Taking out a reverse mortgage isn’t as easy as it used to be.

The Federal Housing Administration (FHA) has long assisted senior homeowners taking out reverse mortgages. Essentially, these programs are home loans that work backwards. The homeowner is able to pull cash out of their home’s equity. They can choose to:

    • receive a lump-sum amount upfront, up to the principal limit, which is determined by the homeowner’s age and the mortgage interest rate; and/or
    • receive monthly “payments” over many months.

Several fees are involved, collectively making up the mandatory obligation, including:

  • mortgage insurance premiums (MIPs);
  • loan origination fees;
  • loan counseling fees; and
  • credit report fees, among other required materials.

The rules for taking out a reverse mortgage are complex, and they’re changing again.

The FHA is making several restrictive changes to its Home Equity Conversion Mortgage (HECM) program for homeowner applications received on or after September 30, 2013. These changes include:

  • consolidating the HECM Standard and HECM Saver programs into a single HECM program;
  • limiting the initial lump-sum disbursement to a maximum of 60% of the principal limit (or, if greater, the mandatory obligation plus 10% of the principal limit);
  • additional MIPs which will change from:
    • 0.01% to 0.5% if the homeowner takes out an initial 60% or less of the principal limit; or
    • 2% to 2.5% if the homeowner initially takes out more than 60% of the principal limit; and
    • new factors to determine the principal limit.

Further, seniors who apply for a HECM loan on or after January 1, 2014 are to undergo a credit profile analysis, called a financial assessment. This assessment includes an analysis of the homeowner’s:

  • credit history;
  • income, assets and cash flow; and
  • any compensating or extenuating circumstances.

The credit profile analysis changes are not set in stone — yet.  Public comments on the proposed financial assessment rule are requested. Comments are due by October 15, 2013 and may be submitted at regulations.gov.

Related article:

Department of Housing and Urban Development: Mortgagee Letters 13-27: Changes to the Home Equity Conversion Mortgage Program Requirements and 13-28: Home Equity Conversion Mortgage (HECM) Financial Assessment and Property Charge Guide

The FHA’s deep losses from the existing HECM programs have driven these qualifying and MIP changes. The FHA is still at risk of needing a bailout to stay afloat as losses exceed MIP revenue. These HECM steps are designed to avoid future losses while keeping the program in place for seniors who:

  • choose to remain in their home in retirement; and
  • withdraw part of their equity upfront or through monthly funding by a reverse mortgage lender.

first tuesday insight

These new regulations arrive on the heels of a new California law requiring applicants to receive in-person counseling before taking out a reverse mortgage.

Related article:

In person reverse mortgage counseling required

Why all the fuss about reverse mortgages all of a sudden?

Those in the know have always viewed reverse mortgages with suspicion. And rightly so, for they are a loan instrument often used to prey upon the elderly. They are complicated financial arrangements and easily misunderstood. Reverse mortgages also trap many seniors in their oversized Boomer homes, far away from family and needed services.

If seniors want to take advantage of their equity in retirement, they ought to take the sophisticated option, a point brokers and agents need to discuss with retired property owners. Seniors are better off choosing to sell and:

  • place the net sales proceeds in a savings account or other liquid asset; and
  • draw down these savings monthly at the same monthly amount funded by a reverse mortgage (and have more money to spend).

What do you think?

Related article:

Warren wants answers – and so do you

Re: Changes to the Home Equity Conversion Mortgage Program Requirements: Financial Assessments-Solicitation of Comment from the Office of the Federal Register