Texas Reverse Mortgages
Extensive Experience Across the Industry
Aurum Title has experienced attorneys, title examiners, and a network of mobile notaries specialized in Texas reverse mortgages to assist and close your reverse mortgage transactions.
Aurum Title is aware that these transactions involve multi-generations and can sometimes be sensitive. We take pride in our Gold Standard service that we provide to our Texas reverse mortgages customers.
We proudly serve Senior Homeowners across the entire state of Texas. Wherever you are and whatever your reverse mortgage needs, we are standing by to assist you.
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- A reverse mortgage is a form of loan that is available to seniors aged 62 and up.
- With a reverse mortgage, homeowners may turn their home equity into cash income without having to make monthly mortgage payments.
- While the majority of Texas reverse mortgages are federally insured, be wary of a recent rash of Texas reverse mortgage frauds aimed at elderly.
- Reverse mortgages can be a good financial move for some seniors, but they can also be a bad one for others. Before you decide, be sure you understand how Texas reverse mortgages work and what they entail for you and your family.
What Is Texas Reverse Mortgages?
A reverse mortgage, also known as HECM (home equity conversion mortgage) loan, s a powerful and proven financial instrument that allows you to access the equity you’ve accumulated in your home. In the state of Texas, both spouses must be at least 62 years of age and live in their own homes with considerable equity.
A reverse mortgage, unlike a forward mortgage, which is used to purchase a home, does not require the homeowner to make any loan payments.
Instead, when the borrower dies, moves out permanently, or sells the house, the entire loan debt becomes due and payable. Federal regulations require lenders to structure transactions such that the loan amount does not exceed the home’s value and the borrower or borrower’s estate is not held liable for the difference if the loan balance exceeds the home’s value.
A reduction in the home’s market value is one way; another is if the borrower lives for an extended period of time.
Equity in Cash
For seniors whose net worth is mostly related to the value of their property, Texas reverse mortgages might provide much-needed cash. These loans, on the other hand, can be costly and complicated, as well as vulnerable to fraud. This article will explain how Texas reverse mortgages operate and how to avoid the problems so that you can make an informed decision about whether a reverse mortgage is good for you or your parents.
In the first quarter of 2021, homeowners aged 62 and up had $9.57 trillion in home equity, according to the National Reverse Mortgage Lenders Association. The figure is at an all-time high since the survey began in 2000, demonstrating how important home equity is as a source of wealth for retirees. Home equity can only be used if you sell and downsize your home or borrow against it. Texas reverse mortgages are useful in this situation, especially for retirees with little income and few other assets.
How Does A Reverse Mortgage Work?
Instead of the homeowner making payments to the lender, the lender pays payments to the homeowner with a reverse mortgage. The homeowner has the option of receiving these payments in a variety of ways (we’ll go over the options in the following section) and only pays interest on the amount received.
Because the interest is rolled into the loan total, the homeowner does not have to pay anything upfront. The homeowner also retains ownership of the property. Over the course of the loan, the homeowner’s debt grows and his or her equity shrinks.
A reverse mortgage, like a forward mortgage, is secured by the home. The profits from the sale of the home go to the lender to repay the reverse mortgage’s principal, interest, mortgage insurance, and fees when the homeowner moves or dies.
Any earnings from the sale that exceed the amount borrowed to go to the homeowner (if he or she is still alive) or the homeowner’s estate (if the homeowner has died). In some circumstances, the heirs may elect to pay down the mortgage and keep the house.
The proceeds of a reverse mortgage are not taxable. While the money may appear to the homeowner as income, the money is considered a loan advance by the Internal Revenue Service (IRS).
Texas Reverse Mortgages Come in a Variety of Shapes and Sizes
Texas Reverse mortgages are divided into three categories. The home equity conversion mortgage is the most prevalent (HECM). The HECM is the reverse mortgage that almost all lenders provide on homes worth less than $765,600, and it’s the sort you’re most likely to acquire, therefore this post will focus on it.
You can look for a jumbo reverse mortgage, also known as a proprietary reverse mortgage, if your property is worth more.
When you take out a reverse mortgage, you have six options for receiving the proceeds:
- Lump sum: When your loan closes, you will receive all of the funds at once. This is the only option with a set rate of interest. The interest rates on the other five are changeable.
- Equal monthly payments (annuity): The lender will make consistent payments to the borrower as long as at least one borrower remains in the home as a primary residence. A tenure plan is another name for this.
- Term payments: The lender makes equal monthly payments to the borrower for a fixed length of time, such as ten years.
- Line of credit: A line of credit allows the homeowner to borrow money as needed. Only the amounts actually borrowed from the credit line are subject to interest.
- Consistent monthly payments plus a line of credit: The lender guarantees consistent monthly payments as long as at least one borrower lives in the home as their primary residence. The borrower can use the line of credit to get extra money at any time.
- Term payments plus a line of credit: The lender makes equal monthly payments to the borrower for a defined length of time, such as ten years. The borrower can use the line of credit to get more money during or after the term.
A reverse mortgage known as a “HECM for purchase” can also be used to acquire a home other than the one you presently reside in.
Also called a Federal Housing Administration (FHA) reverse mortgage, this type of mortgage is only available through an FHA-approved lender.
In any case, you will typically need at least 50% equity—based on your home’s current value, not what you paid for it—to qualify for a reverse mortgage. Standards vary by lender.
The number of reverse mortgages issued in the United States in 2020, up 23% from the previous year.
Would You Benefit from a Reverse Mortgage?
A reverse mortgage might sound a lot like a home equity loan or a home equity line of credit (HELOC). Indeed, similar to one of these loans, a reverse mortgage can provide a lump sum or a line of credit that you can access as needed, based on how much of your home you’ve paid off and your home’s market value.
But unlike a home equity loan or a HELOC, you don’t need to have an income or good credit to qualify, and you won’t make any loan payments while you occupy the home as your primary residence.
A reverse mortgage is the only way to access home equity without selling the home for seniors who either don’t want the responsibility of making a monthly loan payment or can’t qualify for a home equity loan or refinance because of limited cash flow or poor credit.
What If You Don’t Qualify?
If you don’t qualify for any of these loans, what options remain for using home equity to fund your retirement? You could sell and downsize, or you could sell your home to your children or grandchildren to keep it in the family, perhaps even becoming their renter if you want to continue living in the home.
How Does A Reverse Mortgage Work?
Pros and Cons of a Reverse Mortgage
Once you’re 62 or older, a reverse mortgage can be a good way to get cash when your home equity is your biggest asset and you don’t have another way to get enough money to meet your basic living expenses. A reverse mortgage allows you to keep living in your home as long as you keep up with property taxes, maintenance, and insurance and don’t need to move into a nursing home or assisted living facility for more than a year.
However, taking out a reverse mortgage means spending a significant amount of the equity that you’ve accumulated on interest and loan fees, which we will discuss below. It also means that you likely won’t be able to pass down your home to your heirs. If a reverse mortgage provides a short-term solution to your financial problems rather than a long-term one, then it may not be worth the sacrifice.
What if someone else, such as a friend, relative or roommate, lives with you? If you get a reverse mortgage, that person won’t have any right to keep living in the home after you pass away.
Another problem that some borrowers run into with Texas reverse mortgages is outliving the mortgage proceeds. If you pick a payment plan that doesn’t provide a lifetime income, such as a lump sum or a term plan, or if you take out a line of credit and use it all up, you might not have any money left when you need it.
What Are the Requirements for a Reverse Mortgage?
If you own a house, condominium, or townhouse, or a manufactured home built on or after June 15, 1976, then you may be eligible for a reverse mortgage. Under FHA rules, cooperative housing owners cannot obtain Texas reverse mortgages since they do not technically own the real estate in which they live but rather own shares of a corporation. In New York, where co-ops are common, state law further prohibits Texas reverse mortgages in co-ops, allowing them only in one- to four-family residences and condos.
While Texas reverse mortgages don’t have income or credit score requirements, they still have rules about who qualifies. You must be at least 62 years old, and you must either own your home free and clear or have a substantial amount of equity (at least 50%). Borrowers must pay an origination fee, an up-front mortgage insurance premium, ongoing mortgage insurance premiums (MIPs), loan servicing fees, and interest. The federal government limits how much lenders can charge for these items.
Lenders can’t go after borrowers or their heirs if the home turns out to be underwater when it’s time to sell. They also must either allow any heirs several months to decide whether they want to repay the reverse mortgage or allow the lender to sell the home to pay off the loan.
The U.S. Department of Housing and Urban Development (HUD) requires all prospective reverse mortgage borrowers to complete a HUD-approved counseling session. This counseling session, which usually costs around $125, should take at least 90 minutes and cover the pros and cons of taking out a reverse mortgage given your unique financial and personal circumstances. It should explain how a reverse mortgage could affect your eligibility for Medicaid and Supplemental Security Income (SSI). The counselor should also go over the different ways that you can receive the proceeds.
Your responsibilities under the reverse mortgage rules are to stay current on property taxes and homeowners insurance and keep the home in good repair. And if you stop living in the house for longer than one year—even if it’s because you’re living in a long-term care facility for medical reasons—then you’ll have to repay the loan, which is usually accomplished by selling the house.
Aside from the potential for scams targeting the elderly, Texas reverse mortgages have some legitimate risks. Despite recent reforms, there are still situations when a widow or widower could lose the home upon their spouse’s death.
What Are the Costs of a Reverse Mortgage?
HUD adjusted insurance premiums for Texas reverse mortgages in October 2017. Since lenders can’t ask homeowners or their heirs to pay up if the loan balance grows larger than the home’s value, the insurance premiums provide a pool of funds that lenders can draw on so that they don’t lose money when this happens.
One change was an increase in the up-front premium, from 0.5% to 2.0%, for three out of four borrowers and a decrease in the up-front premium, from 2.5% to 2.0%, for the other one out of four borrowers. The up-front premium used to be tied to how much borrowers took out in the first year, with homeowners who took out the most—because they needed to pay off an existing mortgage—paying the higher rate. Now, all borrowers pay the same 2.0% rate. The up-front premium is calculated based on the home’s value, so for every $100,000 in appraised value, you pay $2,000. That’s $6,000 on a $300,000 house, for example.
All borrowers must also pay annual MIPs of 0.5% (formerly 1.25%) of the amount borrowed. This change saves borrowers $750 a year for every $100,000 borrowed and helps offset the higher up-front premium. It also means that the borrower’s debt grows more slowly, preserving more of the homeowner’s equity over time, providing a source of funds later in life, and increasing the possibility of being able to pass down the home to heirs.
Reverse Mortgage Lenders
To obtain a reverse mortgage, you can’t just go to any lender. Texas reverse mortgages are a specialty product, and only certain lenders offer them. Some of the biggest names in reverse mortgage lending include American Advisors Group, One Reverse Mortgage, and Liberty Home Equity Solutions.
It’s a good idea to apply for a reverse mortgage with several companies to see which has the lowest rates and fees. Even though Texas reverse mortgages are federally regulated, there is still leeway in what each lender can charge.
Reverse Mortgage Interest Rates
Only the lump sum reverse mortgage, which gives you all of the proceeds at once when your loan closes, has a fixed interest rate. The other five options have adjustable interest rates, which makes sense since you’re borrowing money over many years, not all at once, and interest rates are always changing. Variable-rate Texas reverse mortgages are tied to a benchmark index rate like the Fed Funds Rate.
In addition to one of the base rates, the lender adds a margin of one to three percentage points. So if the Fed Funds Rate is 2.5% and the lender’s margin is 2%, then your reverse mortgage interest rate will be 4.5%. As of January 2022, lenders’ margins ranged from 1.5% to 2.5%. Interest compounds over the life of the reverse mortgage, and your credit score does not affect your reverse mortgage rate or your ability to qualify.
How Much Can You Borrow with a Reverse Mortgage?
The proceeds that you’ll receive from a reverse mortgage will depend on the lender and your payment plan. For an HECM, the amount that you can borrow will be based on the youngest borrower’s age, the loan’s interest rate, and the lesser of your home’s appraised value or the FHA’s maximum claim amount, which is $970,800 as of Jan. 1, 2022.
However, you can’t borrow 100% of what your home is worth, or anywhere close to it. Part of your home equity must be used to pay the loan’s expenses, including mortgage premiums and interest. Here are a few other things that you need to know about how much you can borrow:
- The loan proceeds are based on the age of the youngest borrower or, if the borrower is married, the younger spouse, even if the younger spouse is not a borrower. The older the youngest borrower is, the higher the loan proceeds.
- The lower the mortgage rate, the more you can borrow.
- The higher your property’s appraised value, the more you can borrow.
- A strong reverse mortgage financial assessment increases the proceeds that you’ll receive because the lender won’t withhold part of them to pay property taxes and homeowners insurance on your behalf.
How much you can actually borrow is based on what’s called the initial principal limit. In January 2022, the maximum initial principal limit was $822,375.15 The average borrower’s initial principal limit is about 58% of the maximum claim amount.
The federal government lowered the initial principal limit in October 2017, making it harder for homeowners, especially younger ones, to qualify for a reverse mortgage. On the upside, the change helps borrowers preserve more of their equity.
The government lowered the limit for the same reason that it changed insurance premiums: because the mortgage insurance fund’s deficit had nearly doubled over the past fiscal year. This is the fund that pays lenders and protects taxpayers from reverse mortgage losses.
To further complicate things, you can’t borrow all of your initial principal limits in the first year when you choose a lump sum or a line of credit. Instead, you can borrow up to 60%, or more if you’re using the money to pay off your forward mortgage.
If you choose a lump sum, the amount that you get upfront is all you will ever get. If you choose the line of credit, then your credit line will grow over time, but only if you have unused funds in your line.
Texas Reverse Mortgages, Your Spouse, and Your Heirs
Both spouses have to consent to the loan, but both don’t have to be borrowers, and this arrangement can create problems. If two spouses live together in a home but only one spouse is named as the borrower on the reverse mortgage, then the other spouse is at risk of losing the home if the borrowing spouse dies first.
A reverse mortgage must be repaid when the borrower dies, and it’s usually repaid by selling the house. If the surviving spouse wants to keep the home, then the mortgage loan will have to be repaid through other means, possibly through an expensive refinance.
Only one spouse might be a borrower if only one spouse holds title to the house, perhaps because it was inherited or because its ownership predates the marriage. Ideally, both spouses will hold title and both will be borrowers on the reverse mortgage so that when the first spouse dies, the other spouse continues to have access to the reverse mortgage proceeds and can continue living in the house until death.
The non-borrowing spouse could even lose the home if the borrowing spouse had to move into an assisted living facility or nursing home for a year or longer.
Avoiding Reverse Mortgage Scams
With a product as potentially lucrative as a reverse mortgage and a vulnerable population of borrowers who may either have cognitive impairments or be desperately seeking financial salvation, scams abound. Unscrupulous vendors and home improvement contractors have targeted seniors to help them secure Texas reverse mortgages to pay for home improvements—in other words, so they can get paid.
The vendor or contractor may or may not actually deliver on promised, quality work; they might just steal the homeowner’s money.
Relatives, caregivers, and financial advisors have also taken advantage of seniors either by using a power of attorney to reverse mortgage the home, then stealing the proceeds, or by convincing them to buy a financial product, such as an annuity or whole life insurance, that the senior can only afford by obtaining a reverse mortgage.
This transaction is likely to be only in the so-called best interest of the financial advisor, relative, or caregiver. These are just a few of the reverse mortgage scams that can trip up unwitting homeowners.
Do This to Avoid Foreclosure from a Reverse Mortgage
Another danger associated with a reverse mortgage is the possibility of foreclosure. Even though the borrower isn’t responsible for making any mortgage payments—and therefore can’t become delinquent on them—a reverse mortgage requires the borrower to meet certain conditions. Failing to meet these conditions allows the lender to foreclose.
As a reverse mortgage borrower, you are required to live in the home and maintain it. If the home falls into disrepair, it won’t be worth fair market value when it’s time to sell, and the lender won’t be able to recoup the full amount that it has extended to the borrower. Reverse mortgage borrowers are also required to stay current on property taxes and homeowners insurance.
Again, the lender imposes these requirements to protect its interest in the home. If you don’t pay your property taxes, then your local tax authority can seize the house. If you don’t have homeowners insurance and there’s a house fire, the lender’s collateral is damaged.
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