Reverse mortgages have been giving home owners over the age of 62 the chance of borrowing money against the equity in their homes. Seniors are usually on low fixed income, so reverse mortgages are very helpful for those who wish to pay off some debt, have unpaid medical bills, or simply need the money for living expenses. Not having the chance of finding a better job or investing money into something that will generate a profit can be really tough financially on seniors, especially when compared to younger people.
Reverse mortgages allow those who qualify to borrow money in the form of a lump sum, which allows them to take out the entire loan proceeds at once, receive the money as monthly payments, or receive as a line of credit. The money that you take out from a reverse mortgage can be used for virtually everything, from paying off your mortgage to paying for utilities and food (Read: You Can Borrow How Much With a Reverse Mortgage?). This is a great way for seniors to acquire some much needed money without having to worry about paying it back. The debt must be paid off if the home owner moves, sells the home, or dies. If the borrower dies, the remaining heirs will have to pay off the reverse mortgage if they want to keep the home. If the heirs decide to sell the home, they come into possession of any equity remaining after selling the home.
Unfortunately, it looks like taking out a reverse mortgage is going to become more difficult. People who were hoping to take out a reverse mortgage in order to resolve their financial problems will, most likely, have to look at other loan options as well. New rules will now impose stricter limits on how much someone can borrow with a reverse mortgage. The pricing of a reverse mortgage will change and the requirements will become much tighter. To read more about the tightening restrictions click here.
Why are There Changes Being Made?
After the economic crisis, more and more home owners took out reverse mortgages because they were having a difficult time making ends meet. Most of these borrowers took out the whole loan amount at once, putting a strain on the program’s funds. Lenders also recommended taking out the money as a lump sum because they were being paid more than when borrowers took out the money as monthly payments or lines of credit.
Lenders were unable to recuperate all the money that they gave out because home prices went down, so the reverse mortgages were not paid off in full. This has also hurt the reverse mortgage program, making these changes inevitable. Most reverse mortgages are backed by the Federal Housing Administration (FHA), who is implementing these changes in order to strengthen the program. The FHA is hoping that borrowers will start treating the equity in their home more carefully by tapping it slowly than before. Go here to read more.
What Will the Changes Be and How They Will Affect You?
Before these changes, almost anyone who met the basic qualifications could take out a reverse mortgage. Borrowers pretty much only had to be 62 or older and use the home as a primary residence. But things are about to change, so here are 3 reasons why getting a reverse mortgage will be harder.
Reason #1 – Reverse Mortgage Loan Limits
The amount that the borrowers can withdraw in the first year will be reduced by 40 percent. For example, if a borrower was eligible to withdraw $250,000 before the new rules, he or she will only be able to withdraw $150,000 once the new rule regarding the first year withdrawal is implemented. Borrowers whose existing mortgage and other debts exceed the 60 percent limit will be able to withdraw a little more. Home owners will have to pay off those debts, which are considered mandatory obligations, so they can withdraw enough to pay them, plus an extra 10 percent of the maximum amount that is allowed. Credit cards do not count as mandatory obligations, so borrowers cannot take out extra money to pay them off.
Also, the two types of reverse mortgages that are available now, the standard and the saver, will be pretty much eliminated and consolidated into one reverse mortgage. The amount that you can borrow will still be influenced by the youngest borrower’s age, the value of your home, and the interest rate. However, once the new reverse mortgage rules are implemented, most borrowers will have access to 15 percent less equity.
Reason #2 – Reverse Mortgage Pricing
The cost of taking out a reverse mortgage will be calculated based on the amount that is borrowed. Borrowers who take out more than 60 percent of the allowed amount in the first year will have to pay higher upfront costs. People who stay within the limit will pay .5 percent of the appraised property value as an upfront mortgage insurance premium, while those who go over the 60 percent limit in the first year will have to pay a 2.5 percent mortgage insurance premium. The annual mortgage insurance premium will remain 1.25 percent of the loan balance for both types of borrowers (Read: Want a Big Cash Payout? Don’t Look to Reverse Mortgages!).
Reason #3 – Reverse Mortgage Qualifications
The new reverse mortgage rules require lenders to make sure that their borrowers are able to afford paying property taxes and insurance during the life of the loan. Lenders will have to analyze the borrower’s income and credit history before giving out a reverse mortgage.
Lenders will also need to factor in the borrower’s living expenses, such as utilities and property related costs, and determine if the borrower has enough money left to pay for insurance and taxes. If your lender comes to the conclusion that you are unable to pay your taxes and insurance after all the other expenses, you will be asked to set money aside or it will be deducted from your reverse mortgage payments (Read: Reverse Mortgages – Not the Smart Investment You Thought They Were).
All these new rules and requirements have the potential of disqualifying many borrowers that would have easily qualified for a reverse mortgage in the past, but should not be a big problem if you take the time to work on your budget a little bit. Taking out a reverse mortgage is becoming harder, so it would be wise to look into other types of loans, as well. Reverse mortgages are designed for seniors, but that doesn’t mean you won’t be able to take out another loan, if it suits you better.