As of April 27, the federal government will be imposing tougher credit standards that are expected to make applying for a reverse mortgage a lot more difficult.
Reverse mortgages, which are only available to those 62 and older, are a way for home owners to get equity out in their homes and convert it to cash. The borrower does not face any repayment requirements until they sell the house, move out, or die. The borrower, however, is required to stay current on property taxes, insurance fees, and keep the home in a reasonable condition.
But the ease of getting these loans, which usually was just based on age and equity, is about to change. In the aftermath of the recession, many borrowers defaulted on their reverse mortgages, failing to pay the required property taxes and hazard insurance premiums. Also, due to fallen real estate values at the time, some home owners faced foreclosure, which amounted to huge losses for the Federal Housing Administration, one of the main insurers of reverse mortgages nationwide.
That has prompted the changes that will take effect as of April 27. Lenders will now scrutinize borrowers' income and financial assets, and applicants will be required to demonstrate upfront that they have both the willingness and capacity to meet the loan obligations. Lenders will pull borrowers' credit reports, and applicants will have to show they've paid their real estate taxes, homeowner association fees, and other property charges for at least 24 months. Lenders may also now require some applications to create a "life expectancy set-aside," where they have an account with part of their loan proceeds.
Reza Jahangiri, chief executive of American Advisors Groups, the nation's highest volume reverse mortgage lender, says the company expects a decline in reverse mortgages due to the changes. The company is expecting an 8 percent to 10 percent decline.
Maggie O'Connell, who originates FHA-insured reverse mortgages for the Federal Savings Bank from offices in Reno and Danville, Calif., says in the long-term the tougher rules for reverse mortgages is probably a good thing for the market because it will prevent financially weak borrowers from taking out loans they can’t handle and that eventually winds up in default.
Source: "Applying for Reverse Mortgages Will Get Tougher," The Los Angeles (April 12, 2015)
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