Strict New Rules for Reverse Mortgages
Applying for a reverse mortgage just got a lot tougher, said Kenneth Harney in the Los Angeles Times. Prior to last month, if you were 62 or older, you “had a good shot at getting” a reverse mortgage, which allows you to convert equity in your home into monthly cash payments or a lump sum, depending on your age and the home’s value. Tens of thousands of seniors have done it in recent years: A 65-yearold with a $250,000 home might be allowed to borrow as much as $127,000. But last month, the government imposed strict new rules that make the once simple process “much like applying for a standard home mortgage.” Applicants will now have to provide evidence of their assets and prove they can continue paying property taxes and insurance premiums. Lenders will also check borrowers’ credit reports and make sure they’ve paid real estate taxes “on time for at least the last 24 months.” If borrowers fail any of these tests, they might be rejected, or required to create a “life expectancy set-aside”—an escrow account funded from their loan proceeds. For some, the set-asides could be so substantial, “they’ll be left with minimal cash at closing,” making the process not worth the effort.
“Critics say the new rules will make it more difficult for consumers with low income or poor credit to obtain reverse mortgages,” said Jill Schlesinger in the Chicago Tribune. “But that’s just the point.” During the recession, thousands of elderly borrowers fell into default because they couldn’t pay their property taxes or insurance premiums. And after property values plummeted when the housing bubble burst, the Federal Housing Administration, which underwrites most reverse mortgages, had to be bailed out to the tune of $1.7 billion. Regulators hope the new rules will ensure that reverse-mortgage borrowers better understand the risks involved, said Casey Dowd in FoxBusiness.com. Both the fees and interest rates tend to be higher than with traditional mortgages. Plus, the interest compounds over time, so borrowers often find that they’ve depleted their equity “sooner than expected.”
These rules will undoubtedly make the reverse-mortgage application process less attractive for many seniors, said Richard Eisenberg in Forbes.com. But “those who do receive reverse mortgages will have fewer worries about them.” Stricter rules mean less risk for lenders, which should encourage more companies to get into the business and “help drive down borrowers’ costs.” For guidance on whether a reverse mortgage might be right for you, the Consumer Financial Protection Bureau has a free online guide assessing the pros and cons. You can also get free counseling through the Department of Housing and Urban Development.
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