Remember that a reverse mortgage is a loan that must be repaid. “Not all advertisements clearly indicate that a reverse mortgage is a loan,” said Mira Marshall, an FDIC Section Chief specializing in consumer issues. “In fact, a reverse mortgage is a very complicated loan that uses home equity as collateral, just like the mortgage you probably used to purchase your home.”

Reverse mortgages allow homeowners to receive cash in a lump sum, through monthly payments, as a line of credit whenever they need money, or any combination of these options. Unlike traditional mortgage products, homeowners do not make any monthly payments to the lender. However, they eventually do have to repay the principal and interest when they move, sell the house or pass away. And, because no monthly payments are being made, the amount owed will grow over time as interest costs build up and, in some cases, as additional funds are advanced.

The borrower also is still responsible for paying the property taxes and insurance and maintaining the house. Failure to do so can cause the reverse mortgage to become immediately due and payable in full.

The rules to determine how much you can borrow through a reverse mortgage are complex. For example, the total amount of cash available is a percentage of the home’s value that will vary by the age of the borrower and the location of the property. And if there’s a co-borrower, the value is determined by the age of the youngest borrower.

Let’s say your house has a market value of $250,000, you owe nothing on a mortgage and the youngest co-owner is 70 years old. Even though your home equity is about $250,000, with a reverse mortgage and depending on the location of the property, you can borrow only up to approximately $130,000. In contrast, with a traditional home equity loan, it may be possible to borrow up to 100 percent of the value of the home.

Be aware that not all reverse mortgages carry insurance and other protections from the federal government. The most common type of reverse mortgage — the Home Equity Conversion Mortgage or HECM — is offered as part of a program from the U.S. Department of Housing and Urban Development’s Federal Housing Administration. The FHA has protections for the lender as well as the borrower. In the case of the latter, for example, if the borrower or heirs sell the home to repay the reverse mortgage (instead of keeping the house and repaying the loan otherwise), the total debt will never be greater than the value of the home.

However, there are several types of reverse mortgages that are not FHA-insured. These are mostly reverse mortgages developed and offered by private companies, nonprofit organizations, and state and local governments. They may not offer the same guarantees and protections as an FHA-insured HECM.

Understand the costs and fees, which can be significant. Most reverse mortgages have an origination fee, closing costs and periodic servicing fees. There also is an additional monthly insurance premium for an FHA-insured reverse mortgage. The total amount of fees will depend on the loan product. And while the costs and fees can be added to the reverse mortgage instead of being paid up front, doing so increases the loan balance and incurs interest charges.

Borrowers also should keep in mind that the more cash they take out and the longer they go without making loan payments, the interest charges and other costs can use up much or all of the equity, leaving fewer and fewer assets for the borrower or heirs. And if you or your heirs want to keep the house instead of selling it, the full loan amount would be due and payable from your own funds, even if it’s more than the value of the property.

“Because the costs and fees can be extremely high,” said Mike Evans, an FDIC Fair Lending Specialist, “most experts generally advise homeowners not to take out a reverse mortgage if they plan to stay in their home less than five years or if they simply need extra money for small expenses.”

Do your research and shop around before committing to a reverse mortgage. To understand the potential pros and cons of a reverse mortgage, talk to financial advisors and qualified housing counselors. Depending on your circumstances, there may be other, less expensive options available to you. Explore different kinds of loans (including a mortgage refinancing, a home equity loan and a home improvement loan) and programs from local government agencies or nonprofit organizations. In some cases, it may even make financial sense to sell your home and downsize to a less expensive home or even a rental.

If you decide that borrowing money is the way to go, contact several lenders and compare the costs and benefits of the options they offer.

“Most financial experts also agree that it is never a good idea to use the funds from a reverse mortgage to purchase other financial products or services,” added David Lafleur, an FDIC Senior Examination Specialist. “Not only will you immediately incur expensive interest charges and other fees in connection with the reverse mortgage, but having large deposits or annuities may make it tougher for you to qualify for certain entitlement programs that take assets into consideration, such as Medicaid. Also, if you tie up money in CDs or annuities, you will be giving up easy access to funds you may need to meet your expenses.”

Additional information and guidance on reverse mortgages is available from HUD at www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm or by calling 1-800-569-4287.

Note: To receive an FHA-insured reverse mortgage, you must first speak with a HUD-approved counselor, who can provide you with information on this product and other alternatives so you can determine what is suitable for you.

Information retrieved from www.ftc.gov.

Here’s What to Do

The possibility of losing your home because you can’t make the mortgage payments can be terrifying. Perhaps you’re having trouble making ends meet because you or a family member lost a job, or you’re having other financial problems. Or maybe you’re one of the many consumers who took out a mortgage that had a fixed rate for the first two or three years and then had an adjustable rate – and you want to know what your payments will be and whether you’ll be able to make them.

Regardless of the reason for your mortgage anxiety, the Federal Trade Commission (FTC), the nation’s consumer protection agency, wants you to know how to help save your home, and how to recognize and avoid foreclosure scams.

Know Your Mortgage

Do you know what kind of mortgage you have? Do you know whether your payments are going to increase? If you can’t tell by reading the mortgage documents you received at settlement, contact your loan servicer and ask. A loan servicer is responsible for collecting your monthly loan payments and crediting your account.

Here are some examples of types of mortgages:

- Hybrid Adjustable Rate Mortgages (ARMs): Mortgages that have fixed payments for a few years, and then turn into adjustable loans. Some are called 2/28 or 3/27 hybrid ARMs: the first number refers to the years the loan has a fixed rate and the second number refers to the years the loan has an adjustable rate. Others are 5/1 or 3/1 hybrid ARMs: the first number refers to the years the loan has a fixed rate, and the second number refers to how often the rate changes. In a 3/1 hybrid ARM, for example, the interest rate is fixed for three years, then adjusts every year thereafter.

- ARMs: Mortgages that have adjustable rates from the start, which means your payments change over time.

- Fixed Rate Mortgages: Mortgages where the rate is fixed for the life of the loan; the only change in your payment would result from changes in your taxes and insurance if you have an escrow account with your loan servicer.

If you have a hybrid ARM or an ARM and the payments will increase – and you have trouble making the increased payments – find out if you can refinance to a fixed-rate loan. Review your contract first, checking for prepayment penalties. Many ARMs carry prepayment penalties that force borrowers to come up with thousands of dollars if they decide to refinance within the first few years of the loan. If you’re planning to sell soon after your adjustment, refinancing may not be worth the cost. But if you’re planning to stay in your home for a while, a fixed-rate mortgage might be the way to go. Online calculators can help you determine your costs and payments.

If You’re Behind On Your Payments

If you are having trouble making your payments, contact your loan servicer to discuss your options as early as you can. The longer you wait to call, the fewer options you will have.

Many loan servicers expanded the options available to borrowers during 2008 – it’s worth calling your servicer even if your request has been turned down before. Servicers are getting lots of calls: Be patient, and be persistent if you don’t reach your servicer on the first try.

You also may want to ask if you qualify for the “HOPE for Homeowners (H4H)” program. Congress created H4H to help those at risk of default and foreclosure refinance into more affordable, sustainable loans. The program provides a new, 30-year fixed rate mortgage insured by the Federal Housing Administration (FHA) if you and your lender agree to certain conditions. The program expires September 30, 2011. For more information, see www.hud.gov/foreclosure.

Avoiding Default and Foreclosure

If you have fallen behind on your payments, consider discussing the following foreclosure prevention options with your loan servicer:

Reinstatement: You pay the loan servicer the entire past-due amount, plus any late fees or penalties, by a date you both agree to. This option may be appropriate if your problem paying your mortgage is temporary.

Repayment plan: Your servicer gives you a fixed amount of time to repay the amount you are behind by adding a portion of what is past due to your regular payment. This option may be appropriate if you’ve missed a small number of payments.

Forbearance: Your mortgage payments are reduced or suspended for a period you and your servicer agree to. At the end of that time, you resume making your regular payments as well as a lump sum payment or additional partial payments for a number of months to bring the loan current. Forbearance may be an option if your income is reduced temporarily (for example, you are on disability leave from a job, and you expect to go back to your full time position shortly). Forbearance isn’t going to help you if you’re in a home you can’t afford.

Loan modification: You and your loan servicer agree to permanently change one or more of the terms of the mortgage contract to make your payments more manageable for you. Modifications may include reducing the interest rate, extending the term of the loan, or adding missed payments to the loan balance. A modification also may involve reducing the amount of money you owe on your primary residence by forgiving, or cancelling, a portion of the mortgage debt. Under the Mortgage Forgiveness Debt Relief Act of 2007, the forgiven debt may be excluded from income when calculating the federal taxes you owe, but it still must be reported on your federal tax return. For more information, see www.irs.gov. A loan modification may be necessary if you are facing a long-term reduction in your income or increased payments on an ARM.

Before you ask for forbearance or a loan modification, be prepared to show that you are making a good-faith effort to pay your mortgage. For example, if you can show that you’ve reduced other expenses, your loan servicer may be more likely to negotiate with you.

Selling your home: Depending on the real estate market in your area, selling your home may provide the funds you need to pay off your current mortgage debt in full.

Bankruptcy: Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, and can make it difficult to get credit, buy another home, get life insurance, or sometimes, get a job. Still, it is a legal procedure that can offer a fresh start for people who can’t satisfy their debts.

If you and your loan servicer cannot agree on a repayment plan or other remedy, you may want to investigate filing Chapter 13 bankruptcy. If you have a regular income, Chapter 13 may allow you to keep property, like a mortgaged house or car, that you might otherwise lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income toward payment of your debts during a three-to-five-year period, rather than surrender the property. After you have made all the payments under the plan, you receive a discharge of certain debts.

To learn more about Chapter 13, visit www.usdoj.gov/ust; it’s the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that oversees bankruptcy cases and trustees.

If you have a mortgage through the Federal Housing Administration (FHA) or Veterans Administration (VA), you may have other foreclosure alternatives. Contact the FHA (www.fha.gov) or VA (www.homeloans.va.gov) to talk about them.

Contacting Your Loan Servicer

Before you have any conversation with your loan servicer, prepare. Record your income and expenses, and calculate the equity in your home. To calculate the equity, estimate the market value less the balance of your first and any second mortgage or home equity loan.

Then, write down the answers to the following questions:

- What happened to make you miss your mortgage payment(s)? Do you have any documents to back up your explanation for falling behind? How have you tried to resolve the problem?

- Is your problem temporary, long-term, or permanent? What changes in your situation do you see in the short term, and in the long term? What other financial issues may be stopping you from getting back on track with your mortgage?

- What would you like to see happen? Do you want to keep the home? What type of payment arrangement would be feasible for you?

- Throughout the foreclosure prevention process:

Keep notes of all your communications with the servicer, including date and time of contact, the nature of the contact (face-to-face, by phone, email, fax or postal mail), the name of the representative, and the outcome.

Follow up any oral requests you make with a letter to the servicer. Send your letter by certified mail, “return receipt requested,” so you can document what the servicer received. Keep copies of your letter and any enclosures.

Meet all deadlines the servicer gives you.

Stay in your home during the process, since you may not qualify for certain types of assistance if you move out. Renting your home will change it from a primary residence to an investment property. Most likely, it will disqualify you for any additional “workout” assistance from the servicer. If you choose this route, be sure the rental income is enough to help you get and keep your loan current.

Housing and Credit Counseling

You don’t have to go through the foreclosure prevention process alone. A counselor with a housing counseling agency can assess your situation, answer your questions, go over your options, prioritize your debts, and help you prepare for discussions with your loan servicer. Housing counseling services usually are free or low cost.

While some agencies limit their counseling services to homeowners with FHA mortgages, many others offer free help to any homeowner who is having trouble making mortgage payments. Call the local office of the U.S. Department of Housing and Urban Development (www.hud.gov) or the housing authority in your state, city, or county for help in finding a legitimate housing counseling agency nearby. Or consider contacting the Homeownership Preservation Foundation (HPF) at 888-995-HOPE or www.hopenow.com. HPF is a nonprofit organization that partners with mortgage companies, local governments, and other organizations to help consumers get loan modifications and prevent foreclosures.

When choosing a counselor, beware of anyone charging large up-front fees or guaranteeing you a loan modification or other solution to stop foreclosure. They shouldn’t be charging you high fees or making any guarantees. Take your business elsewhere.

Consider Giving Up Your Home Without Foreclosure

Not every situation can be resolved through your loan servicer’s foreclosure prevention programs. If you’re not able to keep your home, or if you don’t want to keep it, consider:

Selling Your House: Your servicers might postpone foreclosure proceedings if you have a pending sales contract or if you put your home on the market. This approach works if proceeds from the sale can pay off the entire loan balance plus the expenses connected to selling the home (for example, real estate agent fees). Such a sale would allow you to avoid late and legal fees and damage to your credit rating, and protect your equity in the property.

Short Sale: Your servicers may allow you to sell the home yourself before it forecloses on the property, agreeing to forgive any shortfall between the sale price and the mortgage balance. This approach avoids a damaging foreclosure entry on your credit report. Under the Mortgage Forgiveness Debt Relief Act of 2007, the forgiven debt on your primary residence may be excluded from income when calculating the federal taxes you owe, but it still must be reported on your federal tax return. For more information, see www.irs.gov, and consider consulting a financial advisor, accountant, or attorney.

Deed in Lieu of Foreclosure: You voluntarily transfer your property title to the servicers (with the servicer’s agreement) in exchange for cancellation of the remainder of your debt. Though you lose the home, a deed in lieu of foreclosure can be less damaging to your credit than a foreclosure. You will lose any equity in the property, although under the Mortgage Forgiveness Debt Relief Act of 2007, the forgiven debt on your primary residence may be excluded from income when calculating the federal taxes you owe. However, it still must be reported on your federal tax return. For more information, see www.irs.gov. A deed in lieu of foreclosure may not be an option for you if other loans or obligations are secured by the property on your home.

Be Alert to Scams

Scam artists follow the headlines, and know there are homeowners falling behind in their mortgage payments or at risk for foreclosure. Their pitches may sound like a way for you to get out from under, but their intentions are as far from honorable as they can be. They mean to take your money. Among the predatory scams that have been reported are:

The foreclosure prevention specialist: The “specialist” really is a phony counselor who charges high fees in exchange for making a few phone calls or completing some paperwork that a homeowner could easily do for himself. None of the actions results in saving the home. This scam gives homeowners a false sense of hope, delays them from seeking qualified help, and exposes their personal financial information to a fraudster.

Some of these companies even use names with the word HOPE or HOPE NOW in them to confuse borrowers who are looking for assistance from the free 888-995-HOPE hotline.

The lease/buy back: Homeowners are deceived into signing over the deed to their home to a scam artist who tells them they will be able to remain in the house as a renter and eventually buy it back. Usually, the terms of this scheme are so demanding that the buy-back becomes impossible, the homeowner gets evicted, and the “rescuer” walks off with most or all of the equity.

The bait-and-switch: Homeowners think they are signing documents to bring the mortgage current. Instead, they are signing over the deed to their home. Homeowners usually don’t know they’ve been scammed until they get an eviction notice.

Federal Trade Commission Public information disseminated by Debt Management Credit Counseling Corp.

Since the article referenced above describes the information you will need to gather and the steps you should consider in order to give yourself the best likelihood of preserving your home, it will not be reiterated here. Instead this article will focus solely on the different loss mitigation possibilities that lenders have been offering to prevent foreclosures.

The circumstances that put homeowners into distress fall under two categories: short term and long term. Short term circumstances are situations that have occurred that either increased expenses or caused a loss of income for a limited time. Long term circumstances are permanent changes in income or expenses such as divorce, changing to a lower paying job, ongoing medical expenses or even unmanageable increases in the mortgage payment due to an adjustable rate.

Short Term Solutions

When your problems are caused by a temporary setback but you know that you will be able to afford your payments in the future, you should ask about reinstatement, a repayment plan, or forbearance.

• Reinstatement is the repayment of the full amount of the delinquency plus any penalties in one lump sum on or before a date that you and your lender have agreed upon. In many cases, the lender may waive some or all penalties.

• A repayment plan is the adding of a portion of the amount past due to your regular payments for enough time to bring the account back to a current status. Since this will increase your payments for a period of time, you need to be sure that you can handle the larger payment before you agree to this option.

• Forbearance is the suspending of payments for a fixed amount of time. At the end of the forbearance, you would need to either bring the account current in a lump sum, or have an amount added to your mortgage payment to bring the account current over a limited amount of time. Again, be certain that you will be able to handle the lump sum or increased payments when the forbearance ends.

Long Term Solutions

When your ability to repay the loan has been permanently altered or you will not have the ability to repay delinquencies in a lump sum or by paying extra, you may want to look into a loan modification or a partial claim (if your loan is insured).

• A loan modification is a permanent change in the terms of your loan. Creditors have been getting more creative in the ways that they are working with homeowners. Some types of modification are as follows:

o Lowering or fixing the interest rate: A new trend for lenders is to offer very low interest only rate for a fixed amount of time with the hopes that the equity in the home will recover in time to allow the      homeowner the ability to sell before the rate adjusts. The interest only option is being allowed for as much as 10 years. In other cases, the lender simply reduces the rate to a lower fixed or variable rate.

o Lowering the principal: By reducing the balance owed on the loan but keeping the other terms the same, the payment will be reduced for the homeowner and the negative equity that can keep the homeowner from selling the house is reduced or eliminated.

o Extending the term of the loan: By increasing the amount of time to repay the loan, the payment is reduced. This can give you a manageable payment, but can also greatly increase the amount of interest you will pay and slow the growth of your equity.

o Adding missed payments to the balance of the loan: The payment is not changed, but you will not have to pay extra in the short term. In the long term you will pay additional finance charges and the total number of payments you will make will increase, but in the short term you are able to resume making normal payments and your account will become current again.

o Combination of any or all of the above: More frequently than in the past, lenders have been making more than one modification to a loan to keep people in their homes.

• Partial Claims are available only to people who have mortgage insurance. You may be able to obtain an interest free loan that will bring your loan current and the loan will not have to be repaid for several years.

The HOPE for Homeowners Act of 2008

Due to the recent downturns of our economy, the government implemented a bailout plan for distressed Americans who have bought homes in the last few years or during the high point of the home market.. The plan which is now in effect, allows the FHA to insure up to $300 billion in refinancing loans. The target is homeowners whose loans have become unaffordable and may not be able to sell the home because it is worth less than the mortgage balance. This plan would create some immediate equity for the homeowner although that equity would be shared with the FHA if the homeowner sold or refinanced the house at a later date.

Under the act, the FHA can guarantee a 30 year fixed rate mortgage that does not exceed 90% of the current appraised value. The borrower must be able to prove income, meet FHA loan to income standards, and the appraisal must meet FHA guidelines.

Nationwide there have been extreme drops in housing values which means the lenders of these over-financed homes are asked to take an enormous loss in order to accept the refinancing deal. In most cases, the borrower either has not qualified for the FHA loan or the lender did a loan workout that kept the loss it absorbed to a minimum. This plan which was implemented last year would have been great for overextended homeowners if the lenders could utilize it more. Because of the deep losses the lenders would suffer, however, most often they choose to do their own internal loan modification.

When Keeping Your Home is Not an Option

There are circumstances that make it impossible to retain ownership of a home. People who are being forced to relocate but cannot sell their home or people that have a permanent loss of income that is so great that none of the loan modification options will help them would fall into this category. A short sale, assumption, or a deed in lieu could help you to avoid foreclosure.

• In a Short Sale, your lender agrees to accept less than the total balance owed as long as the house is sold at fair market value. The homeowner will not be held liable for the remaining balance.

• With an assumption, a qualified buyer can assume your mortgage thus allowing you to essentially walk away.

• With a deed-in-lieu of foreclosure, you hand the deed over to your lender rather than go through the foreclosure process. This should be your last resort, as the credit impact is worse than any of the other options, but still is not as negative as a foreclosure.

A good housing counselor will be aware of all of these possibilities and maybe others. The housing counselor will also be able to help you determine what your most advantageous solution will be and help you prepare your case for the lender.

DMCC is a 501 (c)3 is a charitable organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with their debt.  Education is provided free of charge to consumers as well as personal counseling to identify the best options for the repayment of any unsecured debt. To speak to a certified credit counselor, call 1-954-418-1466, email contact@dmcconline.org.

DMCC is located at 700 West Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441.

Your lender does not want your house. Yes, they may be very forward in telling you that foreclosure could happen if you do not pay, but they would much rather have a good loan than face the headache of the foreclosure process, reconditioning a property and finding a way to sell it. In the current economic climate, lenders are more desperate than ever to keep you in your house, but they cannot do it unless you talk to them.

Consider this: Freddie Mac has estimated the cost of a foreclosure to the bank to be around $60,000. Officials at HSBC have estimated that the average loss on a foreclosed home is 20 to 25% of the value of the loan. This means that on a $400,000 home, they could lose $80,000 to $100,000. Doesn’t it make sense that the bank would prefer to cut its losses?

In order to work with you, the lender needs to speak to you. The sooner they can speak to you, the better your chances of working a deal with them. In another article, titled “Mortgage Options to Avoid Losing Your Home”, the specifics of what types of deals you may be able to obtain are spelled out. This article will deal only with what you need to do and what you need to be prepared to provide if you want to avoid foreclosure.

• Find out who actually owns your mortgage and deal with them directly. In most cases, you are making your payments to a company that is merely servicing your loan. That company may not be in a position to make the best deal with you. The actual owner of the mortgage has the most to lose if you reach the point of foreclosure and thus has the most to gain by working something out with you.

• Ask to speak with the “Loss Mitigation” department. Almost every lender has such a department. Those that didn’t in the past have created one because the losses from foreclosure have become so extensive. The collections department has one job: get money from you. The loss mitigation department is there to try to help you either keep your house, or at least make the process of losing it less painful, less expensive and less stressful.

• Don’t wait until they have already begun the foreclosure process. Your best deal will come when the bank has not already spent a lot of money with attorneys. Remember, to work something out, you need to make it easier and less expensive for the lender as well as yourself.

• Be prepared to show need and ability. The loss mitigation department usually has many different options to help you keep your home, but they need to see that you can make some sort of payment and you need to show them that there is a legitimate reason for your delinquency. Too many people are simply taking advantage of bad economic times to try to get a better deal. You will need to be able prove your income and explain your circumstances if you expect to get help.

• Understand that you may need to make sacrifices. You are not going to get a lot of sympathy from your lender if you own a 40 foot boat or you drive almost new luxury cars that are paid in full. You may have to consider liquidating some assets and downsizing to items that fulfill needs and not expensive desires.

• Don’t lose your home in order to salvage credit cards and personal loans. You may have to stop paying unsecured debts altogether or at least put them on a Debt Management Plan or even a Debt Settlement Plan. It might be a good idea to consult with a certified credit counselor at a credit counseling agency to find out about your options with your other debts. A reduction in payments on your other debts could make more of your income available to help save your home.

• Don’t abandon the property or let it deteriorate. Even when there is no way you can keep your home, because of the current difficulties in selling a home, the lender may be willing to offer you some assistance. Some lenders are letting people stay in homes and maintain them for little or even no rent just to keep the value up. Others are offering thousands of dollars in relocation money to people as long as they leave the house in good condition. Be sure you discuss these options with your lender if you are in the worst-case scenario of losing your home. You may find that the lender will make your transition easier or even profitable.

• You don’t have to do it alone. There are HUD approved housing counseling agencies that may be able to help you work something out with your lenders for little or no cost. There are also companies out there that will charge you a fee for their services, but unless the services include a legal challenge to the loan documents, they are unlikely to be able to do more than a HUD approved agency. You can contact HUD at (800) 569-4287. For FHA insured loans, if you feel your lender is not being responsive to your requests for help, you can call (800) CALL- FHA.

DMCC is a 501 (c)3 is a charitable organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with their debt.  Education is provided free of charge to consumers as well as personal counseling to identify the best options for the repayment of any unsecured debt. To speak to a certified credit counselor, call 1-954-418-1466, email contact@dmcconline.org.

DMCC is located at 700 West Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441.

Volume 1; January 2004 – Educational Series

What Can I Afford?

The better your credit, the easier it is for you to qualify for a loan. Can I afford a home? How much money can  I qualify for? As a general rule, your buying power is calculated by multiplying your annual gross income by two and a half (2 ½). For example, if you have a household income of $45,000, you might be able to qualify for a $112,500 home. You could actually qualify for more or less, depending on your individual debt, credit history and amount that you have for a down payment.

Debt-to-Income Ratio

Your buying ability will be affected by factors such as your income, down payment, debt, and credit history. Your debt payments, such as credit card bills, car loans, and other expenses such as housing expenses, alimony and child support, should not exceed 36% of your gross income. To calculate your debt to income ratio, divide your total monthly debt expense by your total monthly income.

Mortgage Types/Lenders

Mortgage types, rates, and lenders are usually published daily in the business section of your daily newspaper. Today’s homebuyer has more financing options than ever  before. From traditional mortgages to adjustable-rate and hybrid loans, there are financing packages designed to meet the needs of virtually anyone.

While the different choices may seem overwhelming at first, the overall goal is really quite simple: you want to find a loan that fits both your current financial situation and your future plans. Ask your lenders for a “good faith estimate” so you can compare all of your costs and make the decision that will fit into your budget.

Fixed Rate Mortgages

If you plan to own your own home for five or more years, a fixed rate mortgage can protect you from inflation. Since your principal and interest payments are fixed, your monthly payment stays the same.

Long-term loans (20-30 years) make it easier for a person to qualify for a loan by giving you a lower monthly payment but at a higher interest rate, which means you are paying more interest for the full term of the loan.

Short-term loans (10-15 years) give you higher monthly payments but the interest rate is lower, which helps you build equity in your home much faster because less of the payment goes to interest.

Adjustable Rate Mortgages (ARM)

ARMs are popular because their interest rates are lower than a fixed rate mortgage giving you a lower monthly payment. This helps the consumer qualify for a larger mortgage, but the interest rate and monthly rate may change within a given time and to a predetermined amount. Understand the consequences to your budget by looking at each scenario. Make sure that you can afford your new monthly amount if the rate goes up.

Bi-Weekly Mortgages

Recently banks have come up with creative ideas to help the consumer pay their mortgage on a bi-monthly basis instead of the traditional once a month method. Through this method of payment, you can pay off your home in less time with less money. By simply paying half (1/2) your monthly payment every 2 weeks, you will subtract 7-9 years off an average 30-year loan.  You will earn equity in your home faster because more of your payment is being applied to the principal of the loan instead of the interest. At the same time, if you have Private Mortgage Insurance (PMI), those premiums will also be eliminated in a shorter period of time, which will result in a greater savings over the life of the loan. Your lender, interest rate, escrow payments, etc. all remain the same.

Balloon Mortgages

Balloon mortgages are short-term loans that have some features of a fixed mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years. At the end of the loan term, there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full or refinanced.

Reverse Mortgages

A reverse mortgage is a complex home loan designed for senior homeowners who have built up substantial equity in their property. In a reverse mortgage, the lender loans you money based on the value of your home, the amount of equity you have in the home, and your age at the time of the loan application. The lender pays you the money   either in a lump sum, in monthly installments, or as a line of credit. Unlike a traditional home equity loan or second mortgage, repayment is not required until you sell your home, move out permanently, or die. The amount of money you owe increases over time because you do not make payments. If you sell your home, you can keep any proceeds from the sale of your home in excess of what you owe the lender. To qualify for a reverse mortgage you must be at least 62 years old and the mortgage on your home must be completely or nearly paid off. You can get a reverse mortgage regardless of your current income.

F.H.A. Home Loans

The “203B” F.H.A home loan requires  3% from the borrower and permits 100% of the money needed for closing costs to be a gift from a relative, non-profit organization or a government agency. F.H.A. home loans do not have strict borrowing criteria. Someone may have had a few credit problems and still be able to qualify for this “203B” loan. For more information on F.H.A. loans go to the website www.hud.gov/offices/hsg and review the different information capsules they have available to the public.

DMCC is a 501 (c)3 is a charitable organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with their debt.  Education is provided free of charge to consumers as well as personal counseling to identify the best options for the repayment of any unsecured debt. To speak to a certified credit counselor, call 1-954-418-1466, email contact@dmcconline.org.

DMCC is located at 700 West Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441.

Volume 1; January 2004 – Educational Series

Until recently, there were two main ways to get cash from your home: you could sell your home, but then you would have to move; or you could borrow against your home, but then you would have to make monthly loan repayments.

Today there are “reverse mortgages” available to you.  A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or repay a loan each month. A reverse mortgage allows a senior citizen to be able to “continue to live independently, and comfortably, right where they are,” said Peter Bell, president of the Reverse Mortgage Lenders Association.

Selling and Moving

The single best way to evaluate a reverse mortgage is to compare it to what may be your only viable option: selling your home and using the proceeds to buy or rent a new home.

Do you know?

- How much cash could you get by selling your home?

-What it would cost you to buy, maintain, and/or rent a new home?

- How much money could you safely earn on any money left over after you buy a new home?

Have you recently looked into buying a less costly home, renting an apartment, or moving into assisted living or alternative housing?

Most likely you will come to one of two conclusions:

- You may find another housing option that is a lot more attractive than you thought.

- You may confirm what you were fairly certain of all along: that where you live now is the best place for you to be.

No matter what you conclude, you will have a much better idea of the overall costs and benefits of staying versus moving. You will get a better sense of what is important to you and it should be easier for you to evaluate the comparative costs and benefits of a reverse mortgage.

Loan Proceeds

The loan proceeds from a reverse mortgage can be paid to you in several ways:

- All at once, in a single lump sum of cash.

- As a regular monthly cash advance.

- As a “credit line” account that lets you decide when and how much of your available cash is paid to you.

- As a combination of these payment methods.

Three Major Types of Reverse Mortgages:

Single Purpose reverse mortgages can be used in only a specific way. Some can be used only to make home repairs or improvements while others must be used to pay property taxes or special assessments. These loans are not available in all areas and are typically offered by state and local government agencies. The restrictions on these loans mean that they generally provide less total cash than the other types of reverse mortgages.

Federally Insured reverse mortgages are also known as Home Equity Conversion Mortgages (HECM). These loans can be used for any purpose, and are available throughout the United States to homeowners age 62 and over, regardless of income. HECMs offer the widest array of loan advance choices, while providing greater total cash advances.

HECMs are backed by the Federal Housing Administration (FHA) and    are offered by banks, mortgage companies, and other private sector lenders. They are federally insured, which means the U.S. Government guarantees that HECM borrowers will get all the cash advances promised them.

Proprietary reverse mortgages are almost always the most expensive type of reverse mortgage. They generally provide larger loan advance amounts only if your home is worth a lot more than the average home value in your county. These mortgages can be used for any purpose and generally provide most types of loan advances. These loans are offered by banks, mortgage companies, and private lenders and are backed by the private companies that develop them. These loans are not federally insured.

Costs  

Almost all the costs of a HECM can be financed, that is, they can be paid from the proceeds of the loan. Financing the upfront costs reduces the net loan amount available to you, therefore, reducing your immediate out-of-pocket cost.

Common reverse mortgage costs are as follows:

Origination Fees: Pays a lender for preparing your paperwork and processing your loan.

Closing Costs: These are the costs incurred by third parties that are necessary to close the contract.  These services include an appraisal, a title search, insurance, a survey, inspections, recording fees, mortgage taxes, and credit checks.

Insurance Premium: This premium guarantees that you will receive your promised loan advances and will not have to repay the loan for as long as you live in your house.

Servicing Fees: Servicing a loan means everything lenders or agents do after the closing to monitor your compliance with your obligations under the loan agreement.

Interest Rates:  All lenders charge adjustable interest rates on HECM loans. This means that the rates can increase or decrease over time. Lenders do not have any control over what the rate will be when the loan closes, or how it will change over time.

Conclusion

The information we have presented here is designed to introduce you to the different types of reverse mortgages that are available. If you are interested in pursuing a reverse mortgage, you should contact a bank or lending institution and request literature on the various mortgages offered. Review all of the specific requirements for the loan and ask for a good faith estimate of the costs and fees involved before you sign for the loan.

DMCC is a 501 (c)3 is a charitable organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with their debt.  Education is provided free of charge to consumers as well as personal counseling to identify the best options for the repayment of any unsecured debt. To speak to a certified credit counselor, call 1-954-418-1466, email contact@dmcconline.org.

DMCC is located at 700 West Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441.

Volume 1; January 2004 – Educational Series

Get Pre-Qualified

Do you know if you can afford a home?  How much can you afford to spend?  These are a few questions you should get answers to before you start to look for a home.

Talk to your lender first. Go over all of your finances with them. Your lender can pre-qualify you to borrow a certain amount of money. The pre-qualification does not commit you to a loan but it does show that you have qualified for a loan based on preliminary questions asked by your lender. The pre-approval process is more involved because your lender will pull your credit reports, check debt to income ratios and perform other underwriting steps. This puts a borrower much closer to obtaining a loan and establishing a rate and term. Be honest with your lender and your financing experience will be concise and pleasant. The pre-approval amount will help you focus your search within a certain price range. Do not waste your time looking for properties that exceed your pre-approval amount because the lender will not loan you more money than you qualified for.

Real Estate Agencies

Real estate agencies can be a tremendous help to you when you decide to purchase a home or property. Use a reputable real estate agency in the area you are searching to help you find properties within your budget. Real estate agencies have access to the MLS (multiple listing service), which is basically a computer database of all homes listed in a geographical area categorized by price, square footage, number of bedrooms, etc. These listings will also display current costs, for example, taxes, electric, water and any other expenses that could be useful in helping you decide if this property meets your budget. Agencies are paid a fee by the seller to list and market their properties, screen potential buyers, and present offers to the seller for review.

Purchase and Sales Agreement

Once you have found the home that you are interested in purchasing, you must sign a purchase and sales agreement. This is a legal and binding document that identifies the buyer and seller, the property to be purchased, the price, and any contingencies that will be a part of this purchase. Contingencies are conditions that must be met in order for this transaction to take place and must be fulfilled by both parties. Once this document is accepted and signed by both parties the contract is enforceable. Be careful you understand the contents of this document because failure by the buyer or seller to fulfill the contract could lead to legal ramifications and potential loss of one’s deposit monies.

Home Buyers Loan Application Checklist

Following is a list of documents you will need to bring your lender for your loan to be processed.  Some lenders will require more information or charge different fees than others.

- A purchase agreement – signed by the sellers and buyers.

- Picture IDs.

- Legal description of the property. Personal check for the application fee (varies by lender).

- Copy of one month’s recent pay stubs.

- Copy of last 2 years’ W-2 forms (Some cases, entire Tax Returns for 2 years).

- Last 3 months’ bank statements (checking and savings).

- Proof of where you are getting down payment funds.

- Name, address, and account number of current mortgage company. If you rent, 12 months of receipts or cancelled checks.

- Creditors’ names, addresses and account numbers, plus balances and monthly payments.

- If applicable, copy of divorce decree or proof of alimony or child support.

How Much Do I Need?

You will need money for the following:

- Down Payment – A down payment is a percentage usually from 3-20% of the property value. If you put down less than 20% you may be required to have PMI (Private Mortgage Insurance).

- Closing Costs - These costs include mortgage points, taxes, title insurance, documentation stamps,finance costs, items that may be prepaid or escrowed and other settlement costs. Your lender will give you an estimate as to the total amount of the costs associated with the purchase of the property after you apply for the mortgage.

Down Payments

Down payments are monies (usually 3-20% of the total selling price of the home) that the buyer must pay up front. You will need to bring these funds in a certified check the day of the closing. These funds cannot be borrowed and can come from your savings, IRA securities, cashed in stocks, etc. If you are given a gift from family, you must be able to prove this money was a gift and not a loan to be repaid.

Closing Costs

Once you have found a property that you would qualify for, talk to your lender and shop the different mortgage plans available. Make note of all costs pertaining to each plan. Add these costs to your initial down payment amount to estimate your total cost necessary to purchase the home.

Can I Afford the House?

Even though you can afford to pay the mortgage, you must be aware of your housing costs. Real estate taxes, insurance, water and sewer, electric, cable, homeowner/condo fees, estimated repairs (see appraisal inspection), maintenance (pool/lawn care), etc. are just some of the costs you will incur in home ownership. Maybe the house will need a new roof in two years or a hot water heater, etc.  Although these costs can be large and overwhelming, do not let them intimidate you. If you are aware that you may be incurring these expenses in the future, plan for them, break them down on a monthly basis and go through your budget to see if you can accommodate them without severely disrupting your needs and lifestyle. If these monthly expenses are overwhelming and exceed your budget, you may choose to purchase a smaller home or a condo. The difference in a lower purchase price could offset all of these costs and make a purchase more appealing. Do not overburden your earning ability or the ability to pay your bills.

Appraisals/Inspection

Your lender will require an appraisal of the value of the property you want to purchase. The property appraisal is performed by a licensed professional who will assign a dollar value to   the property, usually by researching the neighborhood and comparing the value of homes in the area that have recently sold.  The appraisal amount must be able to justify the selling price of the home. A lender will not lend more than the value of the home you are trying to purchase. It is also important to have an inspection done on the home to get an understanding of its condition and integrity. Inspections are performed by licensed individuals and usually are not required by the lender. Inspections can range from $100 – $500 depending on the size and extent of the inspection of the home, and in this writer’s opinion, worth every dollar. Home repairs today are expensive and it is worth your piece of mind to know what you are buying and the condition it is in. Listen to the inspector and find out costs for any repairs you may have to make if you purchase the home. Alert the seller to these problems and they may reduce the price of the home to pay for these costs. Remember once you buy the house the problems and the costs that go with it are yours!

Insurance

Homeowners insurance is required if you are using a lender to purchase a home. Condominium buyers are required to have condo insurance on their unit.  If you are planning on purchasing a home in a flood zone you will also be required to purchase flood insurance, which is underwritten by the Federal Government. Recently, insurance companies have been raising rates and declining coverage in certain areas of the country. Because of these potential premium increases, it is important that you recognize the costs involved and plan for such increases in your monthly budget.  Solicit quotes from three different insurance agencies and choose one that will best accommodate your needs.

Property Values Can Appreciate/Depreciate

Values of homes can change anytime for many reasons.  During the late 1980′s, the economy was weak, unemployment went up, and home values in the northeast and west coast dropped up to 40%.  It took close to 10 years to regain these losses. Many people lost their jobs, lost their homes to foreclosure because they had committed to large mortgages, and were not able to pay back these loans. If your home depreciates (loses value from its purchase price), then you are paying for a house that is worth less than the initial price you paid for it. If your home appreciates in value (increases value from its purchase price), then you are earning a gain, or equity, in the value of your property. It is important to evaluate the home you are buying, its location, condition and surrounding areas, as well as, the state of the economy at the time of your purchase. If you are working for a company that is struggling to keep its workforce busy, you may want to delay purchasing a home until you can get some assurance that things will improve. If you purchase a home and cannot make the monthly payments, the house will be repossessed and sold at auction. You will lose all of the money that you put into it. Remember, when you purchase a home, you are committing yourself to a large financial commitment (15-30 years) and it is up to you to maintain your mortgage payments, as well as the condition of the home, to protect your investment.

DMCC is a 501 (c)3 is a charitable organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with their debt.  Education is provided free of charge to consumers as well as personal counseling to identify the best options for the repayment of any unsecured debt. To speak to a certified credit counselor, call 1-954-418-1466, email contact@dmcconline.org.

DMCC is located at 700 West Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441.

Shop Around

Homeowners insurance can be costly, but it is necessary. The premiums charged for homeowners insurance can vary widely from company to company, so it pays to take the time and effort to shop around to get the best value for your insurance dollar.  The cost of homeowners insurance depends on a number of factors including location, age and type of building, the use of the building (i.e. residence and/or commercial enterprise), local fire protection, choice of deductibles, application of discounts, and the scope and amount of insurance coverage you purchase.

Stick With the Company That Offers the Best Deal

Once you have considered all of the alternatives and have chosen the company that fits your needs, consider multiple policies with that company.

Change Your Deductible

In choosing the deductible amount, you bear the burden of loss up to the  amount you feel you can afford. Deductibles save money because the first dollars of the insurance are the most expensive to buy. Contact your insurance company to see if they offer higher deductibles, such as $500 or $1,000 on your homeowners insurance coverage.

Pay Attention to Rebuilding Costs Versus Actual Land Value of the Home

Consider the home and its contents when pricing the value of a Homeowners Insurance policy, not the land beneath the home. The property itself is not at risk of theft, fire or other hazards covered under your homeowners policy. Adding the land value could increase your premiums.

Discount Opportunities

You should also check with your insurance company to see if they offer premium discounts for the use of dead-bolt locks, smoke alarms, fire extinguishers, sprinkle systems and security systems.

Build a History with the Same Insurer

If coverage remains with the same insurer for 3-5 years, some companies offer up to a 5% discount plan for these long term consumers. After 6 years of coverage, a consumer may find up to a 10% discount. It is important to periodically compare the price with other policies, but the history benefits may be enough to reduce the premiums.

Actual Cash Value vs. Replacement Cost

Actual cash value coverage, as the name implies, will reimburse you for the cost of the property (less depreciation) at the time of the claim, minus your deductible. This may result in a lower claim payment than you expect. Replacement cost coverage, on the other hand, will reimburse the full value of the property. While the up-front cost is greater, you are more likely to receiveaccurate compensation for your possessions.

DMCC is a 501 (c)3 is a charitable organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with their debt.  Education is provided free of charge to consumers as well as personal counseling to identify the best options for the repayment of any unsecured debt. To speak to a certified credit counselor, call 1-954-418-1466, email contact@dmcconline.org.

DMCC is located at 700 West Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441.