On Oct. 1, new rules governing reverse mortgages were put in place by the Federal Housing Administration, or FHA, which insures most reverse mortgages in the U.S. Following are some of the key changes:
1) In the past, there were two types of reverse mortgage products, the standard and saver. Both have been rolled into one product, and the major change is that home owners will now be able to tap into about 15 percent less of their home’s equity than under the old rules. Also, the upfront mortgage insurance premium has been revised.
2) The new rules also cap the amount of money borrowers can take in the first year of their reverse mortgage. That limit is 60 percent of the total amount a borrower is entitled to withdraw based on the equity in his or her home. The disbursement may pay mandatory obligations such as a mortgage, and include an additional 10 percent of the initial principal limit.
3) The upfront mortgage insurance premium structure has two available pricing options, depending on the initial proceeds percentage. If the disbursement does not exceed 60 percent of the borrower’s home equity, then the upfront MIP is .05 percent of the maximum claim amount. If the initial proceeds exceed 60 percent, then the MIP is 2.5 percent of the maximum claim amount.
4) Borrowers will have the option for a fixed interest rate and can take a single lump sum payment at closing that is equal to 60 percent of their equity, or mandatory obligations plus 10 percent of their equity. However, funds that remain will not ever be available to the borrower.
5) Mandatory financial assessment requirements are coming January 14, 2014. These include credit history, cash flow and residual income analysis to determine the borrower’s capacity to make property tax and insurance payments on the home.
6) Set-asides – Borrowers who don’t qualify for a reverse mortgage based on the financial assessment will be required to set aside a portion of their loan proceeds, or withhold a portion of their monthly loan disbursements, for the payment of property taxes and insurance. Lenders can require amounts to be set aside based on the borrower’s life expectancy.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.