Though retirees flock to Arizona to enjoy year-round warm weather, many seniors experience financial anxiety due to lack of income when they quit working or if work is no longer possible or desirable. Reverse mortgages may be the answer for homeowners in distress because reverse mortgages can provide the opportunity to reach short-term goals while fortifying long-term plans. These types of loans allow older homeowners to convert home equity into cash income.
Instead of the borrower paying money to the lender, the lender makes payments to the borrower. ARS § 6-1704 contemplates Reverse Mortgages, stating “a reverse mortgage may provide for a fixed or variable interest rate or future sharing between the originator and borrower of the appreciation in the value of the property, as agreed on by the originator and the borrower.” However, do not be fooled! While the concept is simple, in practice, reverse mortgages can result in several legal, financial and personal complications.
There are several reasons to consider a reverse mortgage. The monthly payments can help cover healthcare expenses, home maintenance costs and more. It’s a sensible option for retired citizens but be sure you know these five things before getting a reverse mortgage in Arizona.
How to Qualify for a Reverse Mortgage in Arizona
The first thing homeowners need to know before seeking a reverse mortgage is whether they qualify. Before you start comparing lenders, be sure you meet these requirements:
- You are at least 62 years old.
- You own your home outright or have a very low balance on your mortgage
- Your home is your primary residence.
- You will maintain your home’s condition throughout the duration of payments and are not delinquent on any federal loan.
- You must attend information sessions approved by the U.S. Department of Housing and Urban Development.
- The home is a single-family, 2-to-4-unit property, HUD-approved condominium, townhouse or manufactured home built after June 1976.
Spouses under age 62 will be considered non-borrowing spouses and must sign a disclaimer deed at the time of closing.
Additionally, note that the Lender must complete certain requirements before accepting a final and complete application from a Borrower. Please see A.R.S. § 6-1703 for a complete list, but in general, you can expect such things as a list of housing counseling agencies, a statement informing you of your liability, rights, obligations and rights ten days before closing, and a disclosure that explains the costs and contingencies you would expect in a typical loan.
Determining How Much Money You Can Borrow
Lenders typically will look at these three factors to determine how much money you can borrow:
- Your age (older borrowers qualify for more money)
- The interest rate of your current mortgage
- The lowest of the following: appraised home value, sales price for purchase transactions or the HECM FHA mortgage limit ($636,150 in all Arizona counties)
Additionally, lenders evaluate factors like the home’s appraisal value, your credit history, the loan-to-value ratio and your mortgage’s interest rate when determining risk.
Mandatory HUD Counseling
As mentioned above, homeowners must first complete a counseling session with a third-party counselor approved by the Department of Housing and Urban Development before getting a reverse mortgage. This session teaches you the nuances of your prospective reverse mortgage. It’s important to understand how your home equity may deplete over time, depending on how much you borrow and how much your home is worth. Once you complete this mandatory counseling session, you can choose a lender and expect to close within 30 days, if approved.
What Happens if the Borrower Dies or Vacates The Premises?
A major appeal of reverse mortgages is that repayments are not due until the borrower dies or moves out of the home. If the reverse mortgage borrower dies or has to vacate the home for health or other reasons, the amount borrowed must be repaid in full, typically within six months. Borrowers or their heirs may sell the home to fulfill the obligation, but this can cause issues if the borrower’s spouse or live-in family members had not planned on moving out of the home. Therefore, it’s crucial to understand the potential risks and negative consequences associated with a reverse mortgage. Our attorneys at MacQueen & Gottlieb are here to walk you through all possible scenarios.
The Impact on Estate Planning
Homeowners are encouraged to consider the long-term impacts a reverse mortgage will have on their estate plans. Spouses are usually protected and allowed to remain in the home, but heirs who wish to keep the home get saddled with the repayment obligation. Keep in mind, heirs will have to sell the home on the open market under time constraints, which may result in the home being sold out less than fair market value.
However, reverse mortgage payments can help retirees avoid withdrawing from an IRA or other retirement funds. This allows you to receive cash while delaying taxes and possibly sidestepping any early withdrawal penalties. Additionally, you can stay afloat and delay (and, therefore, increase) Social Security benefits.
Find an Experience Arizona Real Estate Attorney
Reverse mortgages are a useful tool for senior homeowners with financial anxiety, but there are certain risks involved. Our attorneys can help you review the terms of your prospective reverse mortgage and protect your best interests in any resulting legal predicament. Contact us today at 602-562-7218 to schedule an initial consultation or make an appointment online.