortgages.
As a result, it is one of the most highly disclosed loans available in the country. There are no hidden costs and no extreme terms or conditions at the bottom of the last page of the application in small print.

Is this loan for every senior homeowner? Most certainly not. But the profile of the usual borrower has changed. The image of the stereotypical borrower who uses the loan as a last resort has given way to the borrower who is eager to start the home remodel project, fund a dream vacation, pay for the grandchildren’s college tuition, pay for medical procedures, or pay for in-home care so they can remain in their home.
Porsches sometimes find their way into borrower’s garages and vacation or rental properties become part of investment portfolios. Long-term care policies are written. Hearing aids help spouses to hear their mate’s voice once again (this can be either good or bad news). Churches and charities receive checks that would not have been possible without the funds from a reverse mortgage. In many cases, a borrower just wants to remain in their home without making any additional mortgage payments, which the loan will do when the numbers work properly. The responsible, creative, and intelligent uses of this loan program are fascinating.

The tax-free loan proceeds can even be structured into a gift trust, which can reduce a property’s estate tax liability. In the future, the reverse mortgage will probably become a common part of diversified estate planning.
The basics of the program are as follows:
• Minimum applicable borrower (on title) age is 62+.
• Loan proceeds can be paid out in lump sum, monthly payments, or held in a line of credit for use as needed.
• The FHA program has lending limits that adjust by zip code. A jumbo program is also available with no effective loan limits.
• Pre-payment penalties do not exist and these loans can be retired (repaid) at any time.
• 
The loan becomes due and payable when the borrowers no longer occupy the property as their primary residence.
• The programs carry mandatory mortgage insurance, which makes the loan a non-recourse transaction. Liability for loan repayment does not pass beyond the home.
• The title of the property remains in the borrower’s name.
• Counseling borrowers on the program is a required before a loan can be approved.
• The borrower is responsible for keeping property taxes and homeowner’s insurance current and in force.
• An existing mortgage must be paid off (and transferred into the reverse mortgage) before any cash out is available to the borrower.
• Income, assets/liability status, employment, credit score, and medical conditions are considered for loan approval.
Are reverse mortgage loan applications ever denied? Yes. A common reason is when a mortgage is too large (for an applicant’s age). Programs tend to favor older seniors with medium size mortgages or younger borrowers with little or no existing notes on their property.
Unfortunately, two other frequent conditions can thwart a loan. Seniors are sometimes reluctant to mortgage an inheritance. Leaving a financial legacy may be more important than making their golden years truly golden.
But, since these loans only make a portion of the home equity available to a borrower, they intend to accomplish two important goals: freeing up tax-free proceeds and preserving a portion of home equity for the borrower to pass along to their family.

Another hurdle is when the senior home-owners do not give themselves permission to have a better lifestyle. This can be a very frustrating experience from a sales and marketing perspective. The need may be clear, the family and friends may be in agreement, the numbers may work, but it’s just not going to happen this time or probably ever. You wonder what changes could have been wrought and what lives could have been touched, if it weren’t for that inability to make a decision.

In the world of classic cars, it makes financial sense to preserve and restore the original design of a valued auto. But, with classic seniors, we should preserve and admire the original design, but look for opRportunities to encourage appropriate change while respecting the patina of their years.
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Robert Trommler is a reverse mortgage consultant. For more information call his office at 949-809 2597 or his cell phone at 714-856 9555.