Beginning October 1, the Federal Housing Administration (FHA) has put into effect major changes to the agency’s reverse mortgage program also known as the Home Equity Conversion Mortgage (HECM) program. HECM allow seniors 62 and older to pull out the equity in their homes without the need to make monthly payments.
The money, which is tax-free, can be used for everything from home improvements to home care. The borrower must continue to live in the residence. A reverse mortgage doesn’t have to be paid back until the homeowner dies, sells, or moves out of the residence.
After the housing market collapse, the borrower default rate on reverse mortgage climbed to about 10 percent because many borrowers failed to pay their homeowners’ insurance and property taxes. The FHA implemented the stricter guidelines in an effort to ensure that future borrowers can meet the costs associated with the HECM program obligations.
Here are the new rules for reverse mortgages.
Single loan options and payments
The old program gave borrowers two types of HECM: 1) standard and 2) saver. The new rules combine the attributes of each option into a single product. Borrowers can choose to receive payment in three ways:
- Monthly installments
- One-time lump sum payment
- Ongoing line of credit
Under the changes, most borrowers will be limited to 60 percent of the total loan funds for the first year. Borrowers who need more than 60 percent of the money to pay off mandatory debts to qualify for the loan, such as the existing mortgage or liens, can receive the amount necessary to cover the obligations, plus an additional 10 percent of the maximum loan amount.
New closing cost rules
Borrowers must pay one-time closing costs and ongoing housing costs—utility bills, real estate taxes and insurance premiums for the time the borrower live in the home. The new requirements also obligate borrowers to pay the initial mortgage insurance premiums, which is based on how much the person borrows, upfront with other closing costs.
Homeowners who borrow less than 60 percent of the allowable limit will pay .05 percent of the total loan amount for the first mortgage insurance payment at closing. For loans above this amount, borrowers must pay a 2.5 percent initial insurance fee.
Borrowers must qualify
Under the old program, borrowers did not have to provide proof of income or undergo a credit check. Beginning in 2014, applicants will need to demonstrate the ability to pay the costs related to the mortgage—mainly property taxes, insurance and property maintenance. Borrowers can be subjected to denial or be required to designate a specific amount of the loan to pay for taxes and insurance.
The rules also make it mandatory for borrower to complete a mandatory financial counseling session designed to help them understand the ramifications and responsibilities of taking out a reverse mortgage on their home.