On April 27, 2015, the new Federal rules on reverse mortgage took effect. These rules, which are intended to reduce the risk of default, will likely make getting a reverse mortgage more difficult.
A reverse mortgage, which is insured by the FHA, allows homeowners, age 62 and over, to cash out on their home equity without the burden of regular monthly payments. Instead, the loan is repaid when the homeowner moves, sells the home, or passes away.
In the past, these loans have been costly and controversial and the risk of default has been fairly high. Because of this, new rules have been promulgated which require the homeowner to undergo a “financial assessment” (which is much like the evaluation done for traditional mortgages) in order to qualify. The review will include credit reports and income and expense analysis which may make the approval process substantially longer and make these loans more difficult to obtain.
To qualify, potential borrowers must demonstrate their “capacity” (ability) and “willingness” to pay their property taxes and homeowner’s insurance. To prove capacity, borrowers will need documentation such as tax returns, W-2’s, Social Security Award Letters, bank statements, and the like. To assess “willingness”, the lender will review the borrowers’ payment history to determine if they have paid their mortgage, taxes and insurance on time over the last two years. If the review reveals late or missing payments, the application may be denied or the borrowers may be required to wait a period of time to improve their payment history.
Some applicants who are on the bubble may still be approved if the lender carves out a life-expectancy “set aside” where some of the loan proceeds are set aside and earmarked for the payment of the taxes and insurance. However, the amount of the set aside can be fairly high, resulting in an arrangement that will not be feasible.
Is a reverse mortgage for you? It may be. For more information, contact an experienced Westchester real estate attorney who can advise you on whether a reverse mortgage is right for you.