FHA Introduces New Requirements
Reverse mortgages also referred to as Home Equity Conversion Mortgages or HECMs were originally designed to provide a valuable tool to senior homeowners who prefer to age in place. While this option is not for everyone, it could be a viable consideration for some seniors who might be considering ways to supplement Social Security, pay for unexpected medical expenses or make home improvements. Reverse mortgages can also be used to purchase a primary residence if the borrower is able to pay the difference between the reverse mortgage proceeds and the sales price with closing costs for the property they are buying. This type of loan allows homeowners age 62 and older to convert a portion of their home equity into cash. Unlike a traditional home equity loan or second mortgage, reverse mortgage borrowers do not have to repay the loan until the borrowers no longer use the home as a primary residence or fail to meet the obligations of the mortgage. In late 2013 the Federal Housing Administration introduced new lending requirements to help protect the long term viability of the reverse mortgage program.
Changes to Reverse Mortgages Include:
Mortgage insurance premiums and principal limits will mean that borrowers will most likely qualify for a lower loan amount but will pay more in up front premiums which will increase the cost of the reverse mortgage.
Initial drawdowns will limit the amount of money that can be taken out at closing and during the first year of the loan.
Financial assessments will be required to determine the borrower's ability to maintain their property taxes and homeowner insurance over the life of the loan. This change is intended to reduce the lenders' risk should the borrower fail to maintain the property or defaults on important obligations.
Set-asides at closing will come out of part of the borrowers loan proceeds. The borrower will either need to set aside money for property taxes and insurance or have part of their monthly disbursements be held for these payments.
Protections for surviving spouses will mean that now both spouses names will be on the reverse mortgage even if both parties aren't on the title to the property. This may not sound like a good idea at first. Imagine living in your house for 30-40 years and at some point you decide to take out a reverse mortgage. Only one spouse is listed as a borrower and unexpectedly this borrower dies. The surviving spouse who is not listed as a borrower on the loan is told that the balance on the loan must be paid in full or the property will be foreclosed on. This is one of many true scenarios that have occurred to numerous seniors across the country.
Reverse mortgages can be complicated and expensive. To help you determine if it's a good option for you, ask yourself if you fully understand how these loans work? Do you have less costly options? Can you afford to start using the equity in your home now? There are a number of factors that one should consider before deciding on a reverse mortgage. These factors include the age of the borrower, the amount of equity in the home and the primary reason for wanting access to the equity.
As a Senior Real Estate Specialist, the topic of reverse mortgages does come up quite often. I have found that there are a couple excellent resources for information on reverse mortgages including AARP and U.S. Housing and Urban Development (HUD). Feel free to contact me if you would like to know where the closest HUD approved reverse mortgage housing counselor is in your area.
Debbie Powell, Sales Associate