The Reverse Mortgage, a popular financial tool available to many senior citizens, has undergone additional changes, making it more difficult and potentially more expensive for seniors to tap into the equity in their homes.
The FHA Reverse Mortgage, also known as the Home Equity Conversion Mortgage (HECM), has been around for over 20 years. It allows those seniors over the age of 62 who have significant equity in their home to tap their equity without having to sell their home. There are many misconceptions in the public eye regarding Reverse Mortgages. And while this financial tool – like most any other tool – is appropriate for some, it is not appropriate for many others. These are among the reasons why the Department of Housing and Urban Development (HUD) requires all borrowers to receive financial counseling before they can proceed with a Reverse Mortgage.
A Reverse Mortgage allows a senior homeowner to access their equity via a lump-sum payment at closing, a line of credit, or monthly stipends delivered to the homeowner from the lender. For seniors who choose to remain in their home, but have cash flow challenges and limited income, a Reverse Mortgage can be their saving grace. However, while a borrower is not required to make traditional mortgage payments as they would on a traditional “forward” mortgage (the borrower must still repay the mortgage once their home is sold or if they have not occupied the home as their primary residence for a contiguous period of 12 months), a borrower is still required to maintain their home and pay their real estate taxes and homeowner’s insurance.
It seems the economic challenges of these past several years have been especially difficult for some seniors. Many who received large sums of cash from their Reverse Mortgage did not manage these funds responsibly and could not even pay their property taxes and insurance. In a published statement, HUD explained that changes would make the program “easier for seniors to use responsibly,” and that the limit on equity drawdowns would “help seniors make more responsible financial choices, preserving funds over the life of the loan.”
Translation: Since some seniors proved they could not responsibly manage their own finances, HUD must limit the amounts and how ALL seniors may borrow.
Therefore, as of September 30, 2013, seniors may now tap just 60% of the proceeds allowable under a HECM loan at closing. If the borrower is using these funds to pay off an existing mortgage, the new rules allow for an additional 10% distribution. The changes will also limit subsequent draws over the first 12 months of the loan. Mortgage Insurance premiums have increased. In addition, as of January 14, 2014, FHA will require lenders to conduct a financial assessment of prospective borrowers to ensure they have the residual income to benefit from a reverse mortgage. In other words, if a senior does not have the income or cash flow to cover their basic expenses, including real estate taxes and homeowner’s insurance, they may be required to set aside funds for future property tax and insurance payments, or their Reverse Mortgage may not be approved. (To date, I have not seen any logistical data on how FHA will perform this assessment.)
“The whole idea is to encourage the behavior where seniors take their money out more slowly,” said Peter Bell, president of the National Reverse Mortgage Lender’s Association.
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.
This material is not from HUD or FHA,
and has not been approved by HUD or a government agency.