As with most extremes, reports that a reverse mortgage can ruin your life and finances or that a reverse mortgage can provide a leisure lifestyle filled with luxury and adventure are typically inaccurate. Before you take out a reverse mortgage, there are a few things to know. Revised regulations have made a reverse mortgage a safe choice for most homeowners, but the key is learning about features benefits before choosing a reverse mortgage.
FHA, HUD, HECM, and Reverse Mortgages: Who's Who and What's What
There are several acronyms that you'll encounter when researching and shopping reverse mortgages:
- HUD: The Department of Housing and Urban Development is a federal agency that oversees federal housing programs and regulations.
- FHA, or Federal Housing Administration, is an agency of HUD that provides mortgage insurance programs for its network of approved mortgage lenders. Mutual mortgage insurance, which is paid for by borrowers of FHA mortgage loans, protects lenders against losses on FHA insured loans.
- HECM stands for home equity conversion mortgage, which is FHA's term for a reverse mortgage. Most reverse mortgages are backed by the FHA; the terms HECM and home equity conversion mortgage are generally the same as a reverse mortgage.
A reverse mortgage is a home loan or refinance mortgage available to home buyers and homeowners of age 62 and above. At least one borrower of a reverse mortgage must meet the minimum age requirement in order to be eligible for a reverse mortgage. Instead of making monthly mortgage payments, reverse mortgage borrowers draw against their home equity by taking out a one-time lump sum, receiving periodic payments drawn against home equity, or receiving a combination of a lump sum and periodic payments. No payments are due on a reverse mortgage until the last borrower or eligible non-borrower spouse leaves the home. In cases where all borrowers are deceased, heirs must refinance the reverse mortgage to a standard mortgage or sell the home to pay off the reverse mortgage.
FHA Mortgage Insurance Fund Tanks, Reverse Mortgage Rules Revised
During and after the recession, FHA's fund for paying out mortgage claims sunk below legally mandated levels due to increased claims made by lenders on defaulted FHA mortgages. FHA determined that changing trends in reverse mortgage use accounted for part of the drain on its mutual mortgage insurance fund and revised its regulations for its HECM program. The changes were made to keep HECM mortgages available and to reduce mortgage defaults caused by homeowners' lack of understanding about how reverse mortgages/HECMs work. Key changes include:
- Limits on first year withdrawals: HUD revised maximum withdrawals within the first year of HECM loans to the greater of 60 percent of the principal limit or the amount of mandatory charges plus 10 percent of the principal limit. These changes are designed to prevent a one-time withdrawal of the full principal limit without considering property charges such as providing hazard insurance and paying property taxes.
- Mortgage lenders may elect to set aside funds for payment of property charges; set asides are deducted from the maximum amount that borrowers can withdraw from a reverse mortgage or HECM and cannot be canceled by homeowners. This safeguards against defaults caused by nonpayment of mandatory property charges.
- Credit reports: HUD revised its requirement for lenders to review all aspects of HECM loan applicants' credit reports. Previous regulations required review of only the public records section of consumer credit reports.
- Mandatory obligations: These are charges that must be paid at closing; they include closing costs, upfront mortgage insurance premium, required repairs, delinquent federal debt and funds required to release liens against the property. Requiring payment of these costs at closing can help prevent default on a reverse mortgage.
- Protections for Non-Borrower Spouses: HUD revised regulations that formerly required non-borrowing spouses of HECM borrowers to refinance their mortgages or sell their homes after the death of a HECM borrower. New regulations safeguard the ability of non-borrower spouses to remain in their homes.
Changes to the HECM loan program are designed to protect the HECM loan program and to protect HECM borrowers from losing their homes due to unintentional defaults on reverse mortgage loans.