Saving Your Home from Foreclosure with a HECM

By the time someone receives a foreclosure letter, they are not just a month behind but likely several months behind on their mortgage payments. These late payments will certainly have a steep negative impact on their credit scores. But the biggest problem isn't just the credit scores, it's the mortgage payment history that is specifically the "kiss of death." Generally, once there are 2 or more late payments in the last 12 months, there are virtually NO mortgage options until one can establish an on-time payment history for the next 12+ months. This is often an impossible road out of such a deep hole back to financial health.

I said virtually NO mortgage options previously ... unless someone qualifies the Home Equity Conversion Mortgage (HECM). For someone who is 62 or older, the home in foreclosure is their primary residence, and they have a significant amount of home equity, the HECM has a tool called the Life Expectancy Set-Aside (LESA). The reason LESA solves the mortgage late payment issue is because now it makes the entire mortgage obligation (principal, interest, taxes and homeowner's insurance) optional. If the taxes and insurance are $5000 per year, we multiply that by the number of years of life expectancy, say 15 years as example ($5000 x 15 = $75,000). Think about the LESA as a big escrow account, in which the homeowner would have to have an additional $75,000 of home equity available and set-aside inside the loan to pay their taxes and insurance for them for the next 15 years.

CASE STUDY:

This is a real client whom I helped save her home from foreclosure. I will call her "Rosie" here to protect her privacy. Rosie was 70, her home was worth $525,000, and she only had $30,000 left on her mortgage. Her Social Security income was about $1000 per month; her mortgage including taxes and insurance was also about $1000 per month. For nearly a decade she was able to get by using her retirement savings to buy groceries and other essentials. When the retirement savings were exhausted, Rosie had to make a very difficult decision: make her mortgage payment or buy groceries. The decision to stop making her mortgage payments led to a foreclosure letter a few months down the road.

By the time Rosie called me, she had about 45-60 days left before her house would be sold. Because Rosie had significant home equity, nearly half a million dollars, I was able to establish a LESA which essentially nullified her credit issues. Her 400 credit score and mortgage lates no longer mattered. Here is the math and how Rosie was able to keep her home:

• HECM paid off her $30,000 balance - payments are optional for the rest of her life.

• LESA established: $7000/year for taxes and insurance, 20 years of life expectancy ($7000 x 20 = $140,000)

• There was about $30,000 of ignored maintenance (needed a new roof and HVAC system, plus a list of smaller repairs). We escrowed $30,000 for her to make those necessary repairs for safety and well-being.

• Because she had so much equity, Rosie was also able to use the HECM give her an additional $500/month to make life easier.

What a difference a HECM made for Rosie. She went from having zero disposable income and at risk of losing her home of 40 years and ALL the equity that went with it, to having the peace of keeping her home. Her home obligations are addressed by the loan; no more mandated payments for principal, interest, taxes and insurance. Her entire Social Security check of $1000 plus another $500 per month from the loan proceeds is now disposal income, which was $0 before.

Rosie naturally was grateful for her new financial peace and security. Her only regret was that she didn't know about the Reverse Mortgage (HECM) a decade before. She could have avoided nearly a decade of sleepless nights as she watched her life savings evaporate rapidly each month.

Nationally speaking, seniors currently have more home equity than retirement savings. Incorporating a HECM early in retirement and preserving retirement savings will give seniors more options and peace of mind. As a Reverse Mortgage Specialist, I see an openness to use home equity as I interview my clients. The ability to age in place, retain their financial dignity and not be a burden to their children are important to nearly every senior. The use of home equity makes all those normal desires more attainable. For some, it's the ability to retire a few years earlier and enjoy travel or grandchildren; for others, it really is the difference between having their retirement chapter defined by financial angst or living their best Golden Years. Home equity is a "pot of gold" that should at least be considered.

NOTE: Please use this case study for informational and educational purposes only.  Your specific situation will likely be different, and what is possible with the HECM will depend on your age, equity position, home value and condition, and interest rate climate.

About the Author

Vinh Tran is a Reverse Mortgage Specialist at Fairway Home Mortgage. For nearly 2 decades, he has helped countless Missouri families to buy and refinance their homes, serving as an advisor to make smarter financial decisions regarding their home equity. In the last decade, Vinh has focused his practice to help seniors understand and make better use of their lifelong savings that have been historically ignored...home equity. For most seniors, this is their largest savings bucket.

Have questions about how a reverse mortgage can provide the extra "gold" in your Golden Years? Please reach out to schedule a 15-minute call to get answers to your questions.  (314) 954-8204 (cell)

Website: www.vinhtran.net

Vinh Tran - Fairway Home Mortgage NMLS#850594. 174 Clarkson Road Ste 135 Ellisville, MO 63011 (314) 954-8204. Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. The youngest borrower must be at least 62 years old. Monthly reverse mortgage advances may affect eligibility for some other programs. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.