Introduction to Reverse Mortgages
Why Would We Do a Reverse Mortgage?
Reverse mortgages offer qualified buyers tremendous benefits, including low interest rates, low down payments and many other things. Due to the guidelines set forth on conforming conventional loans, over non conforming conventional loans, generally interest rates are fixed and lower as long as the borrower fits the financial criteria. Conforming loans are not insured by the federal government, like FHA Loans, so the underwriting has higher requirements.
Conforming loans have limits set forth by Fannie Mae and Freddie Mac so they are not for all borrowers if looking at a higher value home, or unable to meet the cash due to close in a conforming loan. However, due to the strong stability, underwriting guidelines and demand in the MBS (mortgage backed securities) market, conforming loans give every day American's an affordable opportunity to own their home and investment properties as well.
What is a Reverse Mortgage or HECM?
The primary factor that makes conforming loans different from non comforming jumbo loans, are the limits set forth by FHFA (Federal Housing Finance Agnecy). These are used by both Fannie Mae and Freddie Mac for limits on the loans issued through both organizations portfolios. For 2022, FHFA has set the national limit at $647,200 for a single family residence. Some high cost counties qualify for a higher limit, which we will look at in the next section.
Beyond the FHFA limits, conforming conventional loans are different from non comforming or jumbo loans, as lenders must stick to the underwriting guidelines, requirements and rates set forth by either Fannie Mae or Freddie Mac. As long as the lender and borrower have met all requirements, Fannie or Freddies corresponding portfolio will purchase the loan from the lender, so the lender may free up cash flow to go offer more affordably priced loans to qualified borrowers.
Fannie and Freddie were created by congress and play crucial roles in the American economy. They put liquidity in the mortgage market, allowing both lenders and borrowers to transact smoothly and affordably, while ensuring that single family homes and two, three, and four unit properties are consistently being purchased, creating a stable housing market.
For more information on Fannie Mae, Freddie Mac, how they were created, and the conforming mortgage guidelines, click here.
REVERSE MORTGAGE LIMITS
2022 IS A BIG YEAR!
Reverse Mortgage Limits
Conforming mortgage loans have limits established by the FHFA each year, based on median home prices in the prior years sales. The limits for 2022 were established in Nov 2021, based on 2021 home sales data. There are limits for 1 unit (single family residences), 2 unit (duplex), 3 unit (triplex) and 4 unit (quadplex) properties.
FHFA sets a nationwide limit, which is at $647,200 for 2022. All counties in the USA can qualify for a conforming home loan up to that amount. However, some "high cost" counties qualify for higher limits as well. These are generally in more expensive, metropolitan markets. However, even more rural counties such as Pitkin and Eagle Counties, CO have limits as high as $856,750 / $862,500 respectively.
It is important to note that the conforming loan limit does NOT relate to the value of the home you're looking to purchase, only the amount of the loan. Let's take a quick look:
Jennifer wants to purchase a $800k home in a county where the 1 unit (single family) conforming loan limit is $647,200. Jennifer wanted to only put $100k down. This
2022 Conforming Loan Limits:
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Title | 1 Unit | 2 Units | 3 Units | 4 Units |
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For Detailed information of the conforming loan limits in your county, click here
GETTING A
REVERSE MORTGAGE
IT'S NOT AS HARD AS YOU'D EXPECT!
What is the Reverse Mortgage Process?
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Credit Scores of 620 and up may qualify for a conforming loan, however, 620-700 credit scores may find better rates with an FHA Mortgage
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Minimum 3% Down Payment.
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If LTV is below 80% at closing, no mortgage insurance required.
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Borrower must have steady income and employment, with two year history.
For borrowers that meet the above criteria, the next step is to figure out how much mortgage payment you can afford and qualify for. This is based upon three factors:
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Borrower's Income
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Borrower's qualifying expenses
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Your DTI, (expenses /divided by/ income)
This will determine the monthly budget your family has available for a mortgage payment, including all PITI (principal, interest, taxes and insurance). Based on the mortgage rate you're able to qualify for, this will determine the loan value you are qualified for so you can begin your home shopping with a pre approval in hand.
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What if We Are Qualifying Jointly For Our Conforming Loan?
Buying a home with multiple people happens every day. Yes, while most are going to be two spouses or domestic partners, it can also be any relationship from two siblings, parent / child, two friends, or anything in between. However, with an FHA home loan, the property must be both applicants primary residence, if applying jointly. (Different if one applicant is only a co-signer to help a less qualified primary applicant)
Note, when qualifying jointly, the lender will use the credit scores of the person with the lower scores only. However, both applicants income and expenses are used to determine DTI.
MORTGAGE INSURANCE IN
A REVERSE MORTGAGE
Nothing You'll Ever Use... But it May Help You Save Thousands!
What is PMI (Primary Mortgage Insurance)
There are two types of mortgage insurance when it comes to FHA Home Loans: 1: MIP (Annual Mortgage iInsurance Premium) and 2: UPMIP (Up Front Mortgage Insurance Premium). Let's take a look at both:
1: MIP - Mortgage Insurance Premium
Mortgage Insurance Premium is more similar to conventional mortgage PMI (Primary Mortgage Insurance). The amount of premium will be a percentage of the loan balance, due every month with your mortgage payments. The percentage of premium paid is determined by the original LTV (Loan to Value) of the Loan when the home was purchased and mortgage was closed. MIP Is not a requirement on all homes if original LTV is below 78%.
2 UPMIP - Up Front Mortgage Insurance Premium:
UPMIP is different and in addition to MIP. As stated above, not all FHA Home loans require MIP, however, any and all FHA Mortgages issued in 2022 have 1.75% of the loan amount due up front at the time of closing. This can either be added to "cash to close" by the borrower, or added to the loan amount and paid by the lender. This is the portion that covers the lender in the event of default by the borrower on FHA loans.
While it can look like an expensive up front cost, if you have less than perfect credit, or you're building your career and income, this premium will save you thousands, compared with higher interest rates from a conventional loan.
If you have good credit and a stronger financial profile, you may qualify for better rates and a net monthly cash flow / equity position by avoiding the UPMIP by choosing a conventional mortgage for your family's new home purchase or mortgage refinance.
This is an introductory overview to FHA Mortgage Insurance. Click here for a deep dive into understanding MIP and UPMIP.
IS A CONVENTIONAL LOAN
RIGHT FOR MY FAMILY?
It All Comes Down To The Numbers. We Will Help You Navigate The Best Path
BENEFITS OF CONVENTIONAL HOME LOANS
There are two types of mortgage insurance when it comes to FHA Home Loans: 1: MIP (Annual Mortgage iInsurance Premium) and 2: UPMIP (Up Front Mortgage Insurance Premium). Let's take a look at both:
1: MIP - Mortgage Insurance Premium
Mortgage Insurance Premium is more similar to conventional mortgage PMI (Primary Mortgage Insurance). The amount of premium will be a percentage of the loan balance, due every month with your mortgage payments. The percentage of premium paid is determined by the original LTV (Loan to Value) of the Loan when the home was purchased and mortgage was closed. MIP Is not a requirement on all homes if original LTV is below 78%.
2 UPMIP - Up Front Mortgage Insurance Premium:
UPMIP is different and in addition to MIP. As stated above, not all FHA Home loans require MIP, however, any and all FHA Mortgages issued in 2022 have 1.75% of the loan amount due up front at the time of closing. This can either be added to "cash to close" by the borrower, or added to the loan amount and paid by the lender. This is the portion that covers the lender in the event of default by the borrower on FHA loans.
While it can look like an expensive up front cost, if you have less than perfect credit, or you're building your career and income, this premium will save you thousands, compared with higher interest rates from a conventional loan.
If you have good credit and a stronger financial profile, you may qualify for better rates and a net monthly cash flow / equity position by avoiding the UPMIP by choosing a conventional mortgage for your family's new home purchase or mortgage refinance.