NAOSA Gold Standards of Professional Practice
Reverse Mortgage/Home Equity Conversion Mortgage (HECM)
Each member profession of the National Association of Senior Advocates has a standard of guidelines that our members must abide. We call these the NAOSA Gold Standards of Professional Practice.
Reverse Mortgage/Home Equity Conversion Mortgage (HECM)
The goal of the NAOSA Gold Standards of Professional Practice™ for Reverse Mortgage Brokers is the requirement to be clear & concise in all communications and to work to ensure that a reverse mortgage is only offered when appropriate. Although reverse mortgages have seen increased regulation from both the federal and state governments, there are still many opportunities for a consumer to be taken advantage. In addition to federal and state regulations that may be already in place, the National Association of Senior Advocates member professionals have identified several business practices that require more clarification or elimination.
The goal of the first part of this document is to offer information on the reverse mortgage product and potential uses for a reverse mortgage. The second details the NAOSA Gold Standards of Professional Practice™.
What is a Reverse Mortgage?
A Reverse Mortgage is a loan that allows qualifying homeowners to convert a portion of the equity in their home into cash. A Home Equity Conversion Mortgage (HECM) loan, also known as a Reverse Mortgage, does not become due as long as the borrowers live in the home as their primary residence and continue to meet the obligations of the mortgage, including paying property taxes and insurance on the home.
A HECM loan is a mortgage insured by the Federal Housing Administration (FHA). Loan proceeds can be used to pay medical bills, to finance living expenses, in-home care or any extra cash needed for unexpected expenses. Mortgage payments are not required to be paid out of pocket, instead, home equity is internally paying the mortgage over time. Unless payments are made, the mortgage balance will grow which will diminish available equity at time of home sale. The loan becomes due, and payable, when the last borrower leaves the home.
What are Eligibility Requirements?
Borrowers must be 62 years of age or older, own and reside in the property as your primary residence. Borrowers must continue to live in the home as their primary residence throughout the life of the loan. They must also meet with a HUD certified Reverse Mortgage Counselor prior to applying for a Reverse Mortgage loan.
Additionally, the property must also meet certain eligibility requirements. The property must be a single-family home, a 2-4unit owner occupied house, a HUD-approved condominium or a manufactured home that meets FHA requirements. With a HECM, the borrower is required to pay an initial Mortgage Insurance Premium (MIP) 2.0% of Max Claim Amount (appraised value up the HUD loan limit), as well as an annual MIP of 0.5 percent (current rate effective October, 2017). The borrower must also pay title insurance, state and county recordation tax and other closing costs, typically found in any mortgage transaction. In some cases, an origination fee may be charged. This is something to consider when comparing lenders.
Why would someone consider getting a Reverse Mortgage?
When used correctly, a Reverse Mortgage can be a useful tool when planning for retirement income and can be a part of the larger retirement income planning conversation with your financial planner or other trusted financial advisor. As part of overall retirement income planning, a Reverse Mortgage can be useful tool to address or resolve many of the Major Concerns of Income Planning, such as, out-living your assets, maintaining your desired overall standard of living, having assets available during down markets if needed and having assets to assist with long term care expenses.
Where should I go to get a Reverse Mortgage?
There are many places these loans can be obtained. NAOSA recommends finding a lender who is local, experienced, and specialized (only does Reverse Mortgages).
Who should I talk to before I get a Reverse Mortgage?
Homeowners should certainly speak to family members, if they are accustomed to seeking input. This is especially true if the clients’ heirs are planning to inherit the home. Homeowners should also consult their financial planner if they have one. All Reverse Mortgages require by law that the client speak to an independent, third-party HUD certified Reverse Mortgage counselor before beginning the Application.
Should I shop around for the best price?
Price is an important component, but be sure to work with an experienced competent advisor. Pricing for Reverse Mortgages should not be dramatically different from one lender to the next, but always check. NAOSA recommends a local, experienced, and specialized lender. Stay away from companies that use high pressure sales tactics. If you are feeling pressured, end all conversations immediately.
How would I know if the lender is suggesting the right type of Reverse Mortgage for me?
The program should fit and assist in solving the concerns mentioned earlier in this document. You should not be told to withdraw more funds up front than you need, but encouraged to allow these funds to remain in the line of credit.Any lender who encourages you to take a large, unneeded cash withdrawal is not acting in your best interest.
NAOSA Gold Standards of Professional Practice™
1: Unneeded Cash Withdrawal: You should not be told to withdraw more funds up front than you need, but encouraged to allow these funds to remain in the line of credit. FHA has set maximum withdrawals to
help protect borrowers. Even so, do not take a large, unneeded cash withdrawal. Any lender who encourages you to do so is not acting in your best interest.
2: Consult with a Trusted Individual: NAOSA advises all consumers to consult with a trusted professional with knowledge of your financial situation and goals when considering a reverse mortgage. If a consumer
does not have one, you can find an NAOSA financial planner or similar professional to consult. You may also want to include a close relative or trusted friend in the process of obtaining a reverse mortgage.
3: No Compensation to Third Parties: A NAOSA member may not compensate a third party, such as a financial planner or other professional, for approval or recommendations of a HECM. This allows for an impartial opinion on suitability.
4: Unneeded Home Improvements: NAOSA members may not suggest using a HECM for unneeded home improvements.
5: Purchase of Other Investments: An NAOSA member may not suggest to purchase an annuity or other investment with HECM proceeds.
6: Disabled or Physically Limited Clients: Although ultimately it is every individual’s right to choose where they want to live, NAOSA members must advise clients of alternative options to remaining in the home if a prospective client is limited physically. Examples of physical limitations are lack of mobility (such as use of a walker), no longer capable of driving or other medical issues. Selling is an option that should be included in the refinancing discussion and the client must be made aware of alternative living arrangements such as senior housing.
7: Always Remain on the Title of Your Home: You or your spouse must always remain on the title to your home (there are exceptions, such as if a house is part of a trust or part of a life estate). There are also provisions that allow a non-borrowing spouse to stay in the home. However, once the last borrower or nonborrowing spouse leaves the home, the loan is due. There are no prepayment penalties, and you can sell your home anytime. Should anyone state any different, immediately cease speaking with that individual.
Are you a professional in the HECM field? We welcome your constructive input to assist in the protection of all consumers. Please contact us.