FHA program can help seniors tap into equity

For the AJC

Many seniors have lived in their homes for years. They now find themselves owning a very valuable asset free and clear but having no way to tap into that equity when they need it.

That situation has changed recently with the arrival of the Federal Housing Administration's reverse mortgage program.

It's a safe plan that can give older Americans greater financial security. Seniors often use it to supplement retirement income, meet unexpected medical expenses, or make home improvements.

• A special kind of home equity loan: A reverse mortgage is similar to a home equity line of credit, allowing senior citizens to tap into the equity they have in their principal residence. The main difference is that no income is needed to qualify and no payments are due until the borrower moves out of the house permanently. The house serves as the complete collateral for the loan.

• Loan amount based on equity and age of borrower: The FHA uses a complex formula to calculate what portion of your equity you can borrow out. The older you are, the more you can borrow, because your life expectancy is less. That means less interest will add up on the amount you borrow. Likewise, the greater the equity in your home, the more that will be made available to you. And because the current interest rate will affect your final loan payoff, that factor is considered as well. For example, a 62-year-old could borrow about 56 percent of his or her home's equity. In contrast, a 90-year-old could borrow closer to 75 percent of the home's equity.

• Multiple ways to get funds: The program allows the borrower to obtain a lump sum of cash, or draw out a stream of monthly payments for life, or get a checkbook with access to funds as needed, or a combination of any of these methods. This makes the reverse mortgage extremely flexible, and allows the borrower to access available funds only as needed.

• No monthly payments: Unless you choose to, there are no monthly payments due on this loan as long as you continue to use the house as your principal residence.

If you move for any reason, the loan plus accrued interest becomes due. The FHA looks solely to the house for repayment. The borrower is not personally liable for the debt. If the house fails to sell for enough to pay the debt, the FHA mortgage insurance covers the loss.

Remember that like all homeowners, you will still be required to pay for insurance and your property taxes as well as utilities and any association fees or assessments that might fall due.

• Special counseling required: Because these reverse mortgages are so focused on the borrower's age and equity, and because they are so often misunderstood, the FHA requires that every borrower receive special HUD counseling to cover the costs and benefits of the reverse loan for that individual applicant.

Steer clear of any lender who might try to charge upfront for reverse mortgage counseling. Many lenders offer the educational session for free.

• How do I qualify? Because no repayment is required from the borrower, there are no income or debt ratio requirements. You must be 62 or older and reside in the house as your principal residence. In addition, you must not be delinquent on any federal debt.

• What's the downside of a reverse mortgage? Because the FHA charges a 2 percent funding fee in addition to all regular closing costs, and because the lender is required to provide free counseling for borrowers, the startup costs are high when compared with conventional loans. As a result, if you die or move out in just a few years, the balance may be substantial even though you may never have drawn on the funds.

In addition, should you pass away or move to a senior care facility, the FHA will demand payment in full immediately. Unless someone pays off the debt and accumulated interest, the property will be sold to cover the debt. Heirs hoping to inherit the house may be surprised or disappointed, so it's a good idea for the family to be included in the decision-making process.

Even if the sale of the house doesn't cover the full debt, the lender looks to the FHA for the difference. The borrower and his or her family are not personally responsible for paying the loan back unless they wish to keep the house.

It seems fitting to me that the family home that built up equity over the years be the vehicle used to supplement incomes and make repairs in a homeowner's sunset years.