GENERAL TRAININGHECM Overview for Consumers

Presentation content is property of the Learning and Development Division at Finance of America Reverse.

Created January 2018

Learning Objectives

• The Basics

• Program Features

• Additional Details

• Loan Process

• Scenarios

• Summary

“New academic research demonstrates how HECMs can play a vital role in retirement planning – not just as a tool of last resort but as a strategic way to provide greater financial flexibility to seniors with ample savings.”*

• *Salter, Pfeiffer and Evensky, Texas Tech University, “Standby Reverse Mortgages: A Risk Management Tool For Retirement,” Journal of Financial Planning, 2012.

The Importance of Home Equity

SECTION 1The Basics

What Is a Home Equity Conversion Mortgage (HECM)?

• Loan that gives borrowers access to a portion of their home value.

• No payments required until the last borrower permanently leaves the home or another maturity event has occurred. Borrowers must pay property charges, i.e. taxes and insurance.

• Non-recourse loan (lender can only look to the property for lien satisfaction).

• Borrowers retain title at all times.

Some Reasons to consider a HECM

• Eliminate a monthly mortgage payment* • Supplement income • Pay for medical expenses or in-home care• Finance the purchase of a new home• Pay off debt• Enjoy passions with financial ease• *Borrowers must pay taxes and insurance

HECM Eligibility Requirements

All Borrowers must:•Be age 62 or older

•Live in the subject property as their primary residence.

•Demonstrate financial capacity and credit responsibility.

•Attend an FHA approved consumer counseling session and obtain a HECM Counseling Certificate.

What types of properties are eligible?

•Single family homes

•FHA approved condominiums

•Townhomes or Planned Unit Developments (PUDs)

•Two to Four unit family homes-must be owner occupied

•Manufactured homes meeting HUD guidelines

HECM Product OptionsFHA-Insured Products

Proprietary Program

• FAR’s HomeSafe® jumbo program is a fixed-rate ONLY product, with a maximum loan amount of $4,000,000.

Fixed Rate

Monthly Adjustable (10 pt. cap)

Annual Adjustable (5 pt. cap)

How are Borrower Principal Limits Calculated?

The Initial Principal Limit (PL) is defined as the maximum amount available to a HECM borrower at the time of closing. The PL is calculated using tables provided by HUD. These include:

• The age of the youngest borrower (or eligible non borrowing spouse)

• Lesser of home’s current appraised market value, or FHA lending limit ($679,650)

• Expected Interest rate (Libor 10 year swap plus lender margin)

Age 62 Age 72 Age 82

Available Principal Limit $178,800 $200,800 $234,400

Principal Limit Factor 44.7% 50.2% 58.6%

• Higher ages usually result in higher principal limits• Higher expected rates generally result in lower principal limits• Any mortgage liens must be paid out of proceeds

The example below illustrates the difference age makes in determining available proceeds

Example assumes a MCA of $400,000 and an expected rate of 4.35%

Additional Factors contributing to Available PL

SECTION 2Program Features

Program Features

• A Line of Credit- unused line of credit grows across time based upon current interest rates.

• Tenure payments- equal monthly payments during the life of the loan.

• Term Payments -for specific amount and period.

• Lump Sum- Lump sum at closing (only option with Fixed rate product).

• Combination – Combination of the above.

• Home Equity Conversion Mortgage (HECM) for purchase option

• Unused Line of Credit grows at the same rate as the interest and FHA Mortgage insurance premium charged on outstanding loan balance.

• Cannot be frozen due to a change in home value.

• Has no term limits or balloon payments.

• Funds can be accessed, paid back if desired, and accessed again at a future date.

HECM Feature - Line of Credit

HECM line of credit: Start now or wait 10 years?

Starting LOC at 62

Starting LOC at 72

Difference

Credit line at age 62 $178,800 N/A

Credit line at age 72 $277,679 $200,800 $ 76,875

Credit line at age 82 $431,123 $311,850 $119,273

Based on a $400,000 house and expected rate of 4.35%. Available line of credit does not assume any closing costs were deducted.

Please note: This is for demonstration purposes only and is based upon estimates only. Actual performance may vary depending upon interest rate and line of credit utilization.

HECM Line of Credit VS HELOCAdvantage Traditional HELOC HECM

Retain ownership X X

No monthly mortgage payments required* X

Unused amount grows over time; more available funds X

Never can be called or recast X

No-recourse: you can never owe more than your house is worth at time of repayment

X

Risk of foreclosure if monthly mortgage payment is not made*

X

* The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, the loan will need to be repaid.

HECM Feature – Tenure Payments

• Utilize some or all available funds for equal monthly payments for the life of the HECM.

• Under the plan monthly payments will be paid for as long as the borrower is living in the home and abiding by the terms of the loan (maintaining property, paying taxes and insurance).

• Payment plan can be changed at anytime with a $20 fee to the servicer.

HECM Feature- Term Payments

• Define a specific dollar amount to be received for a specific period of time.

• Subject to available proceeds.

• Monthly checks stop at end of pre-determined period of time, however loan does not become due and payable until a maturity event occurs.

Purchase a Home using the HECM for Purchase product

• Requires a borrower contribution based upon a percentage of the purchase price, depending on age. The balance of the funds for purchase come from the HECM loan.

• Property must be the borrower’s primary residence and meet FHA property guidelines.

• As with any mortgage, the borrower owns the house, and his or her name is on the title.

• No monthly mortgage payments are required. Payment is deferred until a life event happens, such as sale of the property, passing onto heirs, vacating the property longer than a consecutive year.

• Borrowers spend less money out of pocket and preserve more of their savings, instead of spending it on their home.

• Get more home for their money. A HECM for Purchase could help them to comfortably afford upgrades or a more expensive home.

• “Right-size” their home, relocate to a more suitable neighborhood, or move closer to family.

Approximate Equity Contribution Required by Borrower for HECM Purchase

A 62-year-old borrower wants to purchase a $400,000 home. Using the HECM for Purchase, the borrower provides $233,200 of his or her own funds for an equity contribution. The HECM for Purchase will finance the balance of the purchase price.

Chart below illustrates various borrower equity contributions:

Illustration is for educational purposes only and assumes an Expected Rate of 4.35%., 2% of Purchase Price for Upfront MIP, and third party closing costs of $4,000.

* The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loanobligations, the loan will need to be repaid.

AGE $400,000 $500,000 $600,000

62 $233,200 $290,500 $347,800

72 $211,200 $263,000 $314,800

82 $177,600 $221,000 $264,400

FAR’S Proprietary Jumbo HomeSafe®

HomeSafe was designed specifically for owners of high-value homes. If you’re 62 or older, now you can access even more of your home’s equity and put it to work wherever you want — giving you more control over your assets, investments and cash flow.

• Higher valued properties - loan amounts up to $4 million

• No mortgage insurance premium

• No initial disbursement limitation – you take the full amount of available funds at closing

• Condominiums appraised at $500,000 or more do not require FHA approval

SECTION 3Other Details

The Costs

1st Year Fund Withdrawal Restrictions

Greater of 60% of Principal Limit or Mandatory Obligations plus 10% of Principal Limit

Mandatory Obligations = Liens, Existing Mortgage and HELOC Payoffs, and Closing Costs

Example –Mandatory Obligations Less than Principal Limit:• 62 Year old borrowers• Home Value: $400,000• Expected Rate: 4.35%• Available Principal Limit: $178,800• 60% of Available Principal Limit: $107,280• $107,280 is total Available Funds in year 1• Balance of $71,520 in Line of Credit, can be accessed in year 2.

1st Year Fund Withdrawal Restrictions, cont.

Example –Mandatory Obligations Greater than Principal Limit:

• 62 Year old borrowers• Home Value: $400,000• Expected Rate: 4.35%• Available Principal Limit: $178,800• 60% of Available Principal Limit: $107,280• Mandatory Obligations: $130,000 (Liens, Payoffs and Closing

Costs)• Mandatory Obligations ($130,000 plus 10% of Principal Limit

($17,880): $147,880 Available 1st year proceeds• Balance of $30,902 in Line of Credit, can be accessed in year 2.

Life Expectancy Set Aside

• “Life Expectancy” set-asides are established at closing and are payable ONLY toward taxes, assessments, and insurance (hazard and flood).

• Can be required due to insufficient qualifying profile, or optional at borrower’s request.

Consumer Protections• Mandatory FHA Counseling session required for borrowers, non-

borrowing spouses, and POAs. Screens for competency and comprehension of the loan program.

• Financial Assessment determines if borrower has the financial capacity to pay taxes and insurance, and ongoing maintenance of the property.

• Non-Borrowing Spouse Rules make it possible for a qualified non-borrowing spouse to remain in the home even if the borrower dies.

• Non-Recourse Property Protection for borrowers and heirs. Loan payoff is secured by property. Borrowers and heirs can never owe more than the house is worth when the loan is repaid.

• No Pre-payment penalty provision means you can pay down loan at any time or defer payment.

SECTION 4Loan Process

Loan Process: Education

• A loan officer can help you determine if a reverse mortgage is the right solution for you, and if so, which type best fits your goals and needs.

• We’ll assess your individual needs and financial situation, thoroughly explain everything, and prepare you for your independent counseling session.

• We encourage you to include your family members and trusted advisors in your decision-making process.

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Loan Process: Counseling

• To ensure that you understand all aspects of a reverse mortgage, you are required to have a session with an independent counselor who is approved by the U.S. Department of Housing and Urban Development (HUD).

• This session is usually 60 to 90 minutes, and can be in-person or over the phone.

• Note: Some states require face-to-face counseling.

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Loan Process: Application

• Your loan officer helps you complete the application and collects your documentation. He or she lets you know exactly what documents to provide.

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Loan Process: Closing

• Once the loan is approved and final documents are ready for your signature, we contact you to schedule your loan closing. This can take place at your home.

• Any existing mortgage(s) will be paid off from a portion of the reverse mortgage proceeds.

• After closing and any applicable rescission period, the loan funds, and you receive your money.

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SECTION 5HECM Use Examples

Your HECM , Your WayThis powerful financial option can be an important part of a retirement funding strategy. HECM uses are as unique as the individual adult homeowner it is specifically designed for.

The use of a HECM can afford the opportunity to enhance the quality of life for the adult homeowner…

…because quality of life should not decrease with age.

Example: RefinanceThe Scenario

Mr. and Mrs. Homeowner love their home and their neighborhood.

They have no intentions of ever moving.

They have a home equity loan that is due, and they are struggling to make ends meetThey may need to make a hard choice and move out of the home they love.

Solution using HECM

Age:70Home Value:$400,000HELOC: $100,000

Available HECM proceeds:$200,000*

Available balance after housing obligation payment: $88,000

* Illustration assumes 4.35% expected interest rate with $12,000 financed closing costs.

Borrower Benefits

No monthly mortgage payments required*

Peace of mind

Enjoy life in existing home

Increased monthly cash flow

*Example is for educational purposes only. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, the loan will need to be repaid.

Example: New Home Purchase

The Scenario

Mr. and Mrs. Wannamove realize their home where they raised their children no longer meets their current needs.

They want to move somewhere closer to family.

Solution using HECM

Age: 65Existing home value: $300,000Mortgage balance: $0New Home Desired: $450,000

Available HECM proceeds: $198,150*

Equity Contribution from borrowers’ funds: $251,850

Liquidity increase: $48,150

*Illustration assumes 4.35% expected interest rate with $12,000 financed closing costs.

Borrower Benefits“Right-sized” home living

New home with no monthly mortgage

payments*

Relocation- close to family

Increase liquidity with saving funds from departure home

*Example is for educational purposes only. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, the loan will need to be repaid.

Example: Aging Concerns

Paying for Home Health

Aging parents are experiencing health problems.

Adult children are concerned about how parents will afford the cost of care.

Solution using HECM

Age: 80Home Value: $300,000Mortgage Balance: $0

Available HECM proceeds: $154,500*

Can be used as tenue, term or line of credit payments

* Illustration assumes 4.35% expected interest rate with $15,000 in financed closing costs.

Borrower Benefits

HECM proceeds provide needed home healthcare funds

Peace of mind

Decrease burden on family

Retain independence from family paying for health care

Remain in home rather than going in nursing home

*Example is for educational purposes only. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, the loan will need to be repaid.

SUMMARY

Forbes/Personal Finance

A reverse mortgage can be a good backup strategy for homeowners who are concerned about potentially outliving

their other income sources. A more flexible and potentially more lucrative approach is to obtain a reverse mortgage line of credit. It will continue to grow each year, providing access to an ever-increasing line of credit in later years as the credit line remains in place but unused.

— Mark Dennis, Contributor, “You May Have More Retirement Income Available Than You Thought,” March 26, 2017

Kiplinger/Personal Finance

Reverse Mortgages that Work: One versatile solution for financial flexibility and security is a reverse mortgage. It lets you stay put, ditch your mortgage payment (if you still have one) and tap your home equity.

— Pat Mertz Esswein, Associate Editor, “Reverse Mortgages That Work,” October 2017

Home Equity Conversion Mortgages in Media and Research

Washington Post/Real Estate

On HECM for Purchase: In addition to netting cash from the sale of the original home, the H4P borrower doesn’t have to worry about making mortgage payments for as long as they remain in the home. You can use the money you save for whatever you want.

— Benny L. Kass, Columnist, “Seniors looking to downsize their homes may want to consider this reverse mortgage option,” May 19, 2017

Reader’s Digest/MoneyTips.com

“If you own your home and none of your children have an interest in keeping it, then a reverse mortgage might be worth investigating, as it could provide you with an additional source of retirement income and monthly cash flow.”

— Mike Zaino, Financial Advisor/Contributor, “16 Money-Management Tips Every Retiree Needs to Memorize,” Accessed September 24, 2017

The Motley Fool/Personal Finance

A reverse mortgage may be a good option for homeowners who want to use their home’s equity but don’t want to move. Homeowners can use a reverse mortgage to access equity as a lump sum, a line of credit, lifetime payments, or a stream of payments for period of time.

— Mary Crawley, “4 Ways to Catch Up on Retirement Savings,” September 22, 2017

Integrity, Knowledge and “Doing the Right Thing”

Finance of America Reverse LLC is one of the top reverse mortgage lenders in the United States, and plays a leadership role in our industry. We are a trusted resource and committed to empowering homeowners age 62 and older with the financial independence they’ve earned. FAR strengthens our corporate and social culture by emphasizing business integrity at all times. We earnestly invest in our employees’ growth and well-being, and encourage active community service and participation.Dedication to Customer Education and Service: Our goal is to educate and serve customers through two fundamental business principles: transparency and suitability. Transparency helps ensure our customers are properly informed and suitability ensures they are aligned with the products and services that best fit their lifestyles. FAR’s retail division is licensed in 50 states and D.C. As a proud member of the National Reverse Mortgage Lenders Association (NRMLA), FAR adheres to the industry’s highest ethical standards. Our commitment to being an advocate for older Americans also includes active membership in the National Aging in Place Council (NAIPC).

To learn more, call 877-658-7226 or visit www.FAReverse.com

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