The Federal Housing Administration (FHA) is set to implement tougher credit standards for reverse mortgages on April 27, reports Los Angeles Times.
The news outlet adds that a reverse mortgage is available for senior homeowners aged 62 and above with "equity in their homes that they want to avail into cash."
Reverse Mortgage Loans: Nature and Benefits
According to Phil Stevenson of Housing Wire (HW), the reverse mortgage may only be applied on a primary residence. A borrower may convert part of the equity of the home into cash, while postponing "repayment of the mortgage loan" or credit line until either the home is bought by another buyer or in the event that the borrower dies. The borrower is not mandated to pay any income tax from money withdrawn from the reverse mortgage loan since it is a loan, says HW.
The outlet notes that the line of credit grows annually and can never be frozen or reduced. However, a borrower may prepay loan or line of credit and must not owe more than the value of the loan. The column says that the title reflects the name of the borrower, thus the borrower can sell it any time. If sold, the reverse mortgage, including interests and fees, is repaid. Equity and profits will then be received by the borrower and the heirs.
Upon the borrower's death, Housing Wire also explains some important details. If the borrower dies, heirs will have the home and will get its equity if they decide to sell the property. The lender cannot come after the heirs for any losses, says the outlet. Moreover, the heirs can buy the home at 95% of the property value, if it is less than the mortgage owed by the borrower upon death. FHA will then pay the loss via the FHA's Mortgage Insurance Premium.
Additional Requirements
LA Times notes that the FHA had run the program in an "easygoing" manner for three decades. However, thousands of borrowers have defaulted: they failed to pay their property taxes and insurance premiums. Moreover, the property values really hit rock bottom that FHA incurred great losses. As a result, the FHA got an enormous $1.7B bailout, its first in eight decades, from the Treasury Department.
Thus, FHA will not be lenient anymore and will screen borrowers more meticulously. Reverse mortgage applicants must prove that they are willing and capable to meet their duties as borrowers. The credit reports will then be analyzed from national credit bureaus, and it will be like applying for their first mortgage loan again, notes LA Times. Records in the last two years must show that these applicants have diligently been paying their real estate taxes, home association dues and other fees related to homeownership, LA Times adds. For working individuals, they will still be asked to produce related documents, and would be subject to "residual income" analysis to know how the borrower's cash flow status is.
With these new requirements, many experts believe that thousands of homeowners may not qualify for a reverse mortgage loan.