Making Changes to Reverse Mortgages

Traditional mortgages, borrowers, and lenders are still feeling the financial crunch that was the result of the financial crisis. Along with the traditional, the Federal Housing Administration (FHA) is also feeling the pinch with its reverse mortgage program, and as a result, the Department of Housing and Urban Development (HUD) has established guideline that make the program more restrictive by reducing the borrowing limits and increasing the insurance premiums.

The new changes will take effect on September 30, 2013. The changes include:

  • Consolidation of the HECM Saver and HECM Standard loans into one loan
  • An adjustment of the upfront Mortgage Insurance Premium (MIP) to 0.50%
  • The borrower is only allowed to access up to 60% of the principal limit at closing or within the first year.
    • The exception is if they have “mandatory obligations” which could include closing costs, existing liens being refinances, delinquent Federal debt or other debt amounts that exceed 60% of the principal. The cap is moved to meet the mandatory obligations plus 10%.
    • If the borrower will be assessed an additional 2% upfront MIP if more than 60% of the Principal limit is meet at closing or during the first year.

There are additional changes that take effect January 13, 2014. This will require borrowers to undergo an mandatory financial assessment to determine if they are capable of maintaining the property tax and insurance payments with their other income. If they are unable to meet the obligations then the payments will be drawn from the reverse mortgage and placed in an escrow account.

With the new regulations, the goal is to reduce the number of people using reverse mortgage who are already financially distressed, and prevent them from defaulting on the loan and foreclosing on the property anyways.