Get Ready for Tighter Reverse Mortgage Standards

If you’ve been planning to get a reverse mortgage, be prepared to meet higher loan requirements in the near future. At least that’s what officials at the Federal Housing Administration (FHA) are saying.

At this point basically any homeowner over the age of 62 can qualify for a reverse mortgage, but after many defaulted during the housing market crash, the FHA is looking to tighten up the rules on these loans.

A reverse mortgage is a way for retirement-age homeowners to tap into their home’s equity. Instead of making payments to the bank, the bank pays borrowers a monthly sum or gives them a line of credit. How big the loan is depends on how much equity a homeowner has in his home, and it does not have to be repaid until the homeowner vacates the property. Then the home is sold and the bank takes its share of the profits, or if an heir wants to keep it, she has to repay the loan herself.

The FHA has been running into problems with borrowers not keeping up with their property taxes and homeowners insurance, which has led to a default rate of roughly 10 percent of all reverse mortgages. Because of this the agency, pending Congressional support, wants to make a financial assessment and possibly a credit check part of the loan approval process. The New York Times said the FHA will, “look at how much cash a borrower had left over after paying typical living expenses, in addition to property taxes, homeowners insurance, any homeowner association dues, utilities, taxes and other debts. Credit scores would be considered, though the agency said they would not be a predominant factor.”

And borrowers would have to set up an escrow account for taxes and insurance. Risky borrowers might be required to deposit an amount that would cover those expenses for the life of the loan, while those with better financial situations might only have to have two years worth of payments.

The FHA has also proposed making the cap much lower on how much borrowers can receive. All of the changes are in an effort to reduce defaults and the resulting financial stress on the agency.

The House has already approved the FHA changes and the measures are now being passed through the Senate.

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