Changes to Reverse Mortgages are coming — starting April 27th. What you should know
I have older parents and clients. I am always looking for ways to help them feel more comfortable in their golden
years. This is very useful information concerning those of you who are facing retirement and fixed income. You may not be aware that individuals over 62 years old can use a Reverse Mortgage to buy a home. Why would you want to do this? Well, maybe the family has grown and the hose is too big now. But you don’t want to downsize because of potential payments on a new home.
People over 62 years old can use a Reverse Mortgage purchase loan to buy that smaller home and have no principle and interest payments for as long as they live in the home. All you will need to pay annually is your homeowners insurance and property taxes.
But what about the loss of equity to pass on to your children? Studies have shown that if your home appreciates at 4.5% per year it will completely offset the Reverse Mortgage deferred payment. So the equity you have when you buy your home will be exactly the same 10 or 15 years down the road if the home appreciates at 4.5% per year.
If the home appreciates more than 4.5% their equity will increase so that when it’s time for their heirs to inherit the estate there can be the same, or more, equity in the home than when they started.
But changes are coming beginning April 27th, so advise your clients now. Here is what’s changing …
New Reverse Mortgage Requirements are Coming Soon…
If you’ve been considering a reverse mortgage, there are big changes coming in 2015 that you’ll need to know about.
Most reverse mortgages are insured by the U.S. Federal Housing Administration. As a product of this, the loans are guaranteed by the government, adding a level of protection for borrowers. It also means the government creates rules and regulations around reverse mortgage lending via the Department of Housing and Urban Development, or “HUD.” That’s where the big changes come in.
In order to make reverse mortgages even safer for borrowers who qualify and are at least 62 years old, HUD is introducing new rules on April 27, 2015, that will impact all borrowers.
Here’s what you need to know.
- New financial assessment requirements will take effect on April 27, 2015.
Prior to 2015, reverse mortgage borrowers did not have to go through an income or assets assessment as is customary for borrowers who are getting a “forward” or traditional mortgage.
But any potential borrowers who have been issued an FHA case number on or afterApril 27, 2015, will now undergo a “financial assessment,” conducted by the lender. This will also include a credit score review.
The financial assessment is geared toward making sure a borrower can meet the ongoing payments associated with homeownership including homeowners insurance, property tax, and home maintenance. If borrowers have past delinquencies, for example, those delinquencies will be considered by the lender as part of the assessment. If you have historically not made payments on time for repayment of other debts, those will be considered as well.
- Borrowers will need more documentation.
As part of the financial assessment, lenders will need to collect more documentation in order to underwrite the reverse mortgage and ensure the borrower meets the necessary financial criteria. That may mean gathering income and tax forms, documentation of assets that you own, or payment history for different debts you have held.
The same way you would gather documentation in applying for a forward mortgage, you will need to provide documents as proof of the financial criteria that is required by the financial assessment.
- You may need to “set-aside” money to fund fixed housing costs
Borrowers who lack certain financial standing as determined by the financial assessment, will need to set aside funds from their loan proceeds in order to cover their property charges (taxes and insurance, namely). This Life Expectancy Set Aside (LESA) is a fund specifically designated for those payments. The LESA works in a way that is similar to the way that forward mortgages sometimes escrow property tax payments.
The set-aside amount will be determined by a calculation conducted during the application process, and will either be designed to either fully fund those payments based on a lifetime expectancy assumption, or to partially fund those payments based on the same assumption.