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Reverse Mortgages in Texas

(c) 2016, Paul Premack / This article first appeared in 2001

HISTORY

The 1997 law, which was the first Texas law to allow reverse mortgages, made them available to any Texan age 55 or older.

Unanticipated problems arose with the constitutional provisions authorizing these new liens. The amendment was faulty in the sense that it did not match federal underwriting regulations. As such, there was no resale market for Texas reverse mortgages. The problems resulted in lender refusals to make loans in some circumstances because of their inability to strictly comply with the constitutional requirements. (A lender cannot force a home equity borrower to repay the loan if the lender violates the constitutional provisions.)

AGE -- The 1997 amendment made reverse mortgages available to any Texan age 55 or older. The 1999 update backed off on the age, restricting reverse mortgages to Texans age 62 plus, or whose spouse is 62 plus. This change was made to comply with federal lending regulations, which allow only those 62 or older to use reverse mortgages.

SIZE of HS -- The Constitution prohibited a home equity loan or a reverse mortgage from being secured with any property other than the homestead. Because many urban lots exceed one acre in size and could not be legally subdivided, lenders could not obtain a valid lien on only the homestead (one acre). To address this situation, the Constitution would have to be amended to permit (i) a legal homestead in excess of one acre, or (ii) the lender to accept property in addition to the homestead as collateral.

TYPO - A lender could not require any principal or interest payment on a reverse mortgage until: (A) the homestead property securing the loan is sold or otherwise transferred, or (B) all borrowers cease occupying the homestead property as a principal residence for more than 180 consecutive days and the location of the homestead property owner is unknown to the lender. Thus if the homestead was abandoned but the lender knew where the borrower was, the note could not become due. Consequently no reverse mortgages were made in Texas, substantially because the loans could not be federally insured and sold in the secondary market with this nonstandard term.

In 1999, the legislature changed the law to conform to federal regulations. The 76th Texas Legislature unanimously approved S.J.R. 12 to allow reverse mortgages loans to be offered in Texas. On November 4, 1999, that constitutional amendment was approved by voter referendum.

SIZE OF HS UPPED TO 10 ACRES -- SJR 12 redefined a Reverse Mortgage to be consistent with federal law. SJR 22, among other matters, increased the maximum size of an urban homestead to 10 acres. In addition, Senate Bill 496, passed by the 76th Legislature, amended Texas Property Code Sections 5.042, 41.002, and 41.005, and added new Section 41.008, to further develop the concept of the 10 acre urban homestead, prescribe permissible uses of rural and urban homesteads, and permit an existing lien upon part of a homestead to extend to another part of the homestead. Certain of these amendments were contingent upon voter approval of SJR 22. The bill became effective on January 1, 2000.

Reverse Mortgages are often of greatest interest to Seniors who have extensive equity in their homes. They allow monthly payments to be made from the lender to the homeowner, and are typically on between 30-50% of the total home equity. The owner can spend the money for any purpose.

Interesting facts:

* The median age of those using HUD reverse mortgages tends to be older (75) than the average elderly American homeowner (72).

* Homeowners getting reverse mortgages are more likely to be single female households (56.3 percent) than the average elderly American homeowners (27.6 percent).

* The homes of reverse mortgage holders are more valuable ($107,000) than the homes of the average elderly American homeowner ($87,000).

* The properties with reverse mortgages are older (41 years) than the average elderly American homeowner's home (38 years). However, the average cost of needed repairs is lower - $666 compared with $836 - as is the square-footage of the homes - 1,327 square feet compared with 1,700 square feet.

All reverse mortgages turn your home equity into three things:

      · loan advances paid to you;

      · loan costs paid to the appraiser, lender, insurer, servicer, and others; and

      · leftover equity, if any, paid to you or your heirs at the end of the loan.

Because reverse mortgages turn home equity into only these three things, you can analyze any reverse mortgage by asking three simple questions:

      · How much would I get?

      · How much would I pay?

      · How much would be left at the end of the loan?

Rules must be followed:

(1) The lien must be voluntary and both spouses must sign it. It is not possible for only one spouse, acting alone, to place a lien against the homestead unless that spouse either a) has a Durable Power of Attorney from the other, or b) is the court-appointed Guardian of the other.

(2) The loan must be without recourse for personal liability against each owner.

(3) The lender is not allowed to reduce the amount or number of advances because of an adjustment in the interest rate if periodic advances are to be made. If the lender doesn’t live up to its end – it fails to make loan advances as contracted and doesn’t cure its default as required in the loan contract – then the lender forfeits all principal and interest of the reverse mortgage.

(4) The Texas constitution further requires that before signing a reverse mortgage, the owner must attest in writing that he or she received counseling on the advisability and availability of reverse mortgages. The counseling must include a discussion of other financial alternatives. You can call on your attorney or call on your financial planner to receive the required financial counseling.

HOW MUCH CAN YOU BORROW?

A borrower who uses an FHA-insured Home Equity Conversion Mortgages (HECM) will receive a reverse mortgage amount based on a formula that includes a Maximum Claim Amount. In general, this means the maximum amount you can receive will be determined by factors including the age of the borrower(s), and the appraised value of the property (or the maximum FHA mortgage amount for your area, if lower). For example, based on a loan at recent interest rates, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent, and an 85- year-old could borrow up to 56 percent.

Why? The older you are, the shorter you’ll survive and the less time for interest owed to build up. So more equity is available in loan.

You receive the loan in one of three ways:

1) a single lump-sum disbursement,

2) equal monthly payments for as long as both borrowers live in your house or

3) equal monthly payments for a set period of time.

For a 70 year old husband, 69 year old wife, with a home valued at $100,000 in zip code 78212:

YOU COULD GET

  HECM  

HomeKeeper

1) A single lump sum advance of

$45,782

$14,128

3) OR a monthly loan advance for
  as long as you live in your home

$304

$111

HECM == FHA Loan

HomeKeeper === FannieMae Loan

What are the Interest Rates? All RM's are Adjustable Rate Mortgages (ARM's). For most of this year, the rates charged on the FHA/HUD RM have been below 5.25. The ARM's are tied to the One Year Treasury and the interest is compounded monthly – it is a negative amortized loan. There are no fixed rates or lines of credit available. ALL lenders charge the same federally regulated interest rates.

REPAYMENT -- The loan must, of course, be repaid – but not until either:

    (A) all borrowers have died;

    (B) the homestead property securing the loan is sold or otherwise transferred;

    (C) all borrowers cease occupying the homestead property for a period of longer than 12 consecutive months without prior written approval from the lender; or

    (D) the borrower:

          (i) defaults on an obligation specified in the loan documents to repair and maintainpay taxes and assessments on, or insure the homestead property;

          (ii) commits actual fraud in connection with the loan; or

          (iii) fails to maintain the priority of the lender's lien on the homestead property, after the lender gives notice to the borrower, by promptly discharging any lien that has priority or may obtain priority over the lender's lien within 10 days after the date the borrower receives the notice, unless the borrower:

              (a) agrees in writing to the payment of the obligation secured by the lien in a manner acceptable to the lender;

              (b) contests in good faith the lien by, or defends against enforcement of the lien in, legal proceedings so as to prevent the enforcement of the lien or forfeiture of any part of the homestead property; or

              (c) secures from the holder of the lien an agreement satisfactory to the lender subordinating the lien to all amounts secured by the lender's lien on the homestead property;

REMAINDER: Will I still have an estate that I can leave to my heirs?

When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other finance charges, to the lender. All proceeds beyond what you owe belong to you or your estate. This means the remaining equity in your home can be passed on to your heirs. None of your other assets will be affected by HUD's reverse mortgage loan. No debt will ever be passed along to the estate or heirs. You retain ownership of your home, and may sell or move at any time.

RISKS –

          1) Foreclosure for failure to comply with loan

          2) No remaining equity to leave to family – house is always disposed of, or a family member can pay off the loan (buy the house)

          3) You get a little and pay a lot