Vail Daily column: Reverse mortgage rules changing
In the never ending tradition of fixing what’s not broken (and probably screwing it up even more), the Feds have found time to tinker the rules on reverse mortgages.
For the uninitiated, a reverse mortgage is a loan product for those over age 62 to allow them to tap equity in their homes and never make a mortgage payment. It can also be used to purchase a home. The older the borrower, the more they can borrow.
How it works on a refinance is the new loan will first payoff your existing loan, and depending on the amount of equity you have allow you a line of credit to draw on, or cash monthly payments or a combination of the two. Generally, the amount available to pay off the old loan and pull cash out in one form or another is limited to 50-60 percent of the value of the home, so not everyone can qualify. The total dollar amount available is further limited to the mid-$300,000 range.
Once the loan has closed, the borrower may remain in the home for the rest of their lives and never make a payment. The interest accrues on top of the original loan amount drawn at closing and funds drawn over the life of the loan and is due when the property is finally sold. If there is equity left over, then the money goes to the owner or his estate. If there is more owed than the house is worth, then the heirs have two choices. One is to just send the bank the keys, and the other would be to purchase the home at 95 percent of its appraised value, and the lender (and FHA) eat the difference. However, due to the low loan to value it’s pretty safe to say the chances of a property being upside down is unlikely. Of course much depends on the future value of the home and how long the borrower lives there.
On a purchase loan, the borrower brings a substantial down payment, usually 40-50 percent and the new reverse mortgage pays the balance and there are no payments due and the interest just accrues like it would on a refinance.
In both scenarios, the borrower must pay the taxes and insurance and maintain the home. The borrower always retains full title to the home, and can move or pay off the loan at anytime. If after several years the home has appreciated and there is enough equity, then the homeowner can refinance into a new reverse mortgage and possibly pull more money out.
Income, Asset Requirements
Up until now, there had been no income or asset requirement, or credit standards to get loan. But what was happening was that some borrowers would not pay their taxes or insurance putting the loans in default. This was not a huge problem in the West, where property taxes are fairly low but in some areas of the East and Midwest property taxes can be as much as 10 percent of the value of the home. If a homeowner had a $300,000 home he might have faced taxes of a few thousand dollars a month and to someone with a fixed retirement income that is a huge bill to meet and far exceeded his available cash from the reverse mortgage. In Colorado, the taxes on a $300,000 home might run $1,500 a year.
Now, reverse mortgage borrowers will be subject to a financial evaluation to determine if they have the ability to pay taxes and insurance. Funds for this can come from all forms of income, including payments from the reverse mortgage itself and can factor in liquid assets. There is rather a lengthy formula for determining eligibility. If a borrower doesn’t have the cash, then part of the available proceeds from the reverse mortgage might be reserved for a fund to pay taxes and insurance.
In addition, borrowers with a poor credit history will be scrutinized more thoroughly even if they appear to have the cash to pay their tax and insurance obligations.
In Colorado, most borrowers should not be too heavily impacted by this change of rules, and it does not impact reverse mortgages already in place. In other areas of the country with high property taxes, it is going to have a huge impact.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.