The reverse mortgage loan has continued to evolve since its introduction in 1961 and only grows stronger and safer with each year. This is primarily due to rules and regulations set by the Federal Housing Administration (FHA). The FHA continually updates and regulates reverse mortgages with new guidelines to protect you as a borrower. So what exactly are the current rules and requirements of the reverse mortgage loan product in 2017?
Reverse Mortgage Rules
The intention of the reverse mortgage loan began as a way to help seniors use their equity to age in their home. Therefore, the four most important borrower rules for reverse mortgages are as follows:
You must be 62 years of age or older.
You must own your home.
You must own your home outright, or have a substantial amount of equity.
You must live in the home as their primary residence.
Further Information – Borrower Obligations
Once you satisfy these eligibility requirements and after you obtain a reverse mortgage, you still have obligations to uphold. In order to enjoy all the features of a reverse mortgage loan, and ensure that you do not default on the loan, you are responsible for:
Immediately using reverse mortgage loan funds to pay off any other mortgage you may have.
Continuing payments on your home insurance, property taxes, and basic home maintenance.
Complying with all the loan terms, such as continuing to live in the home as your primary residence.
Beneficial Reverse Mortgage Program Rules
The regulations about loan payback are quite important as well. Luckily, the popular government insured reverse mortgage loan, also called a Home Equity Conversion Mortgage (HECM), is non-recourse. This means that:
If the loan is not repaid after maturity, no assets other than the home can be taken to pay off the reverse mortgage loan.
If the loan debt surpasses the value of the home, the borrower will not owe more than the amount the home sells for.
HECM Government Regulations
In addition, the FHA has set some additional safeguards to protect borrowers and encourage responsible reverse mortgage loan use.
Before loan approval, part of the process is to complete a counseling session with an FHA-approved counselor. This counselor will make sure you know all your options and have all the reverse mortgage information you need to be able to decide if this loan is best for your situation.
In the first year of a reverse mortgage loan, you may only access 60% of your approved loan amount (or the amount required to pay off your current mortgage plus 10%, whichever is greater). After the first year, you may access the remaining amount. This is to encourage you to not pull from your equity too quickly.
Lenders are not permitted to require you to purchase other loans or financial products, as a condition of your loan.
Lenders are required to complete a financial assessment of prospective borrowers and analyze income against expenses. If the ratio shows that you may have some difficulty in paying recurring taxes, insurance, or other loan obligations, you may set aside money from your loan funds in order to pay your financial obligations.
Additionally, the law gives you three business days after loan closing to change your mind and cancel your reverse mortgage loan. Lenders cannot charge you interest during this period of time.
New Reverse Mortgage Rules and Regulations
Two new rules were implemented in 2014 and 2015 for the reverse mortgage loan program. Still in effect for 2017, these rules regarding non-borrowing spouses and the borrower’s financial assessment add new layers of protection for all borrowers.
Reverse Mortgage Rules for A Non-Borrowing Spouse
This rule makes it easier for the non-borrowing spouse to continue living in the home following the death of a borrower. The non-borrowing spouse will inherit the responsibility for the reverse mortgage loan as well as the home’s ownership. Borrowers should be aware, the age of the non-borrowing spouse may effect some loan terms such as the amount available to borrow.
This rule mandates that lenders financially assess all reverse mortgage loan applicants. Borrowers are required to submit documentation regarding income, taxes, assets, payment history, and other debt to lenders. The purpose of this rule is to ensure that borrowers have the financial capability to fulfill their loan obligations, such as continuing to pay property taxes and home insurance.
Although the FHA’s rules and regulations for the reverse mortgage loan program may seem stringent to some, they are designed with the borrower’s best interests in mind and are truly beneficial to you as a borrower. These regulations and rules are meant to encourage borrowers to use this great financial tool as part of an intelligent retirement planning strategy, which in turn solidifies the overall strength of the reverse mortgage loan product.
“Reverse Mortgage Issues/Obligations After Closing.” Hud.gov. n.p. n.d. Web. 17 Jul 2014. http://portal.hud.gov/hudportal/documents/huddoc?id=7610-0_5_secE.pdf
“Most Frequently Asked Questions.” ReverseMortgage.org. n.p. n.d. Web. 17 Jul 2014. http://www.reversemortgage.org/GetHelp/MostFrequentlyAskedQuestions.aspx#right
Alderman, Jason. “Rule Changes Tighten Reverse Mortgage Eligibility.” PracticalMoneySkills.com. n.p. n.d. Web. 17 Jul 2014. http://www.practicalmoneyskills.com/personalfinance/experts/practicalmoneymatters/columns_2014/0124_RuleChanges.php
“Reverse Mortgages: New Rules Ensue.” NetEquityMtg.gov. n.p. n.d. Web. 1 Apr 2015. http://www.netequitymtg.com/2015/01/22/reverse-mortgages-new-rules-ensue/
Reverse Mortgage Loan Glossary
Appraisals: The process of inspecting a home’s condition and assessing the market value of the home. However, the borrower must pay fees for the appraisals as part of their closing costs.
Calculator: Use a reverse mortgage loan calculator to get an estimate of the total proceeds you may receive. The calculator works by determining your eligibility and the amount you may qualify for based on several factors such as your home value, any existing mortgage balance, and your age.
Closing Costs: Closing costs with a reverse mortgage are the same costs associated with a traditional mortgage loan. These fees may include a credit report fee, flood certification fee, escrow fee, document prep fee, recording fee, courier fee, title insurance, pest inspection, and survey.
Counseling: The federal government mandates that all reverse mortgage loan candidates must meet with an unbiased HUD-approved counselor before completing a reverse mortgage application to ensure that all borrower(s) have all the information they need to make the right decision before entering the loan; this is to protect the borrower.
HECM: A HECM (Home Equity Conversion Mortgage) is a home equity loan that allows borrowers to access a portion of their equity. The loan amount is based on the age of the youngest borrower or eligible non-borrowing spouse, the interest rate, as well as the lesser of the home’s value or sales price, subject to HECM lending limits. They are backed by HUD and the FHA. HECM borrowers can qualify to receive a HECM on their home’s value up to $636,150 (effective January 1, 2017).
HECM for Purchase: This option is designed to help senior homeowners accomplish two goals in the same transaction; purchase a more fitting residence and obtain a reverse mortgage loan. With the HECM for Purchase reverse mortgage, the borrower provides a down payment using the sale of the previous home or other savings. Many seniors have found this option helpful when wanting to purchase a new home that is closer to family or for vacation, smaller in size, or to accommodate new physical needs related to aging.
Home Equity: The market value of your home minus your mortgage, and any outstanding liens, such as a home equity line of credit.
HUD: The Department of Housing and Urban Development (HUD) is the nation’s agency committed to creating opportunities for quality and affordable homes for all. It’s also the primary agency involved in rule-making and oversight for HECMs.
Interest Rates: Reverse Mortgage interest rates are determined based in part upon whether they are fixed or variable. If you choose to go with a fixed interest rate, you must take out a lump sum, whereas if you choose to go with a variable interest rate, you have the option of receiving payouts as a lump sum, line of credit, monthly payments, or a combination of all three.
Line of Credit: While you have access to the full payout from the loan, a line of credit differs from cash in that you only pay interest on the money you actually use. The unused line of credit can also grow over time on a reverse mortgage.
Loan Origination Fees: Fees that covers the lender’s operating costs and expenses. The amount of the fee may depend on the value of the home, however, HECMs are strictly regulated by HUD, and are FHA insured, which means there is a strict government mandated cap on this fee.
Miscellaneous Costs: Miscellaneous, upfront fees for counseling, appraisal, mortgage insurance premium, real estate settlement costs, origination fee, and lender service fees.
Monthly Payments: This option allows borrower(s) to choose a fixed monthly payment for a specified amount of time. However, the borrower(s) also have the option to receive fixed monthly payments for as long as they reside in the home and comply with the loan terms. The amount received each month will not change, even if the home decreases in value. A monthly payments option is only available on a variable interest rate.
Mortgage Insurance Premium (MIP): This MIP fee is mandatory per HUD and is intended to protect borrowers if the reverse mortgage loan surpasses the amount the house is worth when sold. This amount is paid upfront at closing.
Proprietary Reverse Mortgage Loan or “Jumbo”: This option is for senior homeowners who have high-value properties and are wanting to access more than the HECM’s federally-set borrowing limit (based on the home’s value up to $636,150). Proprietary Reverse Mortgages do not have to follow the same requirements as HECM reverse mortgages and are not insured by the FHA.
Refinance: This option is designed for senior homeowners with a current reverse mortgage loan. Popular reasons for refinancing include taking advantage of a lower interest rate, adding a spouse to the mortgage, or accessing more cash when the equity in the home rises due to an increase in the home’s value.
Single Disbursement Lump Sum: If the borrower(s) is eligible for a $100,000 loan but only needs $30,000, the borrower(s) may choose to only receive the $30,000 in a one-time lump sum payment. Fixed rates remain the same, protecting you if the market rate rises, however, this option is only available to those on a fixed rate.