The reverse mortgage loan has continued to evolve since its introduction in 1961 and only grows stronger and safer with each year. This is primarily due to rules and regulations set by the Federal Housing Administration (FHA). The FHA continually updates and regulates reverse mortgages with new guidelines to protect you as a borrower. So what exactly are the current rules and requirements of the reverse mortgage loan product in 2016?
Reverse Mortgage Rules
The intention of the reverse mortgage loan began as a way to help seniors use their equity to age in their home. Therefore, the four most important borrower rules for reverse mortgages are as follows:
- You must be 62 years of age or older.
- You must own your home.
- You must own your home outright, or have a substantial amount of equity.
- You must live in the home as their primary residence.
Further Information – Borrower Obligations
Once you satisfy these eligibility requirements and after you obtain a reverse mortgage loan, you still have obligations to uphold. In order to enjoy all the features of a reverse mortgage loan, and ensure that you do not default on the loan, you are responsible for:
- Immediately using reverse mortgage loan funds to pay off any other mortgage you may have.
- Continuing payments on your home insurance, property taxes, and basic home maintenance.
- Complying with all the loan terms, such as continuing to live in the home as your primary residence.
Beneficial Reverse Mortgage Program Rules
The regulations about loan payback are quite important as well. Luckily, the popular government insured reverse mortgage loan, also called a Home Equity Conversion Mortgage (HECM), is non-recourse. This means that:
- If the loan is not repaid after maturity, no assets other than the home can be taken to pay off the reverse mortgage loan.
- If the loan debt surpasses the value of the home, the borrower will not owe more than the amount the home sells for.
HECM Government Regulations
In addition, the FHA has set some additional safeguards to protect borrowers and encourage responsible reverse mortgage loan use.
- Before loan approval, part of the process is to complete a counseling session with an FHA-approved counselor. This counselor will make sure you know all your options and have all the reverse mortgage information you need to be able to decide if this loan is best for your situation.
- In the first year of a reverse mortgage loan, you may only access 60% of your approved loan amount (or the amount required to pay off your current mortgage plus 10%, whichever is greater). After the first year, you may access the remaining amount. This is to encourage you to not pull from your equity too quickly.
- Lenders are not permitted to require you to purchase other loans or financial products, as a condition of your loan.
- Lenders are required to complete a financial assessment of prospective borrowers and analyze income against expenses. If the ratio shows that you may have some difficulty in paying recurring taxes, insurance, or other loan obligations, you may set aside money from your loan funds in order to pay your financial obligations.
- Additionally, the law gives you three business days after loan closing to change your mind and cancel your reverse mortgage loan. Lenders cannot charge you interest during this period of time.
New Reverse Mortgage Rules and Regulations
Two new rules were implemented in 2014 and 2015 for the reverse mortgage loan program. Still in effect for 2016, these rules regarding non-borrowing spouses and the borrower’s financial assessment add new layers of protection for all borrowers.
Reverse Mortgage Rules for A Non-Borrowing Spouse
This rule makes it easier for the non-borrowing spouse to continue living in the home following the death of a borrower. The non-borrowing spouse will inherit the responsibility for the reverse mortgage loan as well as the home’s ownership. Borrowers should be aware, the age of the non-borrowing spouse may effect some loan terms such as the amount available to borrow.
This rule mandates that lenders financially assess all reverse mortgage loan applicants. Borrowers are required to submit documentation regarding income, taxes, assets, payment history, and other debt to lenders. The purpose of this rule is to ensure that borrowers have the financial capability to fulfill their loan obligations, such as continuing to pay property taxes and home insurance.
Although the FHA’s rules and regulations for the reverse mortgage loan program may seem stringent to some, they are designed with the borrower’s best interests in mind and are truly beneficial to you as a borrower. These regulations and rules are meant to encourage borrowers to use this great financial tool as part of an intelligent retirement planning strategy, which in turn solidifies the overall strength of the reverse mortgage loan product.
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