Changes to Reverse Mortgages

A federal law made major changes to reverse mortgages. A reverse mortgage is a loan for people 62 or older that lets the borrower access home equity and requires repayment upon the homeowner’s death, move or sale of the property.

A reverse mortgage was created to maintain a senior’s quality of life in certain circumstances, such as paying off an existing mortgage or other installment debts, or using funds to assist with the cost of in-home care services.

This product came under scrutiny, particularly after HUD announced that its Mortgage Insurance Premium Fund was projected to be in the negative by billions of dollars due to record-high defaults, and that reverse mortgages were playing a part.

HUD made mandatory changes to reverse mortgages. Two options that had previously been available have been eliminated: the traditional reverse mortgage and the home equity conversion mortgage saver.

The traditional reverse mortgage had the highest “cash-out” option, meaning that the senior could receive 100 percent of the proceeds in a lump sum. Under new rules, the amount of funds that a senior can access is lower than the traditional reverse mortgage.

The maximum amount that can be accessed after September 30, 2013 is 70 percent, and even that will be allowed only for “mandatory and legal obligations” such as paying off an existing mortgage. Mortgage insurance premiums have been increased. A borrower who does not access the entire amount of funds at closing is rewarded with a significantly lower mortgage insurance premium.

Additional changes took effect in January of 2014 that include conducting credit checks and requiring certain borrowers to set aside a portion of the loan proceeds in escrow accounts to cover future property taxes and insurance.