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New rules for reverse mortgages

By Polyana da Costa ·
Friday, September 27, 2013
Posted: 5 pm ET

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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August 04, 2014 at 3:53 pm

My Ex-wife was awarded our home but the mortgage is in my name, she also is responsible for a HELOC on the property that's also in my name. I have quick claim the deed to her but she has not gotten a mortgage in her name can eligable still get a reverse mortgage at 62.

roger lewis
March 24, 2014 at 11:03 am

when we get rid of the dummies in the hud and fha maybe we can get some loans Ive been in the real estate business for over 50yrs and we can get some new rules these guys are creating slums in the cities instead of helping

March 17, 2014 at 3:46 pm

I attempted to get a reverse mortgage but was turned down because the condo complex in which I live is not FHA whatever that means.
Is there anyway around this?

January 30, 2014 at 1:27 pm

how come u guys don't cover co-ops
we own our land.

January 23, 2014 at 7:19 pm

Don: A Reverse Mortgage woudl pay off your existing mortgage and you would then only be responsible for paying your Property Taxes and Homeowners Insurance.

January 23, 2014 at 7:15 pm

Maimunah: The only time "being away from your home" becomes a problem with a Reverse Mortgage is when you no longer live in your home as your primary residence ... so a vacation or hospital stay is a non-issue and there is no time limit.

January 20, 2014 at 5:19 pm

Please make sure you have a financial institution that is truly knowledgable about the process. My house was appraised at a much lower rate because several forclosed houses were used in my appraisal. Plus you are required to make repairs on older homes which uses alot of your equity.

November 22, 2013 at 1:28 am

how long are you alowed to be out of the home for a hospital stay....trip around the world....visiting relitives.....grandchildren..........I was told if you are out of your home longer than 2 months they can take your home??????? I need to know

Ron Weismiller
November 07, 2013 at 3:09 pm

Why is the government altering a truly beneficial program for its senior population when entitlement programs are wide open with fraud and unbridled spending?

October 15, 2013 at 12:34 pm

so a reverse mortgage don't pay off the home you just get the equity in the home and I would still have to make my payments to my other loan co