The federally-insured reverse mortgage program has undergone some recent changes—with more on the way—that offer more protections for new borrowers.
If you are aged 62 or older and you’re considering a reverse mortgage, a non-recourse loan that allows homeowners to access their home equity without needing to make monthly repayments, here’s what you need to know about the new chances and how they’ll impact you:
Phase One: HECM Programs Streamlined
While many aspects of the home equity conversion mortgage (HECM) program have remained the same, there are some new rules intended to make it a safer financial product for borrowers.
Under the Reverse Mortgage Stabilization Act of 2013, the Federal Housing Administration, (which insures HECMs) has the authority to implement these changes that aim to make the program easier for borrowers to use responsibly, and also protect the FHA’s insurance fund.
The first round of changes to the HECM program is effective September 30.
There is now one loan program for all borrowers, with new requirements about how you can access your proceeds and how much you can borrow.
Consumers will also be able to choose the existing HECM for Purchase product, which allows borrowers to buy a new home and simultaneously take out a reverse mortgage.
Borrowers will still face a mortgage insurance premium, but the upfront premium amount now depends on how much of the loan is taken at closing.
New Rules for Accessing your Proceeds
Borrowers can still choose either a fixed interest or an adjustable interest rate with the streamlined HECM product, and now have some new guidelines for how they can access their loan proceeds.
Starting September 30, the FHA is limiting the amount of money that you can draw from your loan at closing and in subsequent draws for the first 12 months from closing.
At the time your loan closes, you’ll be able to take the greater of 60% of the principal limit (the total amount of reverse mortgage proceeds you are eligible to receive), or the amount necessary to cover mandatory obligations you must fulfill as a term of the loan, plus 10% of the principal limit.
Mandatory obligations range from paying off an existing mortgage to covering loan origination and closing costs or making necessary repairs to your home.
There’s also an upfront mortgage insurance premium that’s dependent on the amount borrowed upfront, as well an annual insurance premium of 1.25% of your loan’s principal limit.
This rule for how you can access your loan is meant to help borrowers preserve their available proceeds throughout the life of the loan.
Phase Two: The Financial Assessment
Phase two of the changes won’t take effect until mid-January, when lenders will begin looking at borrowers’ financial situations to determine whether they can meet their loan obligations over time. While reverse mortgages don’t require monthly repayments, they do require a couple things, including keeping up with homeowners insurance and property taxes.
If you get a reverse mortgage on or after January 13, 2013, you will need to submit a detailed credit history analysis and details about income and other sources of money, so lenders can determine whether your budget will be able to keep up with ongoing obligations including taxes and insurance after you get the loan.
Some borrowers may be required to set aside some funds to meet these obligations over the life of the loan.
While the financial assessment changes have not yet been implemented, they are something for prospective borrowers to be aware of as they could impact your eligibility for a reverse mortgage.
If you have any questions about the changes to the HECM program or want to find out more about this loan could work in your situation, contact us today.
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