Onward with Reverse: Private reverse mortgages

-The Herald

Where about 98 percent of all reverse mortgages are done through reverse mortgage specialty companies and are insured by the Federal Housing Administration (FHA), a few are done by mortgage companies without the FHA guarantee. These are primarily for homes that need a loan amount over the FHA limit. The interest rate would be higher and the Loan to Value would be lower, but it gets the job done.

Another idea for a “private” reverse mortgage is where a well off family member, i.e. kids, grandkids, etc., does the reverse mortgage and eliminates most of the fees.FHA mortgage insurance is by far the biggest fee. It is 2 percent of the appraised value. If your home value is $200,000.00 mortgage insurance would be $4,000.00. A family member could set up a reverse mortgage. That would reduce fees, increase the equity a parent could use, eliminate the age requirement, and greatly reduce the paperwork. This would give the parents the security they need with no monthly payments, and the lending party would make a good profit after the parents die. This is especially true if the “lender” is also the heir to the property.

If several children are involved, they could set up a limited partnership to do the loan. That way the children could benefit from a “stepped–up basis” when the parents die, meaning the children would not owe capital-gains tax when they sell, says Robert Siefert, a financial planner at Modera wealth Management LLC in Boston.

Another option is to have the family lender set up a line of credit for the parents, backed up by the equity in the home.

Reverse mortgages can also be used with the parent over age 62 in helping a child or grandchild to buy a home. Let’s say the adult child has gone through a period of no employment or other situation that has hurt their credit scores. The situation that caused the bad credit is now cured, but it will take a couple years for them to get their credit back in shape to qualify to buy a home. The parents can do a reverse mortgage to get the money for the child to buy the home. The child then makes monthly payments to the parents until they can qualify to buy the home from the parents.

The safety factor here for the parents is that if the child misses a payment or two, it won’t affect the parents credit because they have no monthly payments to make on the reverse mortgage.

Another advantage here is that the parents can use the payments received from the child to pay the interest and FHA insurance accumulating on the reverse mortgage.

Therefore, the equity in the parents’ home will not go down from the original principal balance. When the child pays them off, they can either pay off their reverse mortgage or leave the mortgage on with the “no monthly payments” and use the money from the child for whatever they want.

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