PRACTICAL MONEY SKILLS: Rule changes tighten reverse mortgage eligibility

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Special to the News Bulletin
Published: Tuesday, February 11, 2014 at 15:51 PM.

Reverse mortgages have become increasingly popular in recent years, as cash-strapped seniors seek ways to keep pace with rising expenses – not to mention cope with the pummeling their retirement savings took during the Great Recession.

But the Department of Housing and Urban Development noticed that borrowers increasingly have been opting to withdraw most or all of their home equity at closing, leaving little or nothing for future needs. Consequently, by mid-2012 nearly 10 percent of reverse mortgage holders were in default and at risk of foreclosure because they couldn't pay their taxes and insurance.

That's why Congress authorized HUD to tighten FHA reverse mortgage requirements in order to: encourage homeowners to tap their equity more slowly; better ensure that borrowers can afford their loan's fees and other financial obligations; and strengthen the mortgage insurance fund from which loans are drawn.

Here are the key changes:

Most reverse mortgage borrowers can now withdraw no more than 60 percent of their total loan during the first year. Previously, borrowers could tap the entire amount on day one – a recipe for future financial disaster for those with limited means.

The first-year limit may be waived for certain homeowners whose "mandatory obligations" (e.g., upfront insurance premiums, loan origination fees, delinquent federal debt, etc.) exceed the 60 percent amount; but they'll have to pay a higher upfront mortgage insurance premium – 2.5 percent of the home's appraised value instead of the normal 0.5 percent. (Note: Credit card debt isn't considered a mandatory obligation, so those with significant credit card debt may not be able to withdraw enough to pay off their debt.)

Generally, borrowers can take the money either as a lump sum at closing (with a fixed-rate loan), or as an ongoing line of credit or monthly payments (adjustable rate loan). However, lump-sum payments are now subject to the 60 percent mandatory obligations test, so to withdraw more than that you'll have to go the line-of-credit route, at least for the first year; after that, you can tap the remaining balance if you wish.



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