Last year, new rules for reverse mortgages came out that changed the way the program works.
Changes to the HECM reverse mortgage program may seem a little bit confusing.
Here’s the Deal: Reverse mortgage qualifications changed, and so has the amount of money you can receive.
Is A Reverse Mortgage Right For You?
The truth is that reverse mortgages are now harder qualify for; however, when you can qualify, they are still usually the best option available.
Before 2008, when my mother took out her reverse mortgage loan, the process was really pretty simple and easy. There were no income or credit requirements. In fact, pretty much anyone 62 or over with sufficient equity could get a loan.
However, when the “financial assessment” requirements went into effect, everything changed.
The new reverse mortgage rules require you to prove sufficient income to pay all home expenses, such as property taxes, homeowners insurance, and other living expenses, while still having a certain amount of “free cash” left over at month end.
Basically, you have to prove you don’t actually need the money. That sounds ridiculous, right?
Here’s how new rules for reverse mortgages work:
If your income doesn’t meet the requirements, the lender will withhold enough money from the loan to pay those home-owning expenses for the rest of the your projected life.
That cost, which is called a “set-aside,” can be tens of thousands of dollars withheld from the loan distribution.
In some cases, the set-aside is large enough that the funds you receive from a reverse mortgage are so low that the loan is no longer practical. For example, if you’re found to be short by $200 monthly and have an expected longevity of 10 years, you’ll now get $25,000 less than you would have before.
Now, if you need cash, getting $100,000 rather than $125,000 is not a bad compromise. In that case, the reverse mortgage still makes sense. However, if you were planning to receive $60,000 and the set-aside reduced that amount to $35,000, in many cases that would make the reverse mortgage impractical, particularly with the fees involved in accessing the product.
In 2008, the amount of money that you could expect from a HECM loan was based on your age, the value of the home, and the current interest rate.
The rule of thumb was to subtract 10 from the your age, and that number was pretty close to the percentage you could expect. For example, a 70-year-old person with a $200,000 home could expect or 60 percent of the value of the home, which is $120,000 in loan distribution. (age 70-10= 60 percent)
The rules for calculating how much money you can expect from a reverse mortgage are now more convoluted. The best way to determine this is to start a conversation with some professionals that work in your area.
What do the New Reverse Mortgage Rules Mean for You?
You still might qualify for a reverse mortgage, in principal. In some cases though, the following factors might reduce your cash available to a level where the loan simply doesn’t make sense:
- Limited initial distribution amount
- The new financial assessment/set aside
- The need to bring the home up to FHA standards
More importantly, if you currently have an existing loan on the home and hoped to use the reverse mortgage to eliminate those monthly payments, you might not have enough equity left to do so.
The first step in figuring out if a reverse mortgage is a viable option for you is to connect reverse mortgage companies to get an analysis of your situation.
To find out more, click here to set up a risk free, no-strings-attached consultation with me. We’ll discuss your specific situation and I’ll recommend a course of action you can take to reach your goal.