The mandatory start date for evaluating a borrower’s ability to handle ongoing costs required to keep a reverse mortgage in place has been extended until April 27, 2015, according to a letter sent to lenders by the Department of Housing and Urban Development.
HUD, which offers the nation’s most popular reverse mortgage through the Federal Housing Administration, announced last year that it will review a borrower’s ability to pay property taxes and insurance before granting a Home Equity Conversion Mortgage (HECM). The date to begin the review component was originally set for March 2, 2015 but most likely was extended so that computer software could be tested that would allow for a smoother process.
Reverse mortgages are loans that allow persons 62 years of age or older to tap into their equity by receiving monthly payments, a line of credit or a lump-sum payment or a combination of those plans. The loans require a confidential meeting with an independent, FHA-approved counselor. They are insured by FHA and do not have to be repaid as long as the home is the borrower's primary residence and the borrower complies with the terms of the loan.
The new prerequisite is a first for reverse mortgages, which had carried no financial qualification requirement since the loans were first offered in 1989. Lenders say the new condition is not a qualification but rather a “financial assessment” to determine if funds need to be set aside to pay the property taxes and homeowners’ insurance.
The reason for the new condition can be traced to past problems with reverse mortgages and their negative impact on FHA’s Mutual Mortgage Insurance Fund, its core reservoir of cash. More seniors than expected withdrew the maximum amount of allowable funds, had no additional income or assets and then did not continue their homeowner’s insurance payments and/or fell behind on property taxes. The goal of the new assessment is to determine upfront a borrower’s overall financial situation so that there are no problems down the road with taxes and insurance.
The other reverse mortgage predicament that has been clarified is the amount of equity available to persons who take out a reverse mortgage with a spouse under the age of 62. That amount is tied to a sliding scale of Principal Limit Factors (PLF) and is reduced given the age of the younger spouse.
For example, a person signing a reverse mortgage with a 55-year-old non-borrowing spouse would be eligible for 48.4 percent of the value of a property. If the non-borrower were age 62, the PLF increases to 52.4 percent of property’s value. A table was added to allow for younger non-borrowing spouses between the ages of 18 and 61 years of age. This table must be used in any event where the borrower is married to an individual who is under 62 and who meets the non-borrowing spouses qualifying criteria.
According to Sarah Hulbert Cavanaugh, Quality Assurance Officer for 1st Reverse Mortgage USA, a division of Cherry Creek Mortgage Company, Inc., HUD is asking reverse mortgage counselors to point out to applicants who have reduced borrowing power in their homes (a result of a younger non-borrowing spouse) that the benefits of a reverse mortgage should be carefully weighed against the cost associated with the program.
“Trailing spouses,” those persons who outlive the borrowing spouse, typically stay in the home for at least a few years after the borrowing spouse dies. However, problems surfaced when the trailing spouse was younger than 62 and not a borrower on the reverse mortgage. Since August 4, 2014, however, non-borrowing spouses younger than 62 have been able to stay in homes if they meet specific conditions.
In these cases, the non-borrowing spouse can enter into an “unlimited deferment period” where he/she can continue to live in the home. The non-borrowing spouse will be required to be put onto title, or remain on title, 90 days after the reverse mortgage becomes due. They also must keep up property taxes and insurance and be married at the time the borrowing spouse left the home on a permanent basis or passes away.
The new conditions placed on reverse mortgages might eliminate a few potential candidates but analysts say the measures will help ensure the future of the HECM program.
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