In 2014, government-backed reverse mortgage rules changed significantly, and these changes will affect almost everyone considering a reverse mortgage loan in the future. They alter the amounts that can be borrowed, there are more protections from foreclosure, and credit and income are assessed. Here's what homeowners and their families need to know.
Surving Spouses Can't Be Kicked to the Curb
FHA-backed reverse mortgages, or Home Equity Conversion Mortgages (HECMs, pronounced "heck 'ems") comprise about 90 percent of reverse mortgages today. This means any change to their rules has a huge impact on the market. HECM rules require borrowers to be at least 62 years old to be eligible for reverse mortgage financing. This rule has led many couples in the past to drop the younger spouse from the home's title in order to qualify for a reverse loan.
In addition, reverse mortgage loan amounts are calculated using the age of the youngest borrower and the loan's interest rate. This has caused a substantial percentage of married borrowers to increase their payout by dropping the younger one from the home's title and applying for a reverse mortgage only in the name of the oldest borrower.
The problem with dropping one spouse from the home's title is that when the older spouse dies, the surviving non-borrowing spouse (NBS) no longer had any legal right to the home -- he or she became legally classified as a "tenant" who could be evicted. The only way for this person to retain the residence was to pay off the reverse mortgage balance or purchase the property from the lender. Because many reverse mortgage borrowers are cash-strapped, this wasn't really possible for many widows and widowers.
New reverse mortgage rules prevent this from happening. Married homeowners are now treated as though they are both borrowers, regardless of who is on the home's title. HUD now requires that FHA-backed reverse mortgages issued on or after August 4, 2014 allow the NBS to remain in the home after the borrower dies (and the loan repayment will be deferred) so long as:
- the NBS is married to the borrower at the time of the loan closing (and remains married to the borrower for the duration of the borrower's lifetime)
- the NBS's existence is disclosed before closing the loan and the NBS is named in the loan documents
- the NBS establishes legal ownership (or another ongoing legal right to remain in the home) within 90 days of the death of the last surviving borrower, and
- the NBS meets all of the obligations described in the loan documents.
If the non-borrowing spouse fails to meet any of the requirements, the loan becomes due and payable.
Reverse Mortgage Payouts Lower for Those with Younger Spouses
Effective August 4, 2014, HUD changed its maximum loan amounts for borrowers with younger spouses. HUD uses a table of Principal Limit Factors, which are determined by the borrower's age and the interest rate, to determine what percentage of the property value can be borrowed. These are now based on the age of the younger spouse, regardless of whether he or she is on the home's title.
With these new Principal Limit Factors in place, senior borrowers with a spouse under the age of 62 who did not necessarily qualify before may now be able to qualify. The younger spouse will be able to remain in the home as long as the property is maintained and the insurance and taxes are kept current.
More New Rules: Financial Assessment Required
One unique characteristic of reverse mortgages is that they are available to people with bad credit and no income, because monthly payments aren't required. They are the only mortgage product that doesn't impose higher rates and fees for those with poor credit. That is changing somewhat. Bad credit and low income won't keep homeowners from getting approved, but they can affect the proceeds available to the borrower. Beginning January 13, 2014, HECM lenders must perform a financial assessment of all applicants.
What does that mean, exactly? Lenders must check the following:
- cash flow/residual income
- property expenses
Lenders are required to consider extenuating circumstances and compensating factors. They mainly want to make sure applicants are paying their home ownership costs like taxes and insurance. If the applicants fails a financial assessment, the lender must set aside finds from the proceeds and earmark them for property-related expenses.
Additionally, HUD says that,"Any delinquent Federal debts or liens against the real estate must not be in excess of the mortgagor's net principal limit, unless the mortgagor has a separate source of funds from which to draw and pay those debts. Liens against the real estate resulting from delinquent Federal debt must be satisfied or resolved."
The new rules are designed to protect borrowers from foreclosure or eviction. The price for this protection is in some cases less money available for borrowing.