Seniors shopping for a reverse mortgage will find the rules for
these loan products are getting tighter. That means borrowing costs
are increasing and loan amounts are shrinking. And some
cash-strapped people may find it tougher to qualify for a loan.
One major change: the merger of the Standard and the lower-cost
Saver programs. On October 1, the Department of Housing and Urban
Development combined these products. Borrowers will now receive
about 15% less in proceeds compared with the Standard product, but
they will get more than with the Saver, says Peter Bell, president
of the National Reverse Mortgage Lenders Association.
The merged product charges 0.5% for an upfront mortgage
insurance premium, compared with the Saver's 0.01% and the
Standard's 2%. However, some seniors may get hit with a higher 2.5%
upfront premium if they take more than 60% of the proceeds during
the loan's first year. "If you're above the 60% threshold, you can
still get the loan, but it will cost a little bit more," says Gregg
Smith, president of One Reverse Mortgage. The annual premium of
1.25% of the loan amount remains the same.
A reverse mortgage allows seniors 62 or older to tap their home
equity. The loan does not have to be repaid until the homeowner
dies, sells the house or moves out for at least 12 months.
Nearly all reverse mortgages are insured by the Federal Housing
Administration. With the Home Equity Conversion Mortgage, or HECM,
the government pays the lender if the house sells for less than the
loan's balance. When the loan comes due, the homeowner will never
owe more than what the home is worth.
HUD made these changes to strengthen the mortgage insurance
fund, which suffered from a struggling housing market and a growing
number of defaults by borrowers. As housing prices dropped, lenders
often could not recoup the full amount of the loans when they came
due. "The changes were made to ensure the program is open for
business tomorrow," Smith says. HUD also has asked Congress for
about $1.7 billion to shore up the fund.
One new rule limits the proceeds a borrower can take within a
year of the loan closing. "Before, you could take 100% of the
available proceeds on day one," says Lori Trawinski, senior
strategic policy adviser for the AARP Public Policy Institute. Now,
in the first year, the borrower can generally take no more than 60%
of the total proceeds he's eligible to receive. A reason for the
new limit: Borrowers taking all proceeds upfront were more likely
to use up the money early on. Often those borrowers were left
without enough cash later on to pay property taxes and homeowners
insurance, and the loans went into default. "HUD has learned that
loans with a larger upfront draw have more risks," Bell says.
There is an exception to the 60% limit. The borrower can take
more in the first year if the amount of "mandatory obligations"
plus 10% of the maximum allowable proceeds is larger than 60% of
the proceeds. Mandatory obligations include the upfront insurance
premium, the loan origination fee and money needed to pay off a
regular mortgage. Borrowers who take more than 60% will pay the
higher upfront insurance premium of 2.5%.
Say a borrower with a home value of $200,000 qualifies for a
$100,000 loan. The first-year draw is $60,000. If the borrower has
mandatory obligations of $20,000, the proceeds will cover those
costs, and he can take the $40,000 balance in cash in the first
year. He will pay an upfront premium of $1,000, or 0.5% of the home
If his mandatory obligations are instead $70,000, the borrower
can draw up to $80,000--the $70,000 to cover the mandatory
obligations plus 10% of the total loan, which is $10,000. This
borrower will pay an upfront premium of 2.5%, or $5,000. Generally
borrowers who go this route are paying off a forward mortgage,
Borrowers can take proceeds as a line of credit or monthly
payments, and they will pay an adjustable interest rate. After the
first year, the borrower can take the balance of available
Those who want a fixed interest rate can take a lump sum payment
at closing. But the one-time lump sum is subject to the 60% and
mandatory obligations limitations. "You can't come back for more,"
Bell says. If you qualify to take up to 60% in proceeds the first
year, that's all you'll get.
New Hurdles to Qualify
For the first time, potential borrowers will need to undergo a
financial assessment to determine whether they can to afford to pay
property taxes and homeowners insurance over the life of the loan.
The assessments will begin January 13, 2014.
About 57,600 borrowers, or 9.8%, defaulted because of taxes and
insurance in mid 2012, up from 8.1% in mid 2011, according to HUD.
A borrower goes into default when he does not pay property taxes
and insurance--a requirement of the loan. AARP's Trawinski says
such costs can be a hardship for homeowners particularly in states,
such as New York, that have hefty property taxes, or in coastal
states, such as Florida, with expensive insurance costs because of
hurricane and flooding risks. A borrower in default is given 24
months to get current on unpaid charges, and if he can't, he could
lose his home if the lender forecloses.
Bell says lenders will scrutinize sources of income and assets
as well as credit history. Some borrowers will be required to set
aside part of the loan into an escrow account to pay future bills.
Borrowers who clearly are able to cover those costs won't have to
put cash aside.
Because the set-aside may need to last for 20 years or more, the
amount could be very large. For some, the proceeds may end up
paying only loan expenses, taxes and insurance--but covering those
costs could enable the senior to stay in the home. And it would
free up cash in a retiree's budget to pay for other expenses, says
Michael Kitces, director of research at Pinnacle Advisory Group, in
A senior could be denied a reverse mortgage if the financial
assessment finds that the senior cannot pay insurance and taxes and
have enough cash left to live on. Seniors who are strapped for cash
may be cut out of the reverse mortgage market, says Trawinski.
Affluent borrowers are likely to pass the financial assessment,
but many may see little appeal in a reverse mortgage now that the
Saver has been eliminated. Because the Saver had ultra-low costs,
some borrowers used it to extend the life of their investment
portfolio by tapping the credit line during a market downturn,
giving their stocks time to recover. "Spending a few more thousand
dollars upfront isn't a deal killer, but it takes a little value
off the strategy," Kitces says.