Misconceptions and misunderstandings over the years have given reverse mortgages a bad name and left banks with a sour taste in their mouths. In the upcoming weeks, reverse mortgages will be going through changes that will provide a much-needed facelift in the public eye, bringing some value back into the system and restoring meaning to the significance of a reverse mortgage for seniors.
On April 27, the Federal Housing Administration will implement several new rules that will protect consumers and ensure that reverse mortgages are used for their intended purpose. Under the pending FHA requirements, borrowers who apply for new reverse mortgage loans on or after April 27 must meet a new set of income and credit requirements. The FHA will be looking at the willingness and capacity of the borrowers’ ability to continue paying property expenses, including taxes and insurance, and consider things like hardship and income to determine whether or not someone will receive the reverse mortgage. However, prospective borrowers can still apply under the current rules until then.
Over the next five years these changes should improve the quality of borrowers who take out reverse mortgages. We will see a shift from the negative label of using it to avoid foreclosure or losing your home towards a stronger retirement planning tool, like my grandparents did.
The biggest impact I see these changes having is on homeowners threatened by bankruptcy or foreclosure, who will be forced to sell their property and downsize. They may then have a chance to get a reverse mortgage on the smaller property if there is enough time.
As a Certified Reverse Mortgage Professional (CRMP), I applaud these steps taken by Congress, HUD and the FHA in the past two years to restore these home equity loans to their appropriate place in the financial services market. A reverse mortgage can provide retirees with significant benefits, the ability to tap the equity in their homes to provide a secure income stream or more funds to last through retirement and enjoy a comfortable lifestyle.
Reverse Mortgage 101: What you need to know and do to save
Regardless of your financial situation, it is important for consumers over the age of 62 to understand the facts about reverse mortgages. In fact, HUD and FHA require that each borrower receive reverse mortgage counseling from an independent third party.
Because there are many misconceptions about reverse mortgages, here is a basic outline of how they work:
- Must be at least 62 years of age, and at least 1 spouse must be 62 and over.
- You can withdraw a portion of the equity in your home, while deferring repayment of the mortgage loan or a line of credit until the home is sold or the borrower dies.
- When your home is sold, the reverse mortgage is repaid, including all interest and fees, and the equity or profits go to you or your heirs (like any other mortgage).
- If you die, you are able to leave your home to your heirs, and they will retain the equity once they sell the home.
- The lender can never come after your heirs or estate for any losses.
- You remain on the title to your home, and can sell your home at any time.
- You have the option of prepaying the loan or line of credit.
- You can never owe more than the value of the loan.
- The Line of Credit grows yearly and can never be frozen or shrunken.
- If the property value is less than the mortgage owed upon death, the heirs can buy the home at 95% of the VALUE and the loss is paid by FHA’s Mortgage Insurance Premium and not by the heirs or the estate.
- You can only apply for a reverse mortgage on your primary residence, not a second home or investment property.
- Because a reverse mortgage is a loan, you do not have to pay income tax on the money you withdraw.