Reverse Mortgages: Big Changes Ahead
To protect borrowers, the federal government will soon slap restrictions on these loans. Here’s what’s coming — and how to shop wisely.
Richard Eisenberg is the senior Web editor of the Money & Security and Work & Purpose channels of Next Avenue. Follow Richard on Twitter @richeis315.
On Wednesday, the U.S. Senate joined the House in passing legislation giving the Federal Housing Administration authority to alter its Home Equity Conversion Mortgage program, or (HECM), protect borrowers and help the agency avoid a federal bailout. The agency is expected to reveal later this month exactly how it’ll alter the rules, which could take effect as early as Oct. 1.
The changes will likely make it harder for some people to qualify for reverse mortgages. But they will also help prevent borrowers who have them – women, especially – from being booted out of their homes.
A reverse mortgage is a loan for people 62 or older that lets you tap your home equity and requires repayment upon the homeowner’s death, move or sale of the property. If you’re thinking about getting one, the impending revisions to the federally insured program may be reason to apply soon – before they take effect.
(MORE: What to Know Before Getting a Reverse Mortgage)
Two more reasons you might consider applying for a loan that’ll let you age in place:
The National Council on Aging, which offers applicants the type of counseling that’s required by law to get a reverse mortgage, has reduced its $125 fee to $90 through Sept. 30. (Call the council’s toll-free number for details: (800) 510-0301.)
The amount of money you can receive from a reverse mortgage may drop if interest rates keep rising, as expected. That’s because the maximum size of a borrower’s loan depends on a variety of factors, including your age, the value of your home and interest rates (the higher they are, the less money you can get).
Some reverse mortgage experts are happy about the news about coming changes in the HECM program, but others aren’t.
(MORE: How to Get the Best Reverse Mortgage Deal)
“The National Council on Aging is pleased that Congress has provided HUD the tools it needs to quickly shore up the program for all involved, including strengthening consumer protections,” says Ramsey Alwin, the nonprofit’s senior director for economic security.
But AARP is upset that the FHA will be allowed to unilaterally amend the program quickly without time for outside experts to weigh in. “We are deeply disappointed that the agency can now circumvent due process in an attempt to solve problems in the HECM program without the benefit of public comment,” says Cristina Martin-Firvida, AARP’s director of financial security and consumer affairs.
Here are four changes you’re likely to see:
1. Applicants will be required to undergo “financial assessments.” With a regular mortgage, of course, you must prove to the lender that you’ll be able to make the payments. Reverse mortgage applicants haven’t had to demonstrate their financial fitness for approval since they don’t make monthly payments. They soon will need to show they're good risks for these loans, however.
Financial assessments – which will evaluate a prospective borrower’s cash flow and future obligations – are designed to prevent giving reverse mortgages to people who can’t make their property tax and homeowners insurance payments. Some 9.8 percent of reverse mortgage borrowers are in “technical default” for nonpayment of those required expenses, which can lead to foreclosure.
Credit scores will probably be part of the financial assessment. That worries some consumer advocates who fear the change could lead to the rejection of worthy applicants.
“We don’t believe a credit score is relevant,” says Lori A. Trawinski, senior strategic policy adviser for the AARP Public Policy Institute. “Many older people don’t use credit and have not had a mortgage for many years, so they may not have a credit score.” She fears that such applicants might then be turned down for reverse mortgages.
Gerri Detweiler, director of consumer education for Credit.com, is also concerned. “Some seniors may find their credit scores are lower due to the fact that they simply don’t use much credit at that stage in their life,” she says. “In addition, this could hurt the seniors who might need reverse mortgages the most: those who are house-rich but cash-poor and are trying to use the equity in their home to resolve financial problems or pay off debts.”
Most reverse mortgage borrowers use their loans to pay off existing mortgages and other debt. And according to the United States of Aging Survey released this week by the National Council on Aging, United Healthcare and USA Today, 37 percent of people 60 and older would consider using their home equity to stay in their home, if necessary.
(MORE: 8 Things to Consider Before Remodeling to Age in Place)
The National Reverse Mortgage Lenders Association’s president and chief executive, Peter Bell, believes credit scores will instead be more likely to help some people get approved for the loans.
If an applicant’s financial assessment gives a lender pause but he or she has a good credit history, “that might be a compensating factor,” Bell says. “Credit scores would be a very marginal part of the financial assessment.”
2. Borrowers deemed risky would have a portion of their reverse mortgage’s proceeds withheld to cover property taxes and homeowner’s insurance. This so-called “set aside” rule would be the equivalent of escrow for a conventional mortgage.
3. There’ll be a limit on how much money you’ll be able to receive at closing. The HECM program is expected to cap that amount at the total of: what you’ll need to pay off any existing liens on the property (your original mortgage, for instance), the reverse mortgage’s closing costs (which can be quite steep) and a modest stipend to pay other day-to-day expenses. The rest of the proceeds would be available as a line of credit or paid out in fixed monthly payments.
4. Surviving spouses of reverse mortgage borrowers would be protected from eviction. Today, a spouse who’s not listed on the loan documents can be forced out of the home if he or, typically, she isn’t able to pay off the full mortgage balance when the reverse mortgage holder dies.
AARP, which has sued the U.S. Department of Housing and Urban Development, to prevent such evictions, says that under the current rules, thousands of people could find themselves in this predicament.
The government is expected to address the problem by requiring lenders to put both spouses’ names on reverse mortgages, even if one isn’t on the deed or is younger than 62.
As the federal Consumer Financial Protection Bureau, or CFPB, noted in its exhaustive report on reverse mortgages last year, these loans are “complex products and difficult for consumers to understand.”
If you’re considering turning your home into a source of cash with one, here’s my advice:
Go online and read one of the excellent plain-English consumer brochures about reverse mortgages. I particularly like the National Council on Aging’s “Use Your Home to Stay at Home” booklet and the CFPB’s “Considering a Reverse Mortgage?”
Meet with a federally approved reverse mortgage counselor before applying. You can find one by calling the U.S. Department of Housing and Urban Development, (888) 995-4673, or searching the government’s website.
If you decide to apply for a reverse mortgage, you and the counselor can then discuss the particular loan details before committing. Keep in mind, however that reverse mortgage counselors are prohibited from providing advice, Trawinski says.
Steer clear of counselors who get paid only if clients sign up for reverse mortgages. That fee structure “could undermine their impartiality,” according to the CFPB.
Consider alternatives that could provide you with extra income or lower your expenses. A refinancing or home equity line might be a better, less expensive choice, for example.
The NCOA’s Homeequityadvisor.org site can help you weigh various options. Its online Benefits Checkup tool will tell you about programs that could lower your property taxes or subsidize the cost of your medications, health care, food, housing or utilities.
You might also want to consider selling your home and downsizing to reduce housing expenses, Alwin says.
Don’t be taken in by bogus marketing claims. I’m not talking about those TV commercials with Fred Thompson, Henry “The Fonz” Winkler or Robert Wagner, with their alluring come-ons about a “smart, safe option” that provides “tax-free cash” but “never any income or credit score requirements.” (The last description will soon need to go, though.)
I’m referring to direct-mail solicitations boasting, for instance, that reverse mortgages provide “income for life.” In reality, what they’re giving you is an advance on a loan and you’ll need to pay it off if you move or sell your home.
A reverse mortgage can be a useful way to remain in your house and supplement your income. But be sure you know what you’re getting into before you sign on the dotted line.