New regulations that went into effect last month aim to make sure that seniors don’t get themselves into financial trouble if they take out a reverse mortgage.
Seniors may wish to use a reverse mortgage to access their home equity, but consumer advocates have been wary of the option, especially if it leaves homeowners short of cash to pay their taxes and insurance. (Update: The Consumer Finance Protection Bureau warned that many older Americans are misled by ads for reverse mortgages, so evaluate those with care.)
In the past, homeowners didn’t have many obligations when applying for a reverse mortgage. The mortgage holder generally needed only to keep the taxes on the property current and pay insurance to hold up their end of the deal. Even so, some homeowners did not budget enough for living or medical expenses, and ended up falling behind on homeowner insurance and property taxes.
The largest provider of reverse mortgages, the Federal Housing Administration, is now requiring more paperwork and stricter background checks to prove that homeowners can keep up with those payments.
“All FHA-insured reverse mortgage borrowers will now have their financial status—including income, expense, and credit history—reviewed to ensure the borrower has the willingness and financial means to meet ongoing obligations,” says Kurt Kessler, reverse mortgage manager for Commerce Home Mortgage.
If you don’t meet the minimum requirements for approval, you’ll also have to set up a life expectancy set-aside (LESA). This is an escrow account to pay property charges over a calculated time period. It can be partly or fully funded from the loan proceeds. The amount set aside is determined simply by the youngest borrower’s life expectancy.
“For example, a 73-year-old borrower’s life expectancy is 13 years. This means that the LESA will be calculated based on 156 months,” Kessler says.
If you don’t have enough equity or private funds to put in place to cover the account, your application may be denied, but lenders may take hardships and other individual situations into account, Kessler says.
The future of reverse mortgages
While most homeowners who met the requirements for minimum age and equity in their home were able to get a reverse mortgage in the past, that may change now.
“It’s hard to tell how many seniors will be affected; most are guessing a drop of from 6% to 20% of the current market,” Kessler says.
Despite the potential drop, Kessler believes the changes will help keep the reverse mortgage industry healthy.
“Moving forward, there will be an even greater need for reverse mortgages as baby boomers start looking for ways to pay for long-term care and supplement their underfunded retirements. I would much rather we bite the bullet now to ensure the longevity of this much-needed program,” Kessler says.
If you’re considering applying for a reverse mortgage, it might be wise to look for a specialist. Many loan officers work primarily—or even exclusively—in reverse mortgages. According to Kessler, these pros will be better able to help you navigate the changes and find the right reverse mortgage for your situation.