On April 27, 2015, new rules for reverse mortgages came out that changed the way the program works. If you’ve been researching reverse mortgage options online, you may have noticed that other websites have not been updated to reflect the reverse mortgage changes. Changes to the HECM reverse mortgage program may seem a little bit confusing.
Here’s The Deal:
Reverse mortgage qualifications have changed, and so has the amount of money you may receive. Let’s go over how the new rules may or may not affect whether a reverse mortgage is right for you.
While reverse mortgages are now harder to qualify for, they are still usually the best option available when you can qualify.
How Reverse Mortgage Qualifications Have Changed
Prior to 2008 when my mother took out her loan, the process was really pretty simple and easy. There were no income or credit requirements and pretty much anyone 62 or over with sufficient equity and breathing could get a loan. When the “Financial Assessment” requirement went into effect, everything changed.
The new reverse mortgage rules make you prove sufficient income to pay all home expenses such as:
- Property taxes
- Homeowners insurance
- Other living expenses
- A certain amount of “free cash” left over at the end of the month.
Basically, you have to prove you don’t actually need the money.
That sounds ridiculous, right?
Here’s how it works now:
If your income doesn’t meet the requirements, the lender will withhold enough money from the loan to pay those home owning expenses for the rest of your projected life. That cost is called a “set-aside” and it can be tens of thousands of dollars withheld from the loan distribution. In some cases, the set-aside is large enough that the funds you receive from a reverse mortgage are so low, the loan is no longer practical.
For example, if you’re found to be short by $200 monthly and have an expected longevity of ten years, you’ll now get $25,000 less than you would have before.
Now, if you need cash and were considering receiving $100,000 versus $125,000, in most cases the reverse mortgage would still make sense. However, if you were planning to receive $60,000 and the set-aside reduced that amount to $35,000, in many cases that would make the reverse mortgage impractical, particularly with the fees involved in accessing the product.
The Amount You Can Get (Initially) From a Reverse Mortgage is Lower Now
In 2008 the amount of money that you could expect to get on your loans was based on your age, the value of the home, and the current interest rate. Pretty straight forward.
The rule of thumb was to subtract 10 from your age and that number was pretty close to the percentage the borrower could expect. So for example a 70-year-old person with a $200,000 home could expect (70-10= 60) or 60% of the value of the home which is $120,000 in loan distribution.
The rules for calculating how much you can receive from a reverse mortgage are now more convoluted, so the best way to determine this is to start a conversation with some professionals that work in your area.
So, What do the New Reverse Mortgage Rules Mean for You?
You might qualify for a reverse mortgage in principal.
In some cases though, cuts in the amount you can borrow, limited initial distribution amount, the new financial assessment/set-aside, and the need to bring the home up to FHA standards might reduce your cash available to a level where the loan simply doesn’t make sense.
More importantly, if you currently have an existing loan on the home and hoped to use the reverse mortgage to eliminate those monthly payments, you might not have enough equity left to do so.
If you can no longer qualify, or if the numbers simply no longer work for you, the sale-leaseback option may be a better option for you.
However, typically the first step in figuring this out is connecting with some great reverse mortgage companies to get an analysis of your situation. Contact us now by clicking the picture below.