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September 15, 2014

Banks Tighten Reverse Mortgage Rules

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Banks Tighten Reverse Mortgage Rules

New rules that go into effect on Sept. 30 will place more limits on how much and when home owners can tap the equity in their homes through a reverse mortgage. 

Under the new rules, some borrowers may have access to around 15 percent less of the equity in their homes compared to the maximum amount available now. The new rules also will limit the amount of money that can be taken out in the first year of a reverse mortgage. For example, if a home owner is eligible to withdraw a total of $200,000 in cash, they would only be allowed to get $120,000—or 60 percent of that—in the first year. Some exceptions apply.

The Federal Housing Administration insures most reverse mortgages. In its program, people 62 and older can tap their home equity without making payments. Lenders get their money back once the house has sold.  

Under the older rules, home owners could withdraw all the money they were eligible for at once. But that strained the program’s cash reserves. The FHA’s changes to its reverse mortgage program sets out to encourage home owners to tap their home’s equity slowly and steadily. 

“What regulators are trying to do is shift behavior so that people are more thoughtful and methodical about how they draw the money,” says 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.”

Starting Jan. 13, the FHA will also implement changes to who can qualify for its reverse mortgage program. Borrowers will then need to prove that they will be able to pay property taxes and insurance over the life of the loan. As such, borrowers will face greater lender scrutiny of all their income sources and credit history when applying for the program. 

Source: “Tighter Rules Will Make It Harder to Get a Reverse Mortgage,” The New York Times (Sept. 6, 2013)

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