The basic benefit of home ownership is shelter. Another critical benefit is it is an asset and valued based on normal market conditions.
Equity is the value of your property less encumbrances (loans, liens, etc.)
Lendable equity is the amount of EQUITY can borrow.
Most prudent lenders have limitations on what percentage you can borrow. Typically for the best rates/programs you can’t exceed 80%, however it is not uncommon to see programs where you can borrow ALL of your equity.
Many homeowners tap into their lendable equity to fund a variety of personal items. On some occasions the lender may restrict how you can use your lendable equity but for the most part it belongs to you to do as you choose.
(cover photo by Mindy Schauer/Digital First Media/Orange County Register via Getty Images)
Reverse mortgages, technically known as Home Equity Conversion Mortgages (HECM) have tougher underwriting guidelines effective October 1st.
The announcement was made by the Federal Housing Administration (HUD) which is part of the United States Housing and Urban Development (HUD) agency. HUD insures the mortgages which are originated by lenders at the consumer level, thus allowing borrowers a tool to utilize the equity in their homes to obtain a loan.
The move essentially means in addition to the initial appraisal used to determine property valuation, a second independent appraisal will now be required. The borrower’s loan will be based on the lower of the two appraisals. In a gesture to appease the borrower’s chagrin of the new requirement, the cost of the second appraisal is allowed to be financed as part of the closing costs. In making the move HUD announced it needed extra protection for the collateral being used to obtain the loan, as it battles with a shrinking insurance pool.
House rich, cash poor
HECM’s have picked up in popularity since the early 2000’s. As people have lived longer lives, it was a statistical reality that many seniors were dealing with a precarious situation. For a variety of reasons their cash reserves were being depleted and the result was a negative impact to their day-to-day living. It was also noted many in that population who were homeowners were sitting on large equity positions. Unfortunately, underwriting guidelines made it prohibitive for them to obtain standard mortgage loans.
HECM’s solved that solution, at least for those who were at least 55 years of age and had sufficient equity. Instead of a regular loan where you make monthly payments, the loan actually provides the borrower income based on the equity position. Paying off the debt was not required until the borrower deceased or it was somehow refinanced.
The new guideline is not expected to thwart the popularity of the program. But, it is one critical guideline that HUD feels will help sustain the viability of the program.