The quick answer is “no”, it’s a completely different type of mortgage than the traditional one almost everyone is familiar with if they’ve ever bought a home or refinanced.
They do not underwrite using “debt-to-income” ratios, FICO scores, or “loan-to-value” calculations, but instead use the potential borrowers’ net cash flow after all housing expenses have been deducted along with any debt credit card, installment loans and utilities. .
Included in this overview is a 24-month history of property taxes, homeowners insurance, and any HOA fees to verify they have been paid on time.
A credit report is run to determine if there have been late payments on credit cards or installment loans during the last 24 months.
If there have been any late payments during that time period, the Lender will request a letter of explanation and may require that part of the reverse loan funds be set aside in an escrow account to pay for ongoing housing expenses.
I am frequently asked how long it will take to complete a loan and that depends on the cooperation of the borrower when asked to provide all the documents needed at the time of application.
And due to the fact that more paperwork is required from the borrower, it usually takes about 45 days to complete the loan and have the borrower sign the loan documents.
What should a person look for in a reverse loan?
They cannot be compared to traditional financing because they are so different and the loan amount is calculated based on the age of the youngest borrower and also depends on whether there is an existing mortgage to pay off and the value of the property.
- There are no “Points”, but an origination fee is sometimes charged and is determined by the loan amount and interest rate.
- You can’t charge “junk” fees from the lender, and regardless of which company offers the FHA HECM program, they all have exactly the same interest rates and costs.
- All rates are regulated by the federal government.
- This is a mortgage offered by the FHA and is insured by the federal government.
The choice of which company to represent you comes down to whether they will meet you in person at your home or expect you to fill out a loan application and submit all of your paperwork without assisting you in what can be a confusing experience.
Ultimately, a reverse loan is still a mortgage and is recorded against the subject property as a lien, but there are no mortgage payments and the comparison to traditional financing ends there.