Glossary
| Bankruptcy | Prior to Funding a Reverse Mortgage Two options are available to the homeowner:
A homeowner my enter bankruptcy proceedings at any time after the reverse mortgage has been funded, but the homeowner will not be able to access funds available in the reverse mortgage line of credit, and monthly payments normally received by the homeowner will end. ALWAYS SEEK COMPETANT LEGAL ADVICE BEFORE DURING AND AFTER ANY BANKRUPTCY! |
| Expected Rate | The Expected Rate is used to determine approval amounts. The Expected rate on adjustable rate reverse mortgages usually equals the 10 year LIBOR swap rate pluse the lender's margin. For a fixed rate reverse mortgage, the Expected Rate is the same as the fixed rate. HUD does not specify indexes or margins or fixed rates; these are determined by Lenders based on market conditions. |
| FHA Mortgage Insurance | FHA Mortgage insurance benefits the bank and the homeowner similarly to how FDIC benefits depositors. If a homeowner had a $100,000 reverse mortgage line of credit from a bank that was ordered to cease operations, the homeowner would still have access to the reverse mortgage line of credit. Likewise, the reverse mortgage monthly payments are insured by FHA and would continue to be made to the homeowner. If the reverse mortgage loan balance evers exceeds the home value, the homeowner (and the heirs) have no personal responsibily and no tax consequences. FHA covers the shortfall. |
| Home Equity | The value of a home minus any/all lien(s). |
| Home Equity Line of Credit | A home equity line of credit (often called HELOC and pronounced HEE-lock) is a loan in which the lender agrees to lend a maximum amount (HELOC limit) within an agreed period (called a term), where the collateral is the borrower's equity in his/her house. A HELOC differs from a conventional mortgage loan in that the borrower does not get the entire loan amount up front, but taps into the line of credit from time to time. HELOC funds can be borrowed during the "draw period" (typically 10 years). The minimum monthly payment during the draw period is usually "interest only". After the draw period ends, the loan is usually repaid over 5-15 years with monthly payments of principal and interest. Another important difference from a conventional loan is that the interest rate on a HELOC is variable. The interest rate is generally based on an index, such as the prime rate. A HELOC may be a recourse loan for which the borrower is personally liable. This distinction becomes important in foreclosure since the borrower may remain personally liable for a recourse debt on a foreclosed property. Banks may unilaterally cancel, suspend or rescind a HELOC, as witnessed in 2008 when many major home equity lenders informed borrowers that their home equity lines of credit had been frozen, reduced, suspended, rescinded or restricted in some other manner. Banks may not, however, arbitrarily cancel or suspend an FHA reverse mortgage line of credit. |
| Home Equity Conversion Mortgagers (HECM) | FHA-insured reverse mortgages that permit homeowners (62 and older) to withdraw home equity without having to leave their home or make mortgage payments. |
| Home Keeper Mortgage | Was a Fannie Mae reverse mortgage program. It had two "advantages". It would finance Co-Ops and it had a rate fixed for 1 year (rather than 1 month in the HECM), but the approval amount was considerably lower than the 1 month HECM. |
| HUD (Housing and Urban Development) | A federal agency that oversees the Federal Housing Administration and numerous housing and community development programs. |
| Initial Interest Rate | For the adjustable rate HECM, the rate in effect when the final loan documents are signed. For fixed rate HECM - it's the fixed rate. |
| Line of Credit Growth Rate | Amounts available to the homeowner in a reverse mortgage will grow over time. The rate of growth is close to (a) the interest rate plus (b) the 1.25% insurance premium accruing to FHA. Technically, the amortization of the Service Fee Set Aside has a minor impact on the line of credit growth rate. |
| Loan Advances | Payments made to a borrower. Usually, these are draws from the line of credit, or automatic monthly payments made to the borrower. |
| Loan Balance | The amount owed, including principal, interest and fees. Bear in mind, with a HECM neither the bank nor FHA can ever collect more than the value of the home. |
| London Interbank Offered Rate (LIBOR) Index | An index that is used to determine interest rate changes for most adjustable rate reverse mortgages funded after June 1, 2009. It represents the average interest rate for 1-month U.S. dollar deposits in the London Interbank market based on quotations of major banks. |
| Lump Sum | The entire net approval amount (after paying all fees and liens) paid in one single payment to the borrower when the reverse mortgage is funded. |
| Margin | This is one component of the adjustable interest rate. This component will never change. For many years, the margin on HECMs was always 1.5% and Fannie Mae bought all the HECMs. In early 2009, Fannie Mae was under pressure to shrink their balance sheet and in order to entice private banks and other financial institutions to purchase HECMS, the Margin increased to a range of 2.5% to 3.5%. The margin differs from one lender to another based on market conditions. |
| Maturity Event and Maturity Date | A Maturity Event is when a loan becomes due and payable. In a HECM, possible maturity events are (a) when the homeowners sell the home, (b) when they pass away, (c) if they’re out of the home 12 consecutive months -the nursing home scenario, (d) if they can’t / won’t maintain the property and (e) if they don’t pay property taxes or hazard insurance. The Note and Deed must have a specific Maturity Date when recorded. That date is 150 years past the birthday of the youngest borrower. This distinction between a Maturity Event and Maturity Date is very important in co-ops and communities where the land is leased. FHA requires the lease to run for at least 99 years and be renewable, or for the lease to expire more than 10 years after the Maturity Date. |
| Maximum Claim Amount | The lesser of (1) the home's appraised value when the HECM was created or (2) the FHA limit in effect when the HECM was created. At the time of the application, this is one of the three factors influencing the approval amount (the other two are the date of birth of the youngest borrower and the Expected Interest Rate). After the loan is funded, this is one of the least important terms for the homeowner, but one of the most important terms for the Servicer (the company that sends the monthly HECM statements to the homeowner). The Maximum Claim Amount is the most the bank can collect from FHA if the bank files a claim on the mortgage insurance. |
| Modified Tenure Payments | Equal monthly payments to the borrower for as long as the borrower lives in the home, combined with a lump sum payment and/or a line of credit on which the borrower may draw at any time. |
| Modified Term Payments | Equal monthly payments to the borrower over a fixed term (for example ten years), combined with a lump sum payment and/or a line of credit on which the borrower may draw at any time. |
| Mortgage | A legal document that pledges property to a lender as security for the repayment of the loan. The term is also used to refer to the loan itself. In some states, a Deed of Trust is used rather than a mortgage. |
| Mortgage Insurance Premium (MIP) | Money paid to FHA for insuring the mortgage. Banks would not make these loans without the FHA insurance. FHA requires two payments. The first is paid by the escrow company on behalf of the borrower to FHA when the HECM funds. This up front payment is 2% of the Maximum Claim Amount for Standard HECMS and 0.1% for Saver HECMs. The second is a monthly Mortgage Insurance Premium (calculated at 1.25% per year) that will appear on the borrower's monthly statement. This fee will be added to the loan balance every month. |
| Net Principal Limit | The net approval amount. Equal to the Principal Limit less (1) any financed MIP, Origination Fee and Closing Costs, (2) the servicing fee set aside plus (3) any repair set-aside and (4) refinancing any existing mortgages. |
| Non-Recourse Mortgage | The lender has no recourse to the homeowner or the heirs in the FHA insured reverse mortgage. |
| Origination | The overall administrative process of setting up the reverse mortgage, beginning with the loan application and ending when the loan funds. |
| Origination Fee | A fee charged to the borrower for processing a loan application, usually computed as a percentage of the home value. For HECM loans, FHA sets an upper limit on the origination fee. The calculation is a bit complex: 2% of the Maximum Claim Amount for the first $200,000 plus 1.5% of the Maximum Claim Amount above $200,000 with an overall limit of $6,000. FHA also sets a floor of $2,500, but if a lender wanted to charge less, FHA would not object. |
| Payment Plan | Manner in which loan proceeds are paid out to the borrower. In the HECM adjustable rate program, six options are available: (1) Tenure Payments, (2) Term Payments, (3) Credit Line, (4) Lump Sum, (5) Modified Tenure Payments, and (6) Modified Term Payments. If the homeowner selects the fixed interest rate, there is only one option: Lump Sum. |
| Power of Attorney | Someone other than the homeowner may sign a reverse mortgage application or final loan documents using a Power of Attorney. It is always important to understand why someone other than the homeowner is signing, because that will determine the proper procedure. It is also important to understand the differing procedures are designed to protect the homeowner from any unauthorized power of attorney usage. If the Power of Attorney is due to mental or physical incapacity, we will need professional verification (such as a diagnosis from the physician). Check with me for more details. Counseling Unless the PoA is being used due to mental incapacity, the homeowner must participate in counseling. The PoA can participate in the call, but the homeowner must be involved for the entire conference. The PoA can sign the original counseling certificate. |
| Principal Limit | The gross approval amount (before fees and FHA insurance). The principal limit is based on the Maximum Claim Amount, the Expected Interest Rate, and the age of the youngest borrower. |
| Property Repairs | The appraiser will determine if any home repairs may be required. If the repairs relate to health and safety issues, such as a leaking roof, no running water, inoperable doors and windows, insufficient heat sources, inadequate electrical systems, etc, the repairs must be done before the final loan documents can be signed. If the homeowner does not have enough money to pay for the repairs up front, it is possible to pay the contractor when the reverse mortgage is funded. In this case, the money going to the contractor will be deducted from the homeowner's proceeds. Minor repairs can be done by the homeowner, or contractors after the reverse mortgage is funded. The total estimated cost of the "after funding" repairs can not exceed 15% of the Maximum Claim Amount. The bank will hold back some of the reverse mortgage money from the homeowner to be certain there will be sufficient funds to pay for the repairs. Banks usually hold back 150% of the total estimated cost. After the repairs are completed, the servicer may require proof the work was done. Usually, an invoice from the contractor is sufficient proof. |
| Property Tax Deferral (PTD) | State governments usually do NOT allow a homeowner with a reverse mortgage to defer their property tax payments until a later date. |
| Proprietary Reverse Mortgages | Reverse Mortgages created by a private company, usually called Jumbo Reverse Mortgages, because they work best with home values over $2,000,000. |
| PUD (Planned-Unit Development) | A real estate project in which each unit owner has title to a residential lot and building and a nonexclusive easement on the common areas of the project. The owner may have an exclusive easement over some parts of the common areas (for example, a parking space), while the common facilities are owned and maintained by a homeowner's association. |
| Reverse Mortgage | A financial tool which provides seniors with funds from the equity in their homes. Generally, no payments are made on reverse mortgages until the borrower moves or the property is sold. The final repayment obligation is designed to not exceed the proceeds from the sale of the home and is usually repaid in one lump sum. |
| Right of Rescission | A borrower's right to cancel a home loan within three business days of signing the final loan documents. |
| Separated or Divorced? | If you are separated from your spouse, the spouse will have to go through counseling, sign forms in the application process confirming they understand you are getting a reverse mortgage and they have no interest in the property, and the spouse will also have to sign a quit claim deed before the reverse mortgage can be funded. After a divorce is final, the spouse is not involved in the reverse mortgage process. |
| Servicing | After a reverse mortgage is created, the homeowner receives a monthly statement showing the interest rate, loan balance and other important information. The company sending the statement is the Servicer and their job is to administer the reverse mortgage. In addition to sending monthly statements, the Servicer manages requests for funds from a line of credit, sends Tenure or Term payments and makes sure the file complies with FHA standards. This process is called Servicing the loan. |
| Set-Aside | Funds held back from the approval amounts for specified reasons. The two most common set-asides are (1) Service Fee Set-Aside, which usually reserves $3,000 to $5,000 to cover the monthly service fee payments and (2) Repair Set Aside, which holds back money if home repairs are required to be made as part of the approval. |
| Supplemental Security Income (SSI) | A federal program providing monthly cash benefits to low-income persons aged 65+, blind, or disabled |
| Total Annual Loan Cost (TALC) Rate | A rather complicated calculation similar to the annual percentage rate "APR" cost of a reverse mortgage. The starting point is the Expected Interest Rate. Then fees and FHA insurance are allocated over a number of years and a new effective interest rate is computed. Finally, we make certain assumptions about the home value in future years (typically a 4% annually compounded appreciation rate is employed). Basic observations about the TALC rate:
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