Also known as a home equity conversion mortgage (HECM), a reverse mortgage allows homeowners age 62 and older to tap into up to approximately 65% ​​of their home’s unused equity. In short, reverse mortgages are insured by the Federal Housing Administration (FHA) and do not require repayment unless the owner sells or moves to another home. While it is true that reverse mortgages are most commonly used by seniors who are refinancing their personal home that they have owned and lived in for several years, there are some very savvy real estate investors who are using reverse mortgages to provide a unparalleled service and a myriad of new options for families who think their home financing options have run out.

Transaction Summary

Reverse mortgages (RMs) can be a viable exit strategy for real estate investors who understand the rules of reverse mortgage financing and creatively market their services to qualified seniors. The United States Department of Housing and Urban Development (HUD) has 2 RM programs; one allows a senior to purchase a home using a reverse mortgage. The other most common program involves the refinancing of a senior’s personal home. It is difficult for investors to benefit from the reverse mortgage purchase program because the senior homebuyer has to show potential lenders where their down payment came from; either from the sale of an existing home or 60 days of “seasoned” down payment money verified through bank statements. The refinance option is easier but has a drawback: the senior must own the home in question for a minimum of one year before refinancing. This means that the real estate investor has to officially transfer the property to the qualified RM applicant and let the property “heal” for one year before the reverse mortgage refinance takes place. The senior must also live in the home with the intention of staying there long-term. When the senior refinances, they are taking out the maximum equity allowed on the home (approximately 65% ​​of the appraised value). Refinancing funds pay the investor who uses a mortgage lien as a mechanism to ensure that the mortgage funds are properly transferred after the transaction closes.

investor acquisition

The actual size of the loan that a senior loan applicant will be able to obtain is a function of their age, the appraised value of the home, and the zip code in which the subject property is located. Generally speaking, a reverse mortgage covers about 65% of a home’s appraised value. This means that investors looking to trade houses using this exit strategy need to buy very low; preferably in the suburbs or in areas with a low foreclosure rate. An investor’s purchase of a home plus closing costs, taxes, and rehabilitation costs must be well below 65% of the final appraised value of the home one year after the date of transfer of title to the primary borrower for the transaction to be profitable. In 2009, the maximum allowable loan amount in RM was raised from $417,000 to $625,500. Any investor looking to hit a “home run” using this technique probably shouldn’t buy homes worth more than $1 million.

seasoning requirements

The seasoning of the title is the main drawback of this exit strategy. In 2008, the FHA and its network of RM lenders began requiring seniors to own the home they want to refinance for one year prior to refinancing. What this means for investors is that they are required to formally sell their investment home to the senior loan applicant and then wait a year before the senior refinances. The associated paperwork and closing can easily be done at a title company. No money changes hands with this “sale” (which is really just a transfer of title). Having to wait a year to collect can be dangerous for investors in uncertain market conditions, as home values ​​can fall during the time the senior lives in the home. When a year has passed and the refinancing process begins, the lender will request the HUD-1 Settlement Statement from the original closing and a payment statement from the senior’s current lender (which is the investor who sold the home to the senior ).

investor protection

Obviously, the senior is protected during this type of transaction, as they will literally own the investor’s home for a year before refinancing. In order for the investor to also be financially protected during this process, the senior must draft and sign a formal mortgage note during the original title transfer at the title company. The mortgage must be for an amount equal to or slightly less than the amount of the loan that the investor will collect at the end of the process. This amount can be calculated online on any simple reverse mortgage calculator or by speaking with a reverse mortgage specialist. The signed mortgage is recorded as a lien on the property and is paid to the mortgage holder (the investor) at the time the senior refinances the home. The investor must write an official payment based on the mortgage signed by the senior 12 months before. Some investors go so far as to form an LLC that sounds like a bank and provide official mortgage payment coupons to the reverse mortgage lender before closing. This maintains a professional image and helps the deal slide through the lender’s underwriting faster. Some investors charge the senior a full or partial mortgage payment until the deal closes, while other investors charge nothing as a gesture of generosity.

Appraisal Reviews

Because lenders currently control the appraisal process and reduce final home values ​​to numbers that protect their best interests, using the reverse mortgage exit strategy is recommended in areas that have low foreclosures, delinquency, and blight. Lenders are looking for any excuse to back out of mortgage origination right now, and a low appraisal is the best justification. Also, because the reverse mortgage investment technique takes over a year to complete, home values ​​can drop even further, which is a warning to investors who want to jump in and try this out. It’s wise to make a reputable appraiser your best friend and ask them to help you look for areas that are more likely to survive a lender’s appraisal slice before diving into uncharted markets.

Ethics

An investor cannot simply coerce a random senior into a home for personal financial gain. The senior loan applicant must be able to afford property insurance, routine maintenance, and annual taxes. Both the Federal Bureau of Investigation (FBI) and the Federal Housing Administration (FHA) recognize figurehead sale schemes within this genre of property sales. A “false buyer” using this investment technique would be a senior citizen who does not intend to occupy the home in question, who is unaware that their identity was used to complete this type of transaction, who is unable to pay the annual property insurance and taxes. , or an older person who does not have the mental capacity to make a cognitive reverse mortgage decision. Many investors abuse a reverse mortgage to simply turn a home’s equity into cash; using a qualified senior for a reverse mortgage as their figurehead scapegoat. This could be why reverse mortgage lenders require every prospective reverse mortgage client to complete a counseling session over the phone or in person before obtaining a reverse mortgage.

Reverse mortgages are common and thousands of banks offer them. Unlike traditional mortgages that have been massacred by the banking system, reverse mortgage loans have remained relatively consistent. With an aging US population, an endless supply of cheap homes, and the availability of reverse mortgage funds, this investment technique is going nowhere; and it may be worth looking into the feasibility of this unique investment strategy.