HECM Originators Get Creative to Solve Short-to-Close Issues

As more Home Equity Conversion Mortgage borrowers are short to close since last year’s principal limit factor reductions, originators are getting creative with ways to help their clients who need to bring funds to closing.

Most commonly, borrowers find out they are short to close when their mortgage balance is still too high, they must make repairs on their home, or they must provide a life expectancy set aside to cover costs like property taxes or homeowners insurance.

In the greater Washington D.C. area, Laurie MacNaughton, a reverse mortgage consultant with Atlantic Coast Mortgage, sees many couples who have recently moved to the area as federal contractors. Because many still have relatively large forward mortgage balances, they tend to have short-to-close issues — something she says has been exacerbated since October 2017. While it is not her favorite topic to bring up to borrowers, said she has become comfortable with it.

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“I basically use a pie chart and show borrowers how there appears to be not enough “pie” [equity] in the piece of the pie they qualify for to pay off what they owe on their current mortgage,” she tells RMD. “I then use a calculator to show how much they would need to bring to the closing table to make the loan work. It often surprises me how many who are short to close choose to move forward.”

These clients most often get their funds from a personal account, but occasionally an adult child gifts the funds, she says.

Malcolm Tennant, president of Access Reverse Mortgage Corp., also says he runs into short-to-close issues more regularly since the 2017 HECM changes, and he has developed ways of explaining and calculating how bringing cash to close affects their long term financial picture.

“I encourage borrowers to divide the cash-to-close figure by their monthly [principal and interest] figure to determine their cash flow break-even,” he says. “We had a borrower bring $110,000 to a closing last year. Their P&I payment was $2,000, so in just over 4 1/2 years, their cash flow breaks even. We find the time frame is usually quite acceptable, provided the borrower has a source of funds.”

Direct HECM lender Royal Pacific Funding has begun offering the Family Solutions Assistance Plan (FAMSAP) — a personal loan that family members can take out to gift needed funds to a cash-to-close relative. As dictated by the Federal Housing Administration, gifts have to come from a direct relation, such as a child or brother or sister.

“The shoe is not going to fit everybody, but even if it helps 25% who are short to close…,” Lou Garcia, an account executive with Royal Pacific Funding tells RMD. “It’s a game-changer for anybody that goes from a ‘no’ to a ‘yes’.”

While Royal Pacific acts as the HECM lender, the Family Solutions Assistance Plan is offered through a separate lender, Garcia says.

Beth Paterson, executive vice president for Reverse Mortgages SIDAC, says most short-to-close borrowers do not proceed in opening a HECM. But for those who do, they have found different ways to get cash. While some receive gift money from family members, Paterson says some home improvement companies will defer their bills and wait to get paid out of the closing to help borrowers who needed home repairs, she says.

“And sometimes, if it’s just short a small amount, they will pull it out of some other investments,” she says. “We always say to talk with their financial adviser or attorney before they do that.”

Daniel Turner, a senior HECM specialist with V.I.P. Mortgage in Hawaii, says he typically points borrowers who need cash at closing to a HELOC until they qualify for a HECM.

“When they are short to close, my tendency is to direct them to a competitive HELOC program with a low interest guaranteed for 2 to 5 years to refinance the primary mortgage and put the HELOC in first lien position,” he says. “Then compel the borrowers to make the same payment or more to knock down the principal debt. When they pay down the principal and the market value trends up, they reach that point when we can come in and do the (HECM) refi.”

Written by Maggie Callahan

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  • I am curious about the FAMSAP concept. On the one occasion several years ago where I had a family member gift funds to a borrower to resolve a STC issue, we had to provide 2 months of asset account statements from the family member providing the gift to prove that the gifted funds were not borrowed! Maybe that was just an over-zealous underwriter…?

    • Agreed. I’ve had more than one using gift funds and both cases the gift funds had to be sourced and could not be borrowed money. Im in CA and maybe its different in other states or our investors were also over zealous?

    • Your understanding of what is required is correct. I don’t believe this FAMSAP concept is FHA-compliant. My understanding is that funds to close cannot be borrowed, period. It says in the gift letter that there is no expectation of repayment.

    • I’ve had lots of short to close files, and Underwriting has always requested the previous 3 months – the Borrower can’t borrow the funds, but that doesn’t mean the funds gifted to them can’t be borrowed.

  • I would be a little concerned on encouraging our seniors to go get a HELOC! Most always it will have to be a second lien HELOC with a higher than normal interest rate. Also, we do not know what the condition of the HECM will look like, 2 or 3 years down the road as the suggestion in this article points out?

    I would prefer all the other suggestions brought up instead of a HELOC, my opinion only, you have to be the better judge on that one!

    John A. Smaldone
    http://www.hanover-financial.com

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