Becoming Your Parents' Mortgage Lender
Q: Our parents own their house free and clear, and it is worth about $400,000. Dad is 79, and Mom is 77; both are in fairly good health. They receive Social Security and a modest pension. We would like to assist them financially. They both like to travel, but their limited resources deny them this pleasure. Do you have any suggestions?
A: You and your parents should consider a reverse mortgage -- either from a commercial lender or privately from you. Here's how such a mortgage works:
Someone who is 62 or older and owns a house that is paid for or has a relatively low mortgage balance can be a candidate for a reverse mortgage. Unlike with a regular mortgage, on which you have to make monthly payments, a reverse mortgage does not have to be repaid until the propery is sold or you die. At that point, the lender is repaid the principal and the accrued interest. The lender cannot foreclose on the property or in any way interfere with ownership unless the owner is causing waste or damage.
There are three forms in which a homeowner can get this money, which is tax-free because it is from the equity in the house:
-- A lump sum of cash.
-- A line of credit so that the money is available as and when it's needed.
-- A monthly cash advance.
There are a number of reverse-mortgage programs available. Among the the most popular is the home-equity conversion mortgage (HECM), which is insured by the Federal Housing Administration. This is the only reverse mortgage the federal government insures.
To be eligible for the HECM, all owners of a home must be at least 62 and use the home as the principal residence and cannot be delinquent on any debt to the Internal Revenue Service. The home must be a single family residence or a one- to four-unit building. Some condominium units that have received approval are also eligible. Cooperative apartments and most mobile homes are not eligible.
How much money can homeowners take out? That depends on a number of factors, including Zip code, age and the appraised value of the property. There's a handy calculator at http:/
Another program, sponsored by Fannie Mae, is called Home Keeper. Although it is similar to HECM, there are differences. For example, loan limits for the HECM vary depending on the location of the house; Home Keeper loans are limited only by the Fannie Mae guidelines. If a borrower opts to take the money as a line of credit, the unused portion of the line can increase over time with the HECM, but will remain fixed with the Home Keeper.
Both these reverse mortgages have loan limits, set annually by the various agencies. For example, Fannie Mae's loan limit is $417,000, while HECM will lend as much as $362,790.