HUD News- New Reverse Mortgage Requirements
FHA provides lending guidelines for the Home Equity Conversion Mortgage, or HECM loan. Most often referred to as a “reverse” mortgage, this program has evolved over time and the Federal Housing Administration announced last September new rules that took effect this past October 2. Reverse mortgage loans are designed to assist seniors aged 62 and older to convert part of their home equity into cash in the form of a lump sum payment, a line of credit or a combination of both. Unlike a cash out refinance or a non-HECM home equity line of credit however, there are no payments due on the reverse mortgage loan until the last borrower in the household leaves the property.
Reverse mortgage loans have been around for nearly 30 years after FHA first issued guidelines to insure the loan program. Yet the program has had difficulty staying afloat and Fannie Mae actually exited the program a few years ago and today the FHA HECM is the only readily available reverse mortgage in the market today. The issues in the past have been the possibility of foreclosure. In the early days of reverse lending, borrowers only needed to have a certain amount of equity available to them. Since there were no payments to be made lenders felt the program was relatively safe and foreclosures would be a rarity. However, lenders didn’t consider the fact that seniors typically experience reduced income in later years and even though there wouldn’t be any mortgage payments to be made while occupying the home there are other expenses related to the property that can trigger the foreclosure process.
Reverse borrowers must also pay for annual property taxes, insurance, maintenance and any association dues. If someone gets behind on property taxes for example, the county could begin foreclosure proceedings and force the sale of the property, leaving the reverse mortgage lender out in the cold or at the very least suffer a loss in the event of a foreclosure. Because the reverse mortgage was insured, claims were made causing the FHA to lose money.
New changes however hope to reverse this trend. One recent change was the introduction of a Financial Assessment. This requires the borrowers to meet minimum standards as it relates to sufficient income to pay taxes, insurance and maintenance in addition to other living expenses. An ability and willingness to repay debt is also part of the Financial Assessment which means a credit report is reviewed. New guidelines also increase the initial mortgage insurance premium to 2.0% from 0.5% yet subsequent mortgage insurance premiums charged annually have dropped from 1.25% to 0.5%. These new mortgage insurance premiums have been implemented to ensure the stability of the reverse mortgage program that is still not completely rehabilitated. However, the FHA secretary has the authority to issue what is known as a “mortgagee letter” to address issues as they arise and can be immediately implemented.
The FHA wants this program to be around for as long as consumers want the program and these new safeguards have been put in place for that very reason. To keep the program around and provide increased financial stability for our seniors