Real Estate

New Rules for Reverse Mortgages

For many retired homeowners, a reverse mortgage sounds like a good idea. Today’s retirees are less likely to have a pension or enough money saved for retirement. A reverse mortgage can turn your home into a source of income.

The loans can be used for any purpose, but are often used for home modifications, repairs, medical expenses or home care that elderly people might not be able to afford without the loan.

What Is a Reverse Mortgage?

Reverse mortgages allow people age 62 and older to convert equity in their homes into cash. The homeowners must be mortgage-free or have just a small balance that will be paid off with proceeds from the reverse mortgage.

The lender then pays the homeowner, who can choose to receive a lump sum, a line of credit to be tapped as needed, or regularly monthly payments. The loan is due, with interest, when the borrower dies, moves or sells the house.

How Much Can I Borrow?

The amount of money a homeowner can obtain depends on the age of the youngest borrower, the home value and the prevailing interest rate. The older you are, the higher your home’s value and the lower the interest rate, the more money you can withdraw.

Roughly, on a $200,000 home, a 65-year-old homeowner could take out about $120,000 after closing costs and other fees. At 85, the same borrower could get about $155,000.

Over time, your loan balance grows and your home equity shrinks.

Reverse Mortgages in Trouble

Unfortunately, 9.5 percent of the 775,000 reverse mortgages currently outstanding are delinquent. Ten years ago, this was only two percent. The delinquency rate on reverse mortgages is far higher than the delinquency rate on regular mortgage loans.

Declining home prices after the housing crisis took a big toll on the federal program.

Also, delinquencies increased as up to 70 percent of borrowers opted for lump sum payouts. Often, they spend all of this money and have nothing left, as years go by, to pay for property upkeep, taxes and home insurance (for which they are still responsible).

Bank of America, Wells Fargo and MetLife have all exited the market, citing falling housing prices and difficulty assessing borrowers’ ability to repay the loans. Smaller - and often less-reputable - mortgage brokers and lenders have moved into the gap. Many seniors are losing their homes.

New Rules Passed by Congress

Congress recently passed legislation that allows the Federal Housing Authority to make sweeping changes to the federal reverse mortgage program. The new rules will take effect Oct. 1, 2013.

For the first time, lenders must perform some underwriting before making a reverse mortgage (previously, none was necessary), set aside some loan proceeds in an escrow account to cover future property taxes and homeowners’ insurance, and cap lump sum payments at 60 percent of the maximum sum for which they are eligible (or the amount needed to pay off their current mortgage).

Call a Real Estate or Estate Planning Attorney

The issues surrounding reverse mortgages can be complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the subject. It is not legal advice. For more detailed, specific information about your own situation, please contact a real estate or estate planning lawyer.

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