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A reverse mortgage could save the day

(ran HN, HH editions)

Question: Please tell me about reverse mortgages. When I try to explain the concept to my parents, it comes off sounding like a free lunch. Where does the reverse mortgage money come from each month to pay senior citizens?

Answer: Instead of making mortgage payments to a lender, as most homeowners do, reverse mortgage lenders pay the homeowner. Reverse mortgages are limited to senior citizens at least 62 years old who have substantial home equity with little or no mortgage debt.

The homeowner's income is irrelevant because the lender pays the borrower each month. No repayment by the homeowner is required. The monthly payment amount depends on the borrower's home equity and life expectancy. For example, a 90-year-old homeowner old will receive a higher monthly payment than a 70-year-old.

A reverse mortgage lets property-rich but cash-poor homeowners borrow from their home equity to provide monthly income. The loan is repaid by selling the home when the borrower either moves out or dies.

Depending on the reverse mortgage plan selected, the monthly payments to the homeowner last from 10 years to a lifetime. Lump sum payments can be arranged, such as to pay for home repairs. A reverse mortgage enables many borrowers to stay in their homes rather than having to sell and move to an apartment.

The "big four" nationwide reverse mortgage lenders are: FHA, Fannie Mae, Transamerica and Household. There are also local and regional lenders.

Each offers a different plan, and not all plans are available everywhere. None are available in Texas because of a Texas constitutional prohibition.

A lease-option plus

Question: Several weeks ago you gave a house renter a list of the benefits of lease options so she could persuade her landlord to consider one, but you overlooked the biggest lease-option advantage to the owner: saving the 6 or 7 percent real estate sales commission.

Answer: Shame on me for failing to mention this! Yes, a landlord who sells a house to a tenant will often save the sales commission, which can be very important.

I hasten to add that I have been involved in several lease options as a buyer in which the real estate agent received a full sales commission when the option was exercised.

Other lease-option advantages for home sellers include obtaining a high-quality tenant who will treat the home well because he or she will probably buy it, charging higher than market rent, receiving up-front nonrefundable option money instead of a security deposit, setting the sales option price in advance, retaining the tax deductions during the option period and being able to sell virtually any home because there are always more lease-option buyers than sellers.

The larger the rent credit (I give 33 percent to my tenants), the higher the probability the tenant will exercise their option to buy.

Escrow impound accounts

Question: Please educate me about escrow impound accounts.

When we signed the papers to buy our home, I got the impression it was voluntary to pay one 12th of the property taxes and fire insurance premium each month and let the mortgage company pay the taxes and insurance, but my mortgage company neglected its duty to pay our insurance on time.

We received a letter stating that our policy would be canceled. After countless phone calls to our mortgage company, it finally paid.

I lost complete trust in my lender to fulfill its promises and want to pay my property taxes and insurance directly, but a supervisor in the lender's escrow department says I cannot do this since I agreed to participate in this program. Is this true?

Answer: The answer depends on the type of your mortgage and applicable state law where the property is located. FHA, VA and PMI (private mortgage insurance) mortgages require escrow impound accounts. Also, if you were late paying these bills, the lender could require an escrow account.

In most states, if a borrower voluntarily agrees to an escrow account but later wants to cancel it on a non-FHA, VA or PMI mortgage, the lender must agree, but lenders often lie to borrowers about such cancellations.

For example, last year a California appellate court ordered a major nationwide lender to cancel a borrower's escrow account (Kirk v. Source One, 54 Cal.Rptr.2d 358).

Inflated asking prices

Question: Thank you for printing the letter from the home buyers who insisted on making a "low ball" purchase offer far under the asking price. As a result, we did the same thing, buying the house for about $34,000 below its asking price.

After the sale closed, we invited the real estate agent over for coffee in our new home. She acknowledged that the seller set the inflated asking price and was embarrassed by how overpriced it was. You should emphasize to first-time buyers like us not to be fooled by inflated asking prices.

Answer: I appreciate your sharing that experience. The seller's listing agent had a fiduciary duty to her seller to get the best possible sales price. She couldn't have told you before the sale that the house was vastly overpriced.

Your situation shows why it is so important for home buyers, before making a purchase offer, to insist that their realty agent prepare a written comparative market analysis. This form shows recent sales (not asking) prices of comparable nearby homes.

With the agent's help, a home buyer can then add or subtract value for the pros and cons of each home to arrive at an intelligent offer price.

Robert J. Bruss is a nationally syndicated columnist on real estate. Write to him in care of the Tribune Media Syndicate, c/o the Times, 435 N Michigan Ave., Suite 400, Chicago, IL 60611. Questions of general interest will be answered in the column.

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