Much has been written about the credit crunch and how financial institutions are lending only to borrowers with the best credit.
This nervousness is causing banks to almost stop lending altogether. Naturally, many senior homeowners are concerned that this will affect their ability to obtain a reverse mortgage. Well, don’t be too concerned, there is a difference.
As a forward mortgage is based on falling debt, rising equity and relies on the borrower repaying the loan, a reverse mortgage is a falling equity, rising debt loan where the borrower receives payments from the lender. In a reverse mortgage the lender is paying the borrower, either in monthly payments or a line of credit. There are no monthly payments from the borrower to the bank. So when there is talk of a credit crunch from the standpoint of the borrowers not obtaining credit due to inability to repay the obligation, seniors with reverse mortgages do not have these concerns.
The credit crunch does affect reverse mortgages in other ways. Most of the proprietary mortgages, known in the industry as jumbo reverse mortgages, have all but disappeared. However, the impact on these high-valued homes is reduced due to the recovery act that has been implemented by HUD, raising the nationwide loan limit on the Home Equity Conversion Mortgage to $417,000. There is pending legislation that might raise the limits even higher.
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The credit crunch has affected the reverse mortgage regarding the margins that are available for the loans. Margins are slowly rising on the reverse mortgage.
The reverse mortgage will remain available. But due to the credit crunch, margins might be higher and few proprietary products available. However, many more people will be able to obtain reverse mortgages since the new law allows seniors owning manufactured homes in co-ops to obtain a reverse mortgage, and also allows the purchase of a home with a reverse mortgage.
As of now the credit crunch has not stopped seniors from being able to obtain reverse mortgages. There is a place to sell these loans on the secondary market and these loans are government insured which makes them a very attractive instrument.
The importance of seniors knowing about reverse mortgages is essential, especially if they want to spend their final years in their home. A growing number of seniors are using the federally-insured, loans to free up monthly cash and avoid foreclosure; others are purchasing second homes, distributing assets and purchasing insurance. No matter what you do, it is vital to fully understand this type of mortgage.