Changes coming to Reverse Mortgages...get it now!

Seniors who want to tap their home equity through a reverse mortgagemight want to keep a close watch on the Federal Housing Administration (FHA).

The Home Equity Conversion Mortgage (HECM) program, a reverse mortgage backed by the FHA, is showing signs of substantial stress, and U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan has a plan to relieve the pressure.

HUD proposes ‘blunt changes’

Donovan outlined his proposals in prepared testimony to the U.S. Senate Banking Committee last week. While most of his discourse concerned the FHA mortgage insurance fund, he also outlined “blunt changes” he wants to make to protect the FHA from losses in the HECM program.

Short-term changes

In the near term, Donovan said the FHA plans to consolidate its two HECM options–the Fixed Rate Standard program and Fixed Rate HECM Saver product–and adjust the factors that are used to determine the maximum amount a senior can borrow. These changes likely would result in smaller maximum loan amounts across the board.

Long-term changes

Longer term, other changes would require federal legislation or a lengthy rule-making process. These proposals include:

• Limiting the senior’s draw when the mortgage is originated to mandatory obligations, such as closing costs, existing mortgage debt and federal loans
• Performing a financial assessment of the borrower as a basis for loan approval and to determine the suitability of various HECM products for that person
• Establishing a tax and insurance set-aside to ensure sufficient equity or an annuity is available to pay taxes and insurance on the mortgaged property

What is a Reverse Mortgage

 
A reverse mortgage is a special type of home loan that lets a homeowner convert a portion of the equity in his or her home into cash. The equity built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. HUD's reverse mortgage provides these benefits, and it is federally-insured as well.

What's the difference between a reverse mortgage and a bank home equity loan?
With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow. You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes and other conventional payments like utilities, but with an FHA-insured HUD Reverse Mortgage, you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."

Can the lender take my home away if I outlive the loan?
No! You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than your home's value.

Will I still have an estate that I can leave to my heirs?
When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs. None of your other assets will be affected by HUD's reverse mortgage loan. This debt will never be passed along to the estate or heirs.
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