Reverse Mortgages (HECM) Overview
28 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is a significant characteristic of reverse mortgages?

  • They allow access to home equity without monthly mortgage payments. (correct)
  • They are primarily offered by traditional banks.
  • They require monthly repayments from borrowers.
  • They are generally available to all ages.

    • Which of the following factors does NOT influence the loan amount available under a reverse mortgage?

  • The appraised value of the property
  • The age of the youngest borrower
  • The credit score of the borrower (correct)
  • The interest rate at the time of application

    • What happens to the loan if the last surviving borrower passes away?

  • The loan continues under the surviving spouse's name.
  • The loan is forgiven.
  • The loan must be paid off immediately. (correct)
  • Repayment is deferred until the home is sold.

    • Which program dominates the reverse mortgage market?

    <p>FHA HECM program</p> Signup and view all the answers

    What is the implication of negative amortization in reverse mortgages?

    <p>Unpaid interest is added to the principal balance.</p> Signup and view all the answers

    What happens after the interest-only payment term ends in a loan?

    <p>The borrower must start paying principal and interest to repay the loan.</p> Signup and view all the answers

    Which type of loan is used specifically to finance the construction of buildings on land?

    <p>Construction loan</p> Signup and view all the answers

    How are funds disbursed in a construction loan during the construction period?

    <p>Based on an agreed draw schedule.</p> Signup and view all the answers

    What is a characteristic feature of a Construction-Permanent loan?

    <p>It combines the construction and permanent phases into one loan.</p> Signup and view all the answers

    What must a borrower have before receiving a construction loan?

    <p>Permanent financing approved in advance.</p> Signup and view all the answers

    In the Voucher System for disbursing construction funds, how are payments made?

    <p>The borrower pays suppliers and then submits receipts for reimbursement.</p> Signup and view all the answers

    What governs the timing of disbursement for draws in a construction loan?

    <p>An agreement established by the lender in advance.</p> Signup and view all the answers

    What characterizes a short-term construction loan?

    <p>It's paid off with permanent financing after construction.</p> Signup and view all the answers

    How does the TRID rule affect construction loans?

    <p>It mandates specific disclosure methods for construction loans.</p> Signup and view all the answers

    What is required from lenders if the permanent financing occurs more than 60 days after the original Loan Estimate is provided?

    <p>They can provide revised disclosures at any time before 60 days.</p> Signup and view all the answers

    What happens to a reverse mortgage if the home cannot be sold for the amount owed?

    <p>The lender writes off the balance.</p> Signup and view all the answers

    What is one requirement for borrowers to qualify for a reverse mortgage?

    <p>Borrowers must be at least 62 years old.</p> Signup and view all the answers

    What must borrowers complete before approval for a reverse mortgage?

    <p>Pre-loan counseling.</p> Signup and view all the answers

    Which of the following disclosures is required for reverse mortgages?

    <p>An itemization of loan terms.</p> Signup and view all the answers

    What is a defining feature of a Home Equity Line of Credit (HELOC)?

    <p>It is an open-ended mortgage loan.</p> Signup and view all the answers

    In a Purchase Money Second Mortgage (PM2), what does it allow borrowers to avoid?

    <p>Private mortgage insurance (PMI).</p> Signup and view all the answers

    What is the Combined Loan to Value ratio (CLTV) associated with?

    <p>Total of the first and second mortgages divided by the sales price or appraised value.</p> Signup and view all the answers

    What characterizes a balloon mortgage?

    <p>It has a large final payment due at the end.</p> Signup and view all the answers

    How are interest rates structured for HELOCs?

    <p>They are usually variable.</p> Signup and view all the answers

    What payment structure is typical during the draw period of a HELOC?

    <p>Interest-only payments.</p> Signup and view all the answers

    What is a unique characteristic of interest-only mortgages?

    <p>They require interest-only payments for a certain period.</p> Signup and view all the answers

    What is a key drawback of balloon mortgages?

    <p>The final payment can be a significant amount.</p> Signup and view all the answers

    What must title insurance do for a reverse mortgage?

    <p>Cover both the loan amount at origination and future amounts due.</p> Signup and view all the answers

    Study Notes

    Reverse Mortgages (HECM)

    • Designed for senior citizens to access home equity without monthly payments.
    • Offered and serviced by specialized lenders.
    • Primarily through the FHA HECM program.
    • Secondary market exists with Ginnie Mae guaranteeing mortgage-backed securities.
    • Loan amount depends on equity, not credit or income.
    • Negative amortization: unpaid interest added to the principal.
    • Loan proceeds: single lump sum, scheduled payments, or line of credit.
    • Borrowers typically retain 50% equity.
    • Loan amount calculation considers:
      • Age of youngest borrower/spouse
      • Interest rate
      • Appraised value
      • FHA mortgage limit (or lender limit)
      • Sales price (if a purchase).
    • Loan repayment triggered by:
      • Death of last surviving borrower/spouse
      • Sale of the home
      • Home no longer used as a primary residence.
    • Lender can demand full repayment for missed property taxes/insurance or lack of property maintenance.
    • Full balance (interest, insurance, fees) due upon repayment.
    • Remaining equity belongs to borrower/estate.
    • Lender writes off unpaid balance if home value cannot cover loan.
    • Requirements:
      • Borrower aged 62 or older.
      • Eligible co-borrower spouses allowed.
      • Properties: single-family homes, condos, planned unit developments.
      • Home must be the borrower's primary residence.
      • Homeowner's insurance at replacement value.
      • Pre-loan counseling required.
      • Title insurance covers loan amount (initial and future due to negative amortization).
    • Exempted from TRID (Loan Estimate/Closing Disclosure).
    • Disclosures required:
      • Notice that the applicant isn't obligated to proceed.
      • Good Faith Estimate (GFE) with projected costs & TALC.
      • Itemized terms, charges, borrower's age, and appraised value.
      • TALC explanation (Reg Z, Appendix K, paragraph (d)).
    • Costs:
      • Upfront at closing (cash or from loan proceeds).
      • Lender origination fees (maximum $6,000).
      • Closing costs (appraisal, title search, etc.).
      • Initial and annual mortgage insurance premiums (different from homeowner's insurance).
      • Ongoing: interest, lender servicing fees, annual mortgage insurance premium (0.5% of outstanding balance).
    • Advertising restrictions:
      • No deceptive or inaccurate marketing materials.
      • Cannot claim FHA/HUD approval or use logos/symbols.
      • Cannot imply risk-free income solution.

    Home Equity Lines of Credit (HELOC)

    • Open-ended second mortgage with a credit limit for borrowing.
    • Two phases: draw period and repayment period.
    • Draw period: borrowing, interest-only or small principal payments.
    • Repayment period: line of credit closes, full repayment by maturity date.
    • Loan disbursement methods: online transfer, checks, connected credit cards.
    • Few to no closing costs.
    • Typically variable interest rates.
    • Loan amounts based on property value and creditworthiness.
    • Draw period: interest/payments are based on average daily balance.

    Purchase Money Second Mortgage (PM2)

    • Second mortgage issued concurrently with a first mortgage (piggyback second).
    • Allows buyers with less than 20% down payment to avoid PMI.
    • Combined Loan-to-Value ratio (CLTV) calculated: first and second mortgages divided by the lower of sale price or appraised value.
    • Common structure (80/10/10).
    • No prepayment penalty.
    • Subject to secondary market guidelines based on borrower qualifications.

    Balloon Mortgage

    • Larger payment than average monthly payment at the end of the loan term.
    • Potential for large balloon payment, often high percentage of original principal.
    • Example: 7-year balloon with 30-year amortization schedule.
    • Generally not considered Qualified Mortgages (QM).
    • Popular before 2007 crisis; purchased by GSEs.
    • Often offered lower interest rates than 30-year fixed-rate loans.

    Interest-Only Mortgage

    • Interest payments only initially, with principal payback later.
    • Not considered Qualified Mortgages.
    • May be available as a Non-QM product.
    • Common structure: interest-only for initial set period, followed by full principal and interest payments until maturity date.
    • Options: interest-only fixed-rate or adjustable-rate mortgages (ARM).

    Construction Loan

    • Finances construction of improvements on land.
    • Short-term loan, paid off with a permanent loan upon completion.
    • Disbursed in installments (draws) based on scheduled construction milestones.
    • Interest is only on disbursed amounts during construction period.
    • Permanent financing must be approved beforehand.

    Construction-Permanent Loan

    • Combined construction and permanent financing.
    • Funds disbursed to borrower/builder in stages, with payment after completion.
    • Lender reviews plans and construction progress.
    • Disbursement methods: draw schedule plan, voucher systems, warrant systems.
    • TRID rule applies, requiring accurate disclosure.
    • Separate Loan Estimates and Closing Disclosures are optional (either combined or individual for construction/permanent phases).
    • Estimating disclosures for periodic payments during construction, using Reg Z Appendix D.
    • Disclosures can (and often must be) revised if the permanent financing settlement occurs more than 60 days after the original Loan Estimate.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Description

    This quiz covers the essentials of Home Equity Conversion Mortgages (HECM), a financial tool designed for seniors to access their home equity. Learn about eligibility, loan repayment triggers, and the impact on home equity while understanding important terms like negative amortization and loan calculations.

    More Like This

    Mortgage Mastery
    3 questions

    Mortgage Mastery

    AbundantMagic avatar
    AbundantMagic
    Mastering Reverse Engineering
    10 questions

    Mastering Reverse Engineering

    InvaluableAmber avatar
    InvaluableAmber
    Reverse Isolation Precautions Flashcards
    3 questions

    Reverse Isolation Precautions Flashcards

    ReliableDiction avatar
    ReliableDiction
    Reverse Osmosis Quiz
    10 questions

    Reverse Osmosis Quiz

    ElegantHelium avatar
    ElegantHelium
    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser