For some time, the reverse mortgage has been a popular tool utilized by many seniors to withdraw equity locked up in their homes. Essentially, the only post-loan requirements were to repay the loan upon sale, departure from the home or dying, pay real estate taxes and insurance, and keep the home in decent shape. These reverse mortgage loans were relatively easy to obtain without any significant credit checks. Be over 62 and have equity in your home. That was about it.
The problem was that these loans were too easy to obtain. And when the recession struck, many seniors were not able to keep up on taxes and insurance and were unable to sell in many situations due to depressed property values. As a consequence, many homes were abandoned or were foreclosed upon. And the FHA, which was the major underwriter of the loans, had huge losses because of the thousands of defaults.
On April 27, 2015, the rules tightened and will make it much more difficult for some seniors to tap this resource. Now seniors will need to apply and go through a more normal process for a mortgage loan of this nature, including credit checks, income verification and proof that real estate taxes, insurance and homeowner association dues have been paid for at least 24 months without a problem. In close approval cases, there is a provision that a separate account, called “life expectancy set-aside,” may have to be established as a reserve or escrow account funded from the borrowed proceeds to insure that there are sufficient funds to cover these costs and to avoid future defaults. This will be a longer and more difficult process. Check out the Consumer Financial Protection Bureau at www.consumerfinance.gov to review their input on what factors to consider before taking out a reverse mortgage.
One thing we recommend is that the parents notify their children that a reverse mortgage is being considered or has been taken out. It’s a nasty surprise for adult children to find out after mom and dad have died that the residence mortgage is now due and payable in full when there are insufficient liquid assets and that a real estate slump has occurred.
Michael W. Margrave