Q. I hear that qualifying for a reverse mortgage will soon become more difficult. Do you know anything about this?
A. Yes, beginning March 2, 2015, all persons applying for a reverse mortgage under the Home Equity Conversion Mortgage (HECM) program will need to pass a Financial Assessment. This is new! No longer will reverse mortgages be based primarily on the borrower’s age, the value of the home and prevailing interest rates. Now, for the very first time, qualifying will also depend upon the borrower’s income and credit history. This is a major development which will place reverse mortgages out of reach for some borrowers.
As you may know, reverse mortgage loans under the HECM program are insured by the U.S. Department of Housing and Urban Development (“HUD”). When the loans go sour, such as when the borrower fails to make real property tax payments and/or homeowner’s insurance premiums, HUD covers the default. This scenario has created significant expense to HUD, and has resulted in some homeowners losing their homes in foreclosure, causing much concern in Washington. Hence the new rule.
In the past, some borrowers have either been unwilling or unable to make property tax and insurance payments, placing the underlying security in jeopardy and triggering a default of the loan and sale of the home. In an effort to address this problem, the new HUD rule will require applicants to demonstrate — by income and credit history — their “willingness and capacity” to timely meet their financial obligations and to comply with the mortgage requirements.
For borrowers who cannot demonstrate a satisfactory “willingness and ability” to meet these obligations throughout the life of the loan, the following are the likely new outcomes:
1) A full Life-Expectancy Set Aside will be required out of the HECM loan proceeds, to cover all of these payments for the life expectancy of the youngest borrower; or
2) The loan will be denied.
For some borrowers, the new lifetime set-aside may be so large as to make the reverse mortgage impractical. This could occur, for example, where there is not enough equity in the home after the set-aside to generate meaningful proceeds for the borrower. This would be especially true for those borrowers who are obliged to pay off an existing mortgage as part of the reverse mortgage transaction.
While it could be argued that the new rule will make the loans “safer” for the homeowners by either imposing mandatory set-aside requirements or denying them the loans entirely, nevertheless the new rule may deprive some homeowners of the means to supplement their living expenses in retirement.
If you have been sitting on the fence about a reverse mortgage, you might consider applying immediately so that your application is on file before the March 2 deadline.
Thanks to Tim Pedersen, a Licensed Reverse Mortgage Adviser with Retirement Funding Solutions, for alerting us to the changes.
Alert: On February 26, 2015, HUD announced that it would delay the new requirement to April 27, 2015, to allow for further training of personnel and development of systems to implement the new rule.
For further reading, see HUD’s Mortgagee Letter 2014-2 issued 11/10/2014.