If you’ve been kicking the tires on a reverse mortgage, you probably don’t want to wait any longer — cheap mortgages are driving off the lot, and they won’t be back.
The U.S. Department of Housing and Urban Development (HUD) has issued new rules designed to make Home Equity Conversion Mortgages (HECMs) safer, but they will also get more expensive.
Beginning NEXT MONTH, the so-called HECM Saver, a program with lower loan limits and cheaper fees, will be extinguished. The so-called HECM Standard will be the only program on the books. However, the spirit of the old programs will still be considered, as those with lower loan-to-value loans will pay substantially less than those borrowing against a higher portion of their home’s equity.
In October 2013, the mortgage insurance premium for larger loans (more than 60 percent of the home’s value, to a max of $625,000) will increase to 2.5 percent of the property’s appraised value (or 2.5 percent of $625,000, whichever is less), up from two percent. For loans below the 60 percent threshold, the fee is 0.005 percent, up from 0.001 on the old saver loans. So, if you borrow $65,000 against a home worth $100,000, your mortgage insurance premium is $2,500, but if you borrow $64,000, the premium drops to $32. The fees were increased to bolster reserves of the FHA Mutual Mortgage Insurance Fund, which is used to repay lenders in situations when the sale of the property doesn’t cover the HECM’s outstanding balance.
Starting in January, some borrowers will be required to put a sizable chunk of their loan proceeds in escrow accounts to pay future property taxes and insurance costs. This is to alleviate foreclosures caused by the homeowner’s failure to maintain their homes, or pay their homeowner’s association dues, property taxes and hazard insurance, all of which are required to protect the collateral.
The HECM program has experienced rising loan defaults, posing risk for the Federal Housing Administration insurance fund, which guaranties the loans.
Limits on even the larger loans will be lowered, starting next month. The formulas governing loan amounts are complex, but the cuts amount to roughly a 15 percent reduction, according to Peter Bell, president of the National Reverse Mortgage Lenders Association.
In addition, borrowers won’t be able to take their entire proceeds in a lump sum at closing. Most won’t be able to access more than 60 percent of the total loan during the first 12 months. This change is aimed at discouraging large drawdowns that can leave borrowers strapped later on if proceeds are used up and other income sources dry up.
One of the biggest advantages offered by reverse mortgages over home equity loans is the fact that credit and income aren’t considered. Starting in January, however, applicants will undergo a financial assessment to make sure they have the capacity to comply with the terms of the HECM. Lenders will evaluate borrower income sources, including income from work, Social Security, pensions and retirement accounts, and their credit history.
Applicants considered “high risk” could be denied their loans or required to have an impound or escrow account, deducted from their loan proceeds, to pay future property taxes, hazard insurance and even flood insurance in areas identified as flood zones by the federal government. This could reduce loan proceeds substantially — it will based on the borrower’s life expectancy and not the expected number of years borrowers keep their reverse mortgages, which is considerably lower.
Last Chance Ends September 30
Don’t wait until September 29 to apply for your reverse mortgage. You’ll have to apply, undergo required financial counseling (different from the new financial assessments) and have a loan case number by that the 30th or you’re back to Square One.
And Square One is expensive.