Just Approved: 2014 brings key changes in reverse mortgage rules
Updated 6:15 pm, Thursday, September 11, 2014
Mortgage adviser: John Holmgren
Loan type: Reverse mortgage for purchase; Federal Housing Administration-insured Home Equity Conversion Mortgage.
Unique features: Reverse mortgages do not require monthly payments and have income and credit requirements that are far more lenient than traditional mortgages.
Backstory: Until now, reverse mortgages have been used primarily to assist homeowners age 62 and older to remain in their homes by eliminating their mortgage payments or providing supplemental income.
These loans had no credit history or minimum income requirements, but this is about to change. Because of problems with homeowners failing to maintain their property tax and home insurance payments, starting in late January, the FHA will require lenders to verify that homeowners have the ability to pay their taxes and insurance and that their credit history demonstrates a commitment to paying obligations.
These changes, along with the reduced benefits recently adopted, mean that many seniors will not qualify for a reverse mortgage to make their homes affordable.
Many seniors seek to remain in their homes when a change to more affordable housing may be the best option.
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For example, let's say that a 62-year-old owns a home that is valued at $700,000 and the amount owed is $450,000. Also assume the payment has become unaffordable as the homeowner nears retirement.
With today's FHA loan amount limits, the amount the homeowner could finance with a reverse mortgage would only be about $312,000, or $138,000 less than the amount owed.
If the homeowner sold his home and purchased a new one using a reverse mortgage, they could buy a smaller house or a condo for $400,000 with a reverse mortgage of $200,000, a loan that would require no monthly payments.
Even with the monthly homeowners fees at condominium projects, the monthly expense including property tax would be far less than the homeowner's current mortgage payments plus property tax and insurance.
Many homeowners understandably want to remain in their homes for sentimental reasons, or because they have spent many years making their home everything they wanted it to be.
Reverse mortgages have assisted many homeowners over the years to stay in their homes when their financial position changed. A reverse mortgage for purchase can enable homeowners to down-size to a more affordable housing situation that may be more appropriate for their current lifestyle and financial situation.