New Reverse Mortgage Law — Challenges and Benefits

The Reverse Mortgage industry is now completing its second month of the new rules and regulations for the Home Equity Conversion Mortgage loan. Many of the issues and concerns which arose when the new Reverse Mortgage product was introduced are being clarified as the process begins to smooth itself out. One thing that is clear is that, although there are a number of new challenges to the new Home Equity Conversion Mortgage loan, there are multiple advantages as well. The National Reverse Mortgage Lenders Association has declared that they are satisfied with the new loan product which, they believe, will strengthen the industry and provide a needed loan option to seniors.

The new Reverse Mortgage was launched in September 2013. The original program was revamped when the Department of Housing and Urban Development (HUD) tightened the requirements on reverse mortgage loans to help to strengthen the financial stability of the program. The Federal Housing Administration (FHA) reduced the amount of equity that homeowners can access when they get a reverse mortgage and limited the amount of money they can take out during the first year.

A Reverse Mortgage allows homeowners aged 62 years or older to get a loan based on the equity that they hold in their home without having to make monthly payments on the loan. With a HECM loan the lending institution doesn’t get paid back until the house is sold.

Main Changes

The amount of money that a borrower can access with a Reverse Mortgage depends on his age, how much equity he has in the house and the interest rate on the loan. With the new rules, seniors will be able to cash out about 10 percent to 15 percent less of their equity than HUD previously allowed. While this is disappointing to people who need money fast, HUD’s rationale involves protecting borrowers from getting into difficulties by withdrawing too much of their equity and, after going through that principle, being subsequently unable to maintain their obligatory loan payments and house upkeep.

Now, for instance, a 62-year-old who obtains a loan with a 5 percent interest will be able to borrow up to 52.6 percent of the home’s appraised value, including loan fees.  That’s lower than the previous 61.9 percent that the same homeowner would have been able to borrow under the previous terms. At the same time, a 90-year-old homeowner can get up to 66 percent of the home’s value with that same interest rate. Higher interest rates result in a lower cap.

Limits

Under the new rules a homeowner won’t be able to cash out all of his allowable equity as soon as he gets the mortgage. The FHA limits the disbursement payments during the first year to no more than 60 percent of whatever the homeowner is allowed to borrow. Exceptions can be made for certain homeowners, including those with delinquent federal debt or pressing health issues.

There are other changes that the FHA is expected to initiate in early 2014. Chief among these is the requirement that homeowners demonstrate that they have sufficient income to cover required loan expenses such as property taxes and homeowners insurance. Again, this requirement aims to protect the borrowers and ensure that they don’t take out a loan that may, in the end, lead to the foreclosure on their home.