Reverse mortgages have been around and insured by FHA (Federal Housing Administration) since 1988. Over the last 35 years, there have been dozens of changes and improvements to make reverse mortgages better and safer than they had been historically. Before we talk about the changes, I just want to remind you of the reverse mortgage basics in case you missed my previous articles. First, reverse mortgages are a great loan option for homeowners age 62 years of age and older (there are some loan options available starting at age 55) to access some of the equity in their home, without the requirement to pay it back monthly, while still maintaining ownership of their home, and retaining the option to sell their home at any time and still be able to pass their home onto their heirs. That all sounds great, right? Well, it is great, and the reverse mortgage is a very misunderstood program. (Please note that you must always pay your property taxes, home insurance and HOA dues if applicable).
So, let’s go back a few years and discuss some of the more recent changes that FHA has implemented to make the reverse mortgage a better and safer program than it was in the past. I believe the most important change that FHA made was in 2014. The FHA change that occurred in 2014 was around spouses under the age of 62. FHA requires that you must be at least age 62 to be considered a borrower on a reverse mortgage. Therefore, if you are under the age of 62 you cannot get a reverse mortgage or be a borrower on a reverse mortgage. However, if you are married and your spouse is over the age of 62, you can be considered a “non-borrowing spouse”. Before the rule change in 2014, non-borrowing spouses had very few protections. Let me explain what I mean.
Let’s take an example. Say you are 60 years old, and you are married to someone who is 62 and you get a reverse mortgage. This is possible, but the 62-year-old would be the only borrower on the loan and the 60-year-old would be considered a “non-borrowing spouse”. Fast forward 30 years and let’s say the older spouse passes away at age 92. Before the rule change in 2014, the younger spouse (who is now 90 years old in this example) would have received a letter from their lender stating that their reverse mortgage must be paid back because the borrower (their spouse) was no longer living in the home. The 90-year widowed spouse was then forced to sell the home or refinance the loan to pay off the reverse mortgage. This was problematic for married couples who had a spouse that was under the age of 62 when they got a reverse mortgage and when the older spouse passed away. In my opinion, this was a horrible situation and caused the reverse mortgage to get a bad reputation, rightly so in these situations.
Thankfully, the FHA changed the rule in 2014 which now provides more protections for spouses under the age of 62 (non-borrowing spouses). The rule change now allows non-borrowing spouses to remain in the home and they are not required to pay off the reverse mortgage ever (extending the deferral period), as long as they are living in the home, paying property taxes, home insurance and HOA dues. This is by far one of the largest and most important changes to reverse mortgages which has made them much safer than they were before 2014.
Another major change, that took place in 2016, was centered around how homeowners qualify for a reverse mortgage. Before 2016, the requirements to qualify were only around age and home equity, that is all. There was no qualification to ensure that homeowners could afford to pay property taxes or home insurance or even maintain their home. Therefore, people could spend all the available equity in their home and if they ran out of money and failed to pay their property taxes, they would end up with a tax lien and in some cases, they lost their home to a tax default. This also happened in the case of not paying for or maintaining homeowner’s insurance as well. Ultimately, the reverse mortgage was being blamed for allowing this to happen.
Therefore, in 2016 the FHA created a new requirement called the Financial Assessment. This financial assessment ultimately requires lenders to ensure that the homeowner has enough income or assets to be able to pay for the property taxes, home insurance and home maintenance and have some money left over to meet what we call a residual income requirement. The financial assessment also requires that lenders run a credit report to check how the homeowner has repaid their obligations in the past and see if they have consistently paid on time or not. Ultimately, the financial assessment allows the lender to determine the homeowner’s willingness and ability to repay their obligations going forward which have helped to alleviate tax defaults from happening. This again is a monumental rule change that has helped to protect homeowners with reverse mortgages so they can maintain their ongoing costs and obligations of maintaining the home.
Some people have a bad taste in their mouths about reverse mortgages because of some unfortunate situations where homeowners were losing their homes as I described above. However, we all must understand these changes have once again made the program safer and better than ever before. Due to these changes and other changes as well, the reverse mortgage is not the loan it used to be. Thousands of senior homeowners can now safely utilize a reverse mortgage.
By Gabe Bodner. Gabe is a retirement mortgage planner and licensed mortgage originator in Colorado. Gabe utilizes the latest research from the top researchers to assist his clients to live for today and plan for tomorrow. To reach Gabe, call 720.600.4870, e-mail [email protected] or visit reversemortgagesco.com.