Reverse mortgages have come a long way since 1988 when President Reagan signed the bill into law which allowed The U.S. Department of Housing and Urban Development (HUD) to insure these loans through the Federal Housing Agency (FHA). The most popular reverse mortgage program is the Home Equity Conversion Mortgage (HECM) which has been an important source of retirement income for seniors.
Growing Pains
The first 25 years of the reverse mortgage program experienced many growing pains which initially gave the program a poor reputation. In order to correct the issues it faced, rules and regulations were implemented in 2013 which strengthened and protected the viability of the program, as well as further protected the borrowers. The main changes include:
Safer, Stronger, and Less Risk for Homeowners
In an effort to protect the borrower’s home equity, a policy allowing seniors to access no more than 60% of the lending limit in the first year was created.
More Thorough Evaluation of Finances
When applying for a reverse mortgage, it is now required to complete a financial assessment to evaluate the borrower’s ability to meet their financial obligations before loan approval and closing. During the assessment, the lender will verify credit and income (however, there isn’t a minimum credit score required. In some situations, a portion of the loan proceeds may be set aside to help the borrower pay for property taxes and homeowner’s insurance.
Inclusion of Spousal Protection
One of the biggest concerns was what happened to the home in the event the borrowing spouse had passed. A co-borrowing spouse can remain in the home if the older spouse passes away without needing to pay the loan back in full as long as they continue to pay taxes and insurance. As of 2014, the non-borrowing spouse also gained protections. Although a non-borrowing spouse wouldn’t continue to receive payments after their spouse’s passing, they could remain in the home as long as they continued to meet the loan obligations.
Increased Lending Limits
The HECM lending limit, commonly known as the maximum claim amount, was established in 2006 and has increased annually since 2017. The 2020 lending limit was set at $765,600 which allows the borrowers more flexibility in the amount of proceeds they wish to tap into.1
Research and Reverse Mortgage
Before these changes were made to the program it was viewed as a product of last resort by the Financial Industry Regulatory Authority (FINRA) until 2014 when responding to research conducted by the Journal of Financial Planning in 2012. Additionally, research by Dr. Wade Pfau concluded that a HECM can be a powerful tool in retirement if applied for early on and used strategically in retirement instead of applying later on when other funds have been depleted.
Want to Learn More?
If you’re interested in leveraging a reverse mortgage in your retirement plan, call 800.976.6211 for a free consultation with a licensed loan advisor.
Important Disclosures
1 https://www.housingwire.com/articles/fha-reverse-mortgage-limit-set-to-rise-in-2020/