Reverse mortgages have long been a safety net for seniors. Most do not want to rely on them, but often the expenses pile up during retirement. When savings and investments run out, and social security is simply not enough to pay the bills, those who are age 62 and older may have the option of turning to a reverse mortgage to help bring in some extra money. But some of those who need them may soon find that they are unable to get them.
The most basic definition of a reverse mortgage is that you sell your home to a reverse mortgage company a little bit at a time. For instance, a senior with a house worth $400,000 (that is paid for or nearly paid for) may be able to reverse mortgage $300,000 of it (factors such as age, current interest rates, and any outstanding loans on the house will all go into determining the actual amount that can be take out of the house). Until recently that $300,000 could be taken in a lump sum, or in regular payments. When the home owner died, or sold the house, the reverse mortgage company would take ownership and be repaid the money that they effectively lent to the owner. This year, the Federal Housing Administration (FHA) got rid of the lump sum option, and they are looking to change the reverse mortgage program again.
Since the recession, reverse mortgage companies have been feeling the squeeze. They have found that they are less profitable, and often people would take out these loans and still be unable to meet their obligations. Because of this, the FHA has proposed that would-be borrowers must go through a financial assessment. This assessment would look at credit scores and financial strength, and certain borrowers may need to set aside a portion of their reverse mortgage to help pay for taxes and insurance on the home.
The FHA is also looking to reduce the amount that people can borrow. Couple that with the fact that credit checks may be necessary (although it is indicated that credit checks will not be a big part of the process), and suddenly many seniors that will come to rely on a reverse mortgage will not have one available to them.
These new rules are proposed to go into effect on October 1st. However, the FHA still needs to get the approval through congress. They see that as a tough sell, and if the government doesn’t comply, they will be forced to take much more drastic measures: chopping the program rather than trimming it. The result if the proposal doesn’t pass? Borrowers can expect that they will end up with 10 to 15 percent less than if the measures do pass.
The reverse mortgage is an important financial tool for many Americans. Without it, people can end up destitute during their golden years. But it still needs some work in order to remain a sustainable program. In just a couple short months we will see what the future of the reverse mortgage program will be. Or if it even still exists.
What is your experience with reverse mortgages? Do you think the changes are good or bad?