The new reverse mortgage can be beneficial for senior homeowners who have built significant equity in their homes, and need a source of supplemental income.
If you are house rich but cash deprived, a reverse mortgage may be able to bridge the financial gap.
A Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, can help seniors be more financially secure and maintain their quality of life throughout retirement.
Since the 2009 housing crisis, the HECM program has seen significant changes in the demographics and behaviors of borrowers. In order to protect the program, on September 3, 2013 the Department of Housing and Urban Development (HUD) announced major changes to the HECM product to help secure the long-term viability of the program.1
Limited fund disbursement at closing or during the first year after closing
To help reduce the rate of default and help protect consumers, the new reverse mortgage limits the maximum amount a borrower can receive during the first year of the loan to 60% of the borrower’s available loan amount. For example, if a borrower qualifies for $200,000, $120,000 of that will be available at closing or during the first year.
There are exceptions that allow the borrower to receive more during the first year if the homeowner has an existing mortgage or other liens on the property. In a situation such as this, “you can withdraw enough to pay off these obligations, plus another 10% of the maximum allowable amount.”2
Single Disbursement Lump Sum Payment
Borrowers were originally required to take the entire lump sum payment available, when choosing this option. However, the new reverse mortgage allows borrowers to choose a “mini” payment option that enables them to take less money at closing.
For example, if you are eligible for a $100,000 loan, but don’t want to take that much, you can choose a single disbursement option equal to 60% or less of that sum. Although this can be a good way to maintain equity in the home, borrowers will have to refinance into a new HECM loan should they require more funds at a later date.2
Mortgage Insurance Premium (MIP)
One of the fees the borrower is required to pay is the MIP which is paid to the Federal Housing Administration and is based off the amount of funds borrowed during the first year. “As long as you don’t take more than 60% of the available funds in the first year, you will be charged an upfront MIP of 0.50% of the appraised value of the home.
If, however, you take more than the 60%, the upfront MIP will be 2.50%.”2 The annual MIP will remain at 1.25% of the outstanding loan balance.
There are also some additional HECM guideline changes that will be coming sometime in 2014. These changes include a financial assessment and set asides.
HUD is concerned about borrowers defaulting due to not being able to pay their property taxes and insurance. As a result, HUD is finalizing guidelines that lenders must follow when conducting a financial assessment of prospective borrowers.2
If it is determined during the financial assessment that the borrower may not be able to afford future taxes and insurance payments, they will be required to set aside a specific amount of the loan funds to pay these in the future. The amount of the set aside will be based on the life expectancy of the youngest borrower.
Should the set aside run out during the life of the loan, the borrower is still required to pay taxes and insurance.2