Reverse mortgages are a powerful and flexible financial planning tool that allows home owners who are at least 62 years of age to access the equity in their home without having to sell their property and move to a new residence. The reverse mortgage allows the home owner to receive a part of the value of their home equity in a lump sum, as a series of monthly checks, or makes the equity balance available as a line of credit.
One of the many advantages of reverse mortgages compared to traditional mortgages is that there are no monthly payments required with reverse mortgages.
New regulations regarding property taxes could be coming
Property taxes and homeowners’ insurance premiums must be paid for all homes, whether they have a reverse mortgage tied to them or not. This is an area that may be the subject of new rules from government regulators.
Many retirees have been struggling financially and reverse mortgages can be used to fund everyday living expenses, including property taxes and insurance. The proceeds of a reverse mortgage can actually be used by the home owner for any purpose, including buying a new property, and the money received from the loan is tax free.
But now, new rules from the Federal Housing Administration, the government agency that insures almost all reverse mortgages, recently allowed lenders to consider a borrowers ability to pay their taxes and homeowners’ insurance premiums.
Most recently, the largest originator of reverse mortgages, MetLife Bank, started reviewing applicants’ finances. They are trying to make sure that home owners will have enough income or assets to meet all of the ongoing costs of property taxes and homeowner’s insurance premiums before granting a reverse mortgage.
Industry experts report that the US Department of Housing and Urban Development, which oversees the FHA, is developing new regulations that will require lenders to perform some degree of financial underwriting on reverse mortgages.
What are the possible effects for potential borrowers?
Peter Bell, president of the National Reverse Mortgage Lenders Association, notes that “it is possible that some borrowers who could have gotten a reverse mortgage before” will no longer qualify under the new rules.
One of the possible changes could be to give lenders the right to require borrowers with smaller financial cushions to receive monthly payments, rather than a lump sum. To ensure that borrowers have enough cash to cover their property taxes and homeowner’s insurance premiums, the new regulations may also allow lenders to set aside a portion of the reverse mortgage proceeds for those expenses.
Home owners considering a reverse mortgage still have time to act under the old rules. The rule change may not have any impact on many potential borrowers, but delaying action could have negative consequences for some.