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Beginning March 2, 2015, borrowers will have to pass a financial assessment before they can take out a reverse mortgage. The new rules are meant to prevent loan defaults, but they will make it much more difficult to get a reverse mortgage.
A reverse mortgage allows a homeowner who is at least 62 years old to use the equity in his or her home to obtain a loan that does not have to be repaid until the homeowner moves, sells, or dies. But the homeowner is required to pay property taxes and homeowners insurance premiums on the property.
The loans are expensive and controversial. In recent years there have been complaints over problems with reverse mortgages, including large costs, aggressive marketing techniques, and the danger of default if insurance and property taxes aren’t paid on time.
Over the past few years, the government has begun addressing problems with the loans, including eliminating a popular loan type. For example, as of April 1, 2013, the federal government no longer allowed home owners to apply for a HECM Standard fixed-rate, lump-sum reverse mortgage. Borrowers still can apply for a line of credit or monthly payments at an adjustable interest rate under the HECM Standard program.
The reason for the change is that there were more defaults with this type of loan as opposed to other loans. While it isn’t possible to default on a reverse mortgage payment, home owners must make timely payments of property taxes and homeowner’s insurance in order to keep the loan in place. If taxes and insurance aren’t paid, the loan can default.
The new financial assessment rule, which applies to reverse mortgage loans under the Home Equity Conversion Mortgage (HECM) program, requires borrowers to demonstrate the ability to pay property taxes and insurance premiums on the property. For the first time, lenders will look at the borrowers’ income and credit histories to ensure they can timely meet their financial obligations.
Borrowers who don’t meet the financial requirements for the loan have the option of setting aside money from the loan to pay the property taxes and insurance premiums. The amount of the set-aside depends on a formula, but it can be quite large and may make the loan impractical for some borrowers. Borrowers who meet the credit requirements for the loan, but don’t have enough income can do a partial set-aside, which requires them to put aside less money.
Sources: ElderLawAnswers January 28, 2015
