Senior homeowners who want to cash out equity with a reverse mortgage will have to play by new rules when applying for a loan after the end of this month.
The Department of Housing and Urban Development has tightened the requirements on reverse mortgage loans backed the Federal Housing Administration to help to strengthen the financial stability of the program. The FHA will reduce the amount of equity that homeowners can access when they get a reverse mortgage and limit the amount of money they can take out during the first year.
Reverse mortgages allow homeowners 62 years or older to get a loan backed the equity in their home without having to make monthly payments on the loan. With a reverse mortgage, the lender doesn't get paid back until the house is sold.
The main changes
The amount of money you can borrow with a reverse mortgage depends on your age, how much equity you have and the interest rate on the loan. With the new rules, seniors will be able to cash out about 10 percent to 15 percent less of their equity than HUD currently allows.
"Most of the rules basically help protect the borrowers from themselves," says Robert Stammers, director of investor education at the CFA Institute.
Once the changes go into effect, a 62-year-old getting a loan with a 5 percent interest will be able to borrow up to 52.6 percent of the home's appraised value, including loan fees, the Federal Housing Administration says. That's down from the current 61.9 percent the same homeowner is currently allowed to withdraw.
A 90-year-old homeowner with that same interest can get up to 66 percent of the home's value. A higher interest rate results in a lower cap.
Limits on how much you can borrow during the first year
Under the new rules, homeowners won't be able to cash out all of their allowable equity as soon as they get the mortgage. The FHA will limit the disbursements in the first year to no more than 60 percent of whatever the homeowner is allowed to borrow. There are exceptions for certain homeowners, including those with delinquent federal debt.
Starting next year, homeowners will also have to show they have sufficient income to cover expenses such as property taxes and homeowners insurance.
"Before, they didn't do income verification because you don't have to pay the loan until you move from the house," Stammers says. "But they are putting in some safeguards to make sure borrowers have enough money to cover their mandatory expenses on the property."
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