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Tighter Reverse Mortgage Rules Protect Borrowers

HI10-16-13v1Long marketed to retirees and those heading toward retirement age, reverse mortgages just got harder to negotiate, thanks to new regulations that make those equity-based loans more expensive and harder to get. And the goal, according to the Federal Housing Administration, is to get people to plan retirement options more carefully.

According to some housing professionals, reverse mortgages are generally just not a good idea. As the name implies, a reverse mortgage is the exact opposite of a standard mortgage, where a homeowner makes regular payments on the loan to a bank or other lender. In a reverse mortgage, a borrower receives loan payments from the lender against the value of a home. The reason these loans are so attractive to retirees the reverse mortgage doesn’t have to be paid back until the homeowner dies, sells the house or creates another primary residence.

This kind of loan is only available to people age 60 or older. The money from a reverse mortgage can be used for all kinds of things, including medical bills, home repairs – and even paying off a current mortgage. There’s interest to pay on a reverse mortgage loan of course, and the recent low rates have boosted the numbers of seniors taking out such a loan.

Though easy availability and low interest rates account for the popularity of reverse mortgages, another reason for their recent surge has to do with poor retirement planning, according to the FHA. Rather than saving for retirement or making other kinds of provisions for an income during the “golden years,” more and more people are simply turning to reverse mortgages to guarantee a cash flow.

So, to encourage people to make better retirement decisions, the FHA has made reverse mortgages both harder to get and more expensive. Loan amounts have been reduced, fees are higher and there are new limits on how much a homeowner can get in the first year of the loan.

The biggest change, though, comes in the form of tighter assessment standards. Where in previous years a reverse mortgage was pretty well guaranteed if a homeowner had equity and decent credit, lenders are now required to do a more thorough assessment and require iffy applicants to set aside money to cover interest payments and other fees associated with the loan.

Whether or not the FHA is sincere in its dedication to making people plan better for retirement, the new rules make these loans a less easy fix for money problems. As Jason Hartman points out, home equity can be a risky proposition – and a mortgage that goes forward, not back, offers a better route to financial security.  (Top image: Flickr/byrdiegyrrl)

Anderson, Mike. “Retirement Just Got Harder: The FHA Sets Limts on Reverse Mortgages.” The Motley Fool. MotleyFool.com. 30 Sep 2013

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