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New FHA reverse mortgage boon to seniors

A new Federal Housing Administration, or FHA, reverse mortgage program can help senior homeowners relocate or downsize to a new home without giving up all their savings -- and save them thousands of dollars in the process.

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They don't even have to sell their existing home first.

The program comes at a time when many financially strapped seniors are trying to boost their monthly incomes after being hit especially hard by the economic downturn: stock portfolio values plummeted, interest on investments shrank, and costs for health care and home repairs skyrocketed.

But help is now available through a new, but little known, FHA reverse mortgage program, known as the Home Equity Conversion Mortgage, or HECM, for Purchase program which gives seniors new ways to use equity in their homes. HECM loans have been available for several years.

The FHA developed the program because it noticed seniors were selling their homes, buying smaller, more affordable homes and then taking out reverse mortgages on the new properties. That meant they were paying closing costs twice -- first on the real estate closing, and a mortgage if they needed one to make the purchase, and then again when they switched to a reverse mortgage.

Program combines costs
But now, the new HECM for Purchase program allows seniors to buy a home directly with a reverse mortgage -- paying closing costs only once, says Bill Glavin, special assistant to the commissioner of the FHA. A sale of an existing home is not necessary and is not part of this transaction.

The new HECM program allows using a reverse mortgage to buy a single-family home, a condo or a small multifamily residence, and allows them to convert some of the equity in their existing home to cash. They never have to make a single payment. Instead, they would collect monthly payments out of the equity on a tax-free basis as long as the home serves as their principal residence. If they did not sell their previous home, they could get additional income out of renting that property.

Under the plan, you can choose to take the money either in monthly payments, as a lump sum, a combination of the two or even in a line of credit that you can access whenever you need cash.

Higher amounts this year only
What's more, this year, seniors can access up to $625,500 -- up from $417,000 last year. In 2010, the amount reverts to $417,000.

Eligible homes can be one- to four-units, a condo approved by the U.S. Department of Housing and Urban Development, or HUD, or a manufactured home that meets FHA requirements. You must agree to pay your taxes and make any necessary home repairs. No credit check or income verification is required -- despite the current tight credit market.

To qualify for the program's reverse mortgage, a senior, age 62 or older, must:

  • Agree to live in the house as a primary residence.
  • Own the home outright or have enough equity to pay off any existing mortgages and equity lines with the proceeds from the reverse mortgage. Those with more equity may be able to access even more cash.
  • Not be delinquent on any federal debt.
  • Participate in a consumer information session given by an HUD-approved counseling agency or HECM counselor.

Most reverse mortgages range from 35 percent to 55 percent of the home's equity. You can, however, take out a reverse mortgage as low as $10,000, though it is not recommended because of the costs involved, says Eric Bachman, CEO of Golden Gateway Financial, a firm specializing in matching lenders with borrowers. "Many times, seniors are just looking to pay off their forward mortgage and cover closing costs (usually less than $10,000) with a reverse mortgage, to get out from under monthly mortgage payments," Bachman says.

Regardless of your income, the reverse mortgage pays you. The amount you can borrow depends on your age, current interest rates, and the appraised value of your home or FHA mortgage limits for your area, whichever is less.

How much you can borrow
Generally, three factors will affect the amount you can borrow:

  • The value of your equity (the higher the better).
  • Your age (the older the better).
  • Interest rates (the lower the better).
 
 
Next: "... You or your heirs will never owe more than the value of the home."
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 RESOURCES
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The ins and outs of reverse mortgages
Reverse mortgage payments don't grow
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