Pay Attention to New Reverse Mortgage Rules, Protections and Cautions
The surviving spouses of HECM borrowers are now better protected against eviction. A rule, recently issued recently by the Federal Housing Administration, aims to clarify the steps that spouses need to take to prevent foreclosures. However, new study by the Consumer Financial Protection Bureau has determined that borrowers may still get into trouble due to potentially misleading advertising.
On June 12th 2015 the FHA announced a policy change that affects non-borrowing spouses of Reverse Mortgage borrowers. Potentially, any such spouse who is able to prove that s/he was legally married to the borrower, that s/he maintains primary residency in the home and has the legal right to stay in the home, will be able to continue to live in the home after the borrowing spouse dies. This is effective regardless of when the loan was made. According to the new rule, lending institutions can transfersuch loans to the Department of Housing and Urban Development upon the passing of the borrowing spouse. If the non-borrowing spouse agrees to accept responsibility for the tax, insurance and loan interest payments, s/he will be able to continue to live in the home. The surviving spouse must also commit to maintain the property as per the original agreement.
Reverse Mortgage Ads Continue to Confuse and Mislead
Reverse mortgages offer seniors, aged 62 or older, the opportunity to access the equity that they have on their home. Through the HECM loan the individual can take out a mortgage which is based on the equity. Until the FHA revised its rule in June, Home Equity Conversion Mortgage contracts required that such loans be repaid upon death of the borrower. If only one spouse signed on the Reverse Mortgage, when s/he died, the house would revert back to the lender. If a second partner was still living in that house, the lender could foreclose on the mortgage and evict the non-borrowing spouse.
A Reverse mortgage loan can be a lifesaver. However, the costs of the loan, including origination fees, closing costs, and interest which must be paid monthly on the principal, make it questionable as to whether the loan is appropriate for everyone. In addition, there are still risks – if you don’t keep up on your property taxes, insurance payments or home maintenance, the lender may foreclose.
Recently, a Consumer Finance Protection Bureau study pointed out how reverse mortgage advertisements don’t fully disclose those risks. CFPB regulates loans and credit products and follows the process of the loans to ensure that they offer the public the best option possible for their needs. The CFPB report demonstrated that many ads for HECM loans are incomplete and sometimes don’t provide an accurate description of the loan. According to the report, key loan requirements “were often buried in fine print, if they were even mentioned at all.”
The CFPB report concluded that consumers have been – and still can be — misled into signing on a HECM loan even though they don’t fully understand all of the implications of the loan.
CFPB reminds potential borrowers to make full use of the counseling sessions, with HUD-approved counselors, that are mandated by the FHA. Read up on the loan even before you begin the application process so that you’ll know which questions to ask of the counselor.
It’s also a good idea to calculate your existing expenses. If a potential borrower can’t keep up with his property taxes, home maintenance and homeowners insurance, he could risk foreclosure by taking on a Reverse Mortgage.