Many homeowners understandably want to remain in their homes as they age because they want to remain independent and because they have spent many years making their home everything they wanted it to be. Reverse mortgages have assisted many senior homeowners over the years to stay in their homes when their financial position changed.
A reverse mortgage is a loan for people age 62 or older. It provides money from the equity in your home through a line of credit, monthly payments or a lump sum. It does not require repayment of the loan until you move, sell the property, or pass away, and the homeowner is still responsible for property taxes and insurance.
Now, reverse mortgages were initially developed as a tool to assist individuals to remain in their homes and communities as they grow older, by allowing homeowners to tap their equity without selling their homes. All that said, however, the rules about reverse mortgages recently changed, making them harder to obtain.
And, of course, harder to sell. But that doesn’t stop the advertisements!
In August of 2013, the President signed HR 2167 — “The Reverse Mortgage Stabilization Act of 2013” (https://www.govtrack.us/congress/bills/113/hr2167/text ) — giving the Federal Housing Administration (FHA) the authority to make necessary changes to the reverse mortgage program. According to the United States Department of Housing and Urban Development (HUD), the changes “reduce their risk and make the program easier for seniors to use responsibly.” For the homeowner, the changes will make it harder to qualify for a reverse mortgage, but will provide additional protections.
Until now, getting a reverse mortgage loan required no credit history and no minimum income requirement. Due to problems with homeowners failing to maintain their property tax and home insurance payments, starting on January 13, 2014, the FHA began requiring lenders to verify that homeowners have the ability to pay their taxes and insurance and that their credit history demonstrates a commitment to paying obligations.
To qualify for a reverse mortgage, lenders now must analyze all income sources — including pensions, Social Security, IRAs and 401(k) plans — as well as credit history. They also look closely at how much money is left over after paying typical living expenses.
In my opinion, these changes are welcome and needed. Too many seniors have been sucked into financial arrangements that were NOT in their best interest.
Now, if a lender determines that you would not be able to keep up with property taxes and hazard insurance payments, they are now authorized to set aside a certain amount of funds from your loan to pay future charges. The amount of the set-aside is based on the life expectancy of the youngest borrower. If set-aside funds run out, you must continue paying property charges using whatever funds are at your disposal.
If a lender determines that you have sufficient income left over, then you don’t have to worry about having any funds set aside to pay for future tax and insurance payments.
These changes, along with the reduced benefits adopted in September of 2013 (see a helpful NYT article here: http://www.nytimes.com/2013/09/07/your-money/tighter-rules-will-make-it-harder-to-get-a-reverse-mortgage.html?pagewanted=all ), mean that many seniors will not qualify for a reverse mortgage to make their homes affordable.
Why the new rules?
Some seniors who obtained reverse mortgages with rather harsh terms found that they were unable to either live off the loan for long, or to pay it back entirely. The FHA’s changes to its reverse mortgage program sets out to encourage homeowners to tap their home’s equity slowly and steadily. Again, this is a good thing, in my opinion.
“What regulators are trying to do is shift behavior so that people are more thoughtful and methodical about how they draw the money,” said Peter H. Bell, president of the National Reverse Mortgage Lenders Association. “The changes are intended to put the program back on track and encourage people to take what they need and no more.”
Reverse mortgages can sometimes interfere with other programs. Keeping money in a reverse mortgage line of credit, in most states, will not count as a resource for Medicaid eligibility purposes so long as the house itself is an exempt resource — which it would be as long as the recipient is living in the home and receiving home-based Medicaid services.
However, transferring money from the reverse mortgage line of credit to a bank account and leaving it there past the end of the month would convert the exempt home equity into a “countable resource” and that would make the person lose his or her Medicaid eligibility.
This important distinction between countable resources and exempt assets is not a simple black and white issue — if you or your loved one is facing the possible need for long-term care, you should have a conversation with a professional who can help you to handle such matters properly.