Quirky Reverse Mortgage Rules (Part 1)

limits”.

Reverse mortgages have lots of rules. Specifically, the FHA insured Home Equity Conversion Mortgage (HECM), has more rules than any loan I have ever done.
The other challenge is that FHA tends to add, change and update (never subtract), these rules on at least a yearly basis.

That’s just on the national level. A number of states with overbearing governments that think they know what’s best for their residents also like to impose
their own rules. For example, the state of New York just signed a new law that caused reverse mortgage lenders to suspend all lending in that state
until they can figure out how to work within the new rules.

Luckily, in Colorado we have not seen this government overreach…Yet. Let’s keep our fingers crossed.

But this article is not a complaint about governments. I’m an active member in the National Reverse Mortgage Lenders Association and they keep me informed
about what new law, rules and regulations are coming down the pike. As I find out about rule changes, I will keep you informed through this blog and
my radio show.

Today, I want to discuss an older rule that tripped up a customer of mine in recent months. It’s called “initial disbursement limits”.

Initial Disbursement Limits

This rule requires a bit of background. From 2009 – 2013 most reverse mortgage loans were on the fixed-rate product. Since fixed-rate loans are what is
known as “closed-end” loans, borrowers receive all the funds available in one lump sum at closing, whether they needed it or not. Think of refinancing
your mortgage. You tell the bank you want to pay off your current mortgage and maybe roll a car loan in with it. You get a loan for that amount and
that is it. No more money is available after the loan has closed. That is known as a closed-end loan.

With the example above, you tell the bank how much you want. However, wit a HECM loan, HUD dictates how much the lender can loan and if the borrower chooses
a fixed rate, they do not get to say “I only want half now and the other half in the line of credit” because there is no line of credit available with
this option.

During that time when most borrowers chose the fixed rate option and took all the money upfront, some spent it all and did not save any for reserves. This
caused a wave of people forgetting, or not having the funds to pay, their property taxes and/or homeowners insurance premiums, (property charges).
When a borrower fails to pay their property charges, this is what is called a “technical default”. This means the loan is called due and payable.

Before we go into the rule HUD created to fix this problem, I need to give a couple of definitions:

Principal Limit: The maximum amount of money a reverse mortgage borrower can receive. In normal loan terms, this would be called the loan amount.

Mandatory Obligations: Items that must be paid off at closing. They include mortgages, liens, judgements that affect the home’s title, federal debt, closing costs, and initial mortgage insurance premiums. Mandatory obligations may be financed into the loan or paid by the borrower at closing.

As a result of this wave of technical defaults, in 2013 HUD announced new rules to restrict the amount of money a borrower is allowed to use during the
first year of the HECM to 60% of the principal limit (PL) or if mandatory obligations are more than 6% of the PL, the lender can loan enough to cover
the mandatory obligations +10% of their principal limit.

This amount is called “initial disbursement limit” and the purpose of it is to limit the amount of funds available to the borrower during the firs 12 months
of the loan. However, the way this limit is treated will depend upon which interest rate the borrower chooses – fixed or adjustable.

Fixed-Rate HECM Loans are closed-end loans and the proceeds can only be drawn at closing, (see refinance example above). As such, there
is no access to additional funds once the loan is closed. This creates a problem for someone who doesn’t want to draw extra money at closing but may
want access to additional money at a later date.

For example, someone who has a PL of $200,000 would have an initial disbursement limit of $120,000, ($200,000 x 60% = $120,000). If they had mandatory
obligations of just $50,000, and decided to take a fixed rate, they would have to take $120,000. That would leave them and additional $70,000 that
they may or may not want and they would be charged interest on that full $120,000 amount. In addition, since the fixed-rate program is a closed-end
loan, they would NOT have access the additional $80,000 ($200,000 PL – $120,000 Initial Disbursement = $80,000).

Adjustable-Rate HECM Loans are open-end loans meaning the additional PL ($70,000) would be available to the borrower after the first month.
Additionally, the borrower is not required to pull the entire 60% of the PL at closing.

Using the example above, this borrower would only be required to take the mandatory obligations amount of $50,000 at closing. This would leave the rest
of the $120,000 initial disbursement limit during the first 12 months of the loan ($70,000) available to the borrower during that time period.

Once the first year is over, 100% of the LOC would be available to the borrowers. If they only used the initial $50,000 and did not use any of the LOC
after that, they would have the full $150,000 LOC available (plus the growth on the LOC).

My customer that was caught in this initial disbursement net owned her home free and clear. She needed to draw down 100% of the funds to pay off her husband
who she was planning to divorce. Normally, with a divorce that has been finalized and recorded, HUD allows the homeowner staying in the home to access
100% of the funds because they treat a divorce settlement as part of the mandatory obligations. This case was different because, while they were separated,
they were not planning to get divorced for at least another year so she could stay on her husband’s health insurance plan.

Because there was no divorce recorded, we limited her funds she could take to just 60% of the PL. This was not enough to pay off her husband, so she did
not get the reverse mortgage.

As you can see, this is just one of many rules that most people do not consider when they’re thinking about reverse mortgages and it is a good reason to
make sure you work with an experienced loan officer that specializes in reverse mortgages.

Bruce Simmons

Bruce Simmons

I absolutely love what I do - working with senior homeowners to help them live a more comfortable, flexible and secure retirement. I have the absolute best customers in the world, and even though I worked in the forward mortgage business for a number of years, I could never go back to doing conventional loans. I'm a 100% reverse mortgage specialist.

5.0

I was hesitate about getting a reverse mortgage until Bruce Simons put my mind at rest. He is easy to work with, extremely knowledgeable and efficient. Things get done and he will make sure that you understand every part of the process. I interviewed several other people and he was hands down.....The only choice.

Doing a Reverse Mortgage is a major decision, when working with Bruce he came out personally to go over every thing in detail, there was no pressure to finalize the transaction, I had even put the loan on hold for awhile even though I had locked in my rate, I had called Bruce off and on for a few weeks to ask questions that I had concerns about and he was always available to talk to me. In the end it gave me time to feel comfortable about my decision to move forward with the Reverse. Bruce was very pleasant to work with and would certainly recommend Bruce if you are going to consider a Reverse Mortgage.

Bruce Simmons at American Liberty is one of the best in the reverse mortgage industry. I have known and worked with him for years and he always does a great job. You are in good hands with Bruce and know that he will take good care of you or your loved ones every step of the way.

Best thing I ever did! Bruce Simmons at American Liberty Mortgage is the best. He is always there to answer your questions, and can easily explain the whole idea of a Reverse Mortgage. He takes the time and goes through the entire process with you. It worked out so well for me. Thank You Bruce!

We had researched Reverse Mortgages for 5 years and after hearing about Bruce Simmons and meeting with him, we finally decided to move forward with the Reverse Morgage. It has been over a year now and we are still very pleased with our decision. We think Bruce is very professional, knowledgeable and honest. Thank you, Bruce, for all your help.

I first met Bruce Simmons 2017. I found him on the internet. I was looking for someone local. I called him and explained I was only looking into doing a reverse mortgage, so I did not want him to think this was something I was ready to do. Bruce was friendly, very open about the basics of a reverse mortgage. Bruce came to my home and presented the figures and other details that he could offer. The first thing that impressed me was this was not a hard sell, more of a informational meeting. He was very open about all of the details, and answered my questions without hesitation. What really was evident was he was establishing a relationship with me, and I realized he knew I would not take the loan at that time. There was not enough equity in my home, and I would have to bring money to the table. Although I was not ready to do a loan, Bruce assured me he is always available for questions. Four years later, I finally did do a reverse mortgage, and I couldn't be happier with having done it. I have done away with a mortgage payment which allows me to fund my retirement account with that mortgage payment. We did some much needed landscaping with our cash out transaction, and will move on to improvements inside of the house. My reverse mortgage has a line of credit, and I feel sense security knowing it is there if I need it. Bruce explained that a reverse mortgage is not for everyone, but I feel certain that he paved the way for a strategy that worked for me. I will definitely do a refinance when the time is right. I will check in with Bruce to be sure what the benefits are when I do it again.

I have worked with Bruce Simmons for 15 years. Bruce is one of the best in the industry. He is extremely knowledgeable, kinds and detailed in what he does. His clients love working with him and trust him to help them with their Reverse Mortgage loans. I would recommend Bruce to anyone I know that is thinking about or wanting to do a Reverse Mortgage. He will always take very good care of the customers and make sure their needs are met! Class act and one of the best in the industry by far!

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Kathleen Mitchell
Kathleen Mitchell

Just left us a 5 star review

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Kathleen Mitchell
September 18, 2022

I was hesitate about getting a reverse mortgage until Bruce Simons put my mind at rest. He is easy to work with, extremely knowledgeable and efficient. Things get done and he will make sure that you understand every part of the process. I interviewed several other people and he was hands down.....The only choice.

google
Mike Hoeffner
August 30, 2022

Doing a Reverse Mortgage is a major decision, when working with Bruce he came out personally to go over every thing in detail, there was no pressure to finalize the transaction, I had even put the loan on hold for awhile even though I had locked in my rate, I had called Bruce off and on for a few weeks to ask questions that I had concerns about and he was always available to talk to me. In the end it gave me time to feel comfortable about my decision to move forward with the Reverse. Bruce was very pleasant to work with and would certainly recommend Bruce if you are going to consider a Reverse Mortgage.

google
Jonathan Maiolatesi
August 22, 2022

Bruce Simmons at American Liberty is one of the best in the reverse mortgage industry. I have known and worked with him for years and he always does a great job. You are in good hands with Bruce and know that he will take good care of you or your loved ones every step of the way.

google
Ronda Giblin
August 20, 2022

Best thing I ever did! Bruce Simmons at American Liberty Mortgage is the best. He is always there to answer your questions, and can easily explain the whole idea of a Reverse Mortgage. He takes the time and goes through the entire process with you. It worked out so well for me. Thank You Bruce!

google
John Bell
August 20, 2022

We had researched Reverse Mortgages for 5 years and after hearing about Bruce Simmons and meeting with him, we finally decided to move forward with the Reverse Morgage. It has been over a year now and we are still very pleased with our decision. We think Bruce is very professional, knowledgeable and honest. Thank you, Bruce, for all your help.

google
Mary Bernard
August 19, 2022

I first met Bruce Simmons 2017. I found him on the internet. I was looking for someone local. I called him and explained I was only looking into doing a reverse mortgage, so I did not want him to think this was something I was ready to do. Bruce was friendly, very open about the basics of a reverse mortgage. Bruce came to my home and presented the figures and other details that he could offer. The first thing that impressed me was this was not a hard sell, more of a informational meeting. He was very open about all of the details, and answered my questions without hesitation. What really was evident was he was establishing a relationship with me, and I realized he knew I would not take the loan at that time. There was not enough equity in my home, and I would have to bring money to the table. Although I was not ready to do a loan, Bruce assured me he is always available for questions. Four years later, I finally did do a reverse mortgage, and I couldn't be happier with having done it. I have done away with a mortgage payment which allows me to fund my retirement account with that mortgage payment. We did some much needed landscaping with our cash out transaction, and will move on to improvements inside of the house. My reverse mortgage has a line of credit, and I feel sense security knowing it is there if I need it. Bruce explained that a reverse mortgage is not for everyone, but I feel certain that he paved the way for a strategy that worked for me. I will definitely do a refinance when the time is right. I will check in with Bruce to be sure what the benefits are when I do it again.

google
LESLIE HINES
August 19, 2022

I have worked with Bruce Simmons for 15 years. Bruce is one of the best in the industry. He is extremely knowledgeable, kinds and detailed in what he does. His clients love working with him and trust him to help them with their Reverse Mortgage loans. I would recommend Bruce to anyone I know that is thinking about or wanting to do a Reverse Mortgage. He will always take very good care of the customers and make sure their needs are met! Class act and one of the best in the industry by far!