Competency 16 Section 5 Flashcards
- Reverse mortgages are nonrecourse loans, meaning that neither the borrower nor his/her estate is responsible for the shortfall if the loan balance at the time payment is due exceeds the value of the home
True. (LO 16-5-1)
- The amount of money available through a reverse mortgage depends on two factors: the age of the youngest borrower and the value of the home
False. In addition to these two factors, the interest rate associated with the loan also influences the amount. The lower the interest rate, the more funds the borrower has access to. (LO 16-5-1)
- The standard acquisition costs of a reverse mortgage include the FHA mortgage insurance premium, origination fees charged by the lender, and third-party closing costs such as title insurance, notary, and document preparation.
True. (LO 16-5-1)
- If the living situation changes so that the principal residence shifts to a different property, the original reverse mortgage can be honored until the borrower no longer owns that original property
False. If the living situation changes such that principal residence changes, the reverse mortgage on the original principal residence must be paid off. It may be possible to take out another reverse mortgage on the new principal residence. (LO 16-5-2)
- All of the owners on the title of a home must be party to the reverse mortgage loan
True. (LO 16-5-2)
- Upon the death of a borrowing spouse, an eligible non-borrowing spouse in entitled to a loan deferral period and can continue to live in the home and continue borrowing from the reverse mortgage line of credit until he or she leaves the home
False. If a spouse is not on the title of the home and meets the qualifications as a “non-borrowing spouse,” the loan payments can be deferred. However, he or she can no longer borrow against the reverse mortgage line of credit. (LO 16-5-2)
- The objective of the HECM income requirements is to ensure that borrowers do not take a larger loan than they can handle and still be able to meet their home’s tax, insurance, and maintenance obligations.
True. (LO 16-5-2)
- The percentage of the value of the home that can be borrowed through a HECM loan is based on the full value of the home, regardless of whether the home is above or below the $625,500 lending limit.
False. If a home is worth more than the lending limit, then the amount that can be borrowed will be based on a percentage of the $625,500 rather than the full value of the house. (LO 16-5-3)
- A reverse mortgage must be the first mortgage on the home, so any liens, judgements, home equity loans, or IRS judgements must first be repaid from the proceeds of the reverse mortgage
True. (LO 16-5-3)
10.If a couple shares homeownership with one being 65 and the other being 75, a lender would use the average age of the couple, which is 70, to calculate the maximum available loan.
False. In the case of couples, the younger age is used to calculate the maximum available loan. (LO 16-5-3)
11.The interest rates charged on a HECM reverse mortgage are not dependent upon credit history
True. (LO 16-5-3)
12.Borrowers under a HECM reverse mortgage can generally choose to lower origination fees in exchange for higher interest rates.
True. (LO 16-5-3)
13.It is encouraged, but not required, for those taking a HECM loan to attend an independent counseling session to ensure that they understand the terms of the loan.
False. Counseling is required for a HECM loan. (LO 16-5-3)
14.Under today’s rules, borrowing the maximum amount under a HECM loan as a lump sum is only allowed to pay off the current mortgage on the principal house or to purchase a new home.
True. (LO 16-5-4)
15.For an individual who establishes an unused HECM line of credit, the available amount that can be borrowed decreases over time.
False. The line of credit grows each month at the same rate that the loan balance would have grown if it were a debt rather than credit. (LO 16-5-4)
16.The lower the interest rate used for calculating how much can be borrowed under a HECM loan, the larger the percentage of the home value that can be borrowed.
True. (LO 16-5-4)
17.The most common technique used by borrowers is to combine the different payout options to suit their circumstances
True. (LO 16-5-4)
18.For every partial repayment that the borrower makes toward the loan, their line of credit also increases by that same amount
True. (LO 16-5-5)
19.Immediately upon moving into a long-term retirement care facility, a person is considered to be no longer living in their principal home and the loan becomes due.
False. In case the placement is temporary, the borrower is not considered to have permanently left the home until he or she has lived in the long-term retirement care facility for one year. (LO 16-5-5)
20.In the case of the borrower’s death, heirs can purchase the property for 95% of the appraised value when the HECM loan is underwater
True. (LO 16-5-5)
21.Unlike a regular mortgage, the interest portion of the loan balance repayment is not tax deductible when it is paid.
False. The interest portion is tax deductible when the loan payments are made. (LO 16-5-5)
22.HECM for purchase borrowers are only eligible for an adjustable rate loan.
False. Since a HECM for purchase is a lump sum payment, there is an option to elect either a fixed interest rate loan or an adjustable rate loan. Lump sums are the only instance in which fixed rate loans are available. (LO 16-5-6)
23.Research suggests that the worst way to use housing wealth is as a last resort.
True. (LO 16-5-6)
24.By providing the means to fund home care options other than through Medicaid, a reverse mortgage line of credit allows a retiree to increase their quality of care and allow them to continue living in their home
True. (LO 16-5-6)
25.If a retiree takes out a reverse mortgage, then they are automatically disqualified from Medicaid eligibility due to their extensive line of credit
False. It is possible to stay eligible for Medicaid even with a reverse mortgage if the retiree avoids lump sum payment options and does not take out more than they need to meet current monthly expenses from their line of credit. (LO 16-5-6)
- Which of the following statements concerning a HECM reverse mortgage is correct? (LO 16-5-1)
A. Only single-family residences can qualify for a loan.
B. The age of the oldest homeowner is used to determine how much can be borrowed.
C. An individual who owns two homes can have two loans.
D. The loan has to be repaid only after an eligible non-borrowing spouse leaves the home
- The answer is D. A is incorrect as condos, 1-4 unit homes, and modular homes are all eligible. B is incorrect because the age of the youngest owner is used to calculate how much can be borrowed. C is incorrect as an individual can only have one principal residence and can only have one loan. D is correct because to protect non-borrowing spouses from losing their homes, as long as the spouse qualifies as an “eligible non-borrowing spouse,” the loan only has to be repaid when the spouse permanently leaves the home
- Which of the following statements concerning the HECM reverse mortgage is (are) correct? (LO 16-5-5)
I. A line of credit cannot be frozen, cancelled, or reduced in the way that a home equity line of credit potentially can.
II. The borrower has the built-in ability to borrow more over time as an unused line of credit continues to grow with interest credits.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
- The answer is C. Both statements are correct
- All of the following statements are correct about HECM reverse mortgages EXCEPT (LO 16-5-2)
A. The maximum available loan will be determined in part by current interest rates.
B. The initial FHA insurance premium (as a percentage of home value) varies from one loan program to another.
C. The origination fee can vary widely from one loan program to another.
D. A fixed rate interest rate loan can only be selected if a lump sum distribution option is chosen
- The answer is B. The FHA premium is one fee that does not change from loan program to loan program. It is either .5% of the value of the home or 2.5% of the value of the home, depending upon the amount that is borrowed.
- All of the following statements about the intra family sale-leaseback strategy are correct EXCEPT (LO 16-5-7)
A. The client receives a payment for their home and can use this additional infusion of cash to supplement their retirement savings and/or improve their cash flow position.
B. Transaction costs are more than a reverse mortgage.
C. The family unit has turned a non-depreciable asset (the home) into a depreciable asset (the rental property).
D. Intra-personal family relationships can get in the way and result in hurt feelings and damaged relationships because of the mix of personal and business activities
- The answer is B. Transaction costs are less than a reverse mortgage.
- All of the following statements about strategies for using a reverse mortgage in a retirement income plan are correct EXCEPT (LO 16-5-8)
A. Many people today are using reverse mortgages as a way to reduce debt.
B. A reverse mortgage can be used to supplement a long-term care insurance policy to pay for long-term care provided in the home.
C. Research is conclusive that deferring withdrawals from a reverse mortgage until other assets have been depleted is the most efficient way to use a reverse mortgage.
D. It can be beneficial to take a reverse mortgage line of credit before the need arises if interest rates are currently low and are expected to rise.
- The answer is C. This is not the case. One study found that taking withdrawals before using other assets would be more effective. Other research has shown benefits to drawing from the reverse mortgage in years that the client’s portfolio was underperforming
