Why FHA Insurance and How You Benefit?
Forward mortgages and reverse mortgages are both FHA insured. In either case FHA plays a role throughout the marketplace.
There exists an irony in that people perceive FHA mortgages to be mainly for first time home buyers and reverse mortgages for last time home buyers.
In either case these mortgages require the payment of an upfront mortgage insurance premium. That thing is expensive and people want to know why.
When we own something many times we get insurance to cover that item against loss. So, when we pay for insurance we expect to get something for it.
So, we expect FHA insurance to act accordingly. Well, FHA insurance really isn’t for the homeowner. The home owner pays for it, but the lender gets the benefit.
Mortgage insurance exists to protect the lender against loss.
In the case of forward mortgages it is to hedge the lender’s losses in the event of a foreclosure.
I should give a real scenario: in this scenario we should assume the mortgage to be $110,000 at foreclosure and the home value to be $100,000. Not extraordinarily unlikely.
What if the sale price is only $90,000. Now the lender is in the hole $20,000. The mortgage insurance covers the lender against this loss.
Fha mortgage insurance works a bit differently on reverse mortgages but with the exact same outcome for the lender. Reverse mortgages are protected against more being owed on the mortgage than the home is worth.
The problem for the lender in the reverse mortgage industry is the constant accrual of interest on the mortgages. If market conditions are drastic or the borrower lives to 100 the lender could have a problem.
At the same time the FHA mortgage insurance allows the reverse mortgage lender to be more aggressive with its lending practices than perhaps a non-FHA insured reverse mortgage.
People will continue to complain about high fees regarding fha forward and reverse mortgages, but they get benefits they’d never receive without this mortgage insurance, in the form of light credit checks and high LTVs.
