Reverse Mortgage Rules
For nearly five decades, the reverse mortgage loan has been an advantageous tool for financial security in many homeowners’ retirement years. Its popularity has increased, due in part to the rules and regulations created by the Federal Housing Administration (FHA) that make it safer and more secure for borrowers.
An FHA reverse mortgage, also called a Home Equity Conversion Mortgage (HECM), is designed for borrowers age 62 and older who either own their home or are very close to owning it with substantial equity. The home must also be their primary residence. These are the four key eligibility rules.
Key Eligibility Rules for Reverse Mortgages:
- Borrower must be a homeowner with substantial equity or who owns their home outright.
- Borrower must be 62 or older.
- The home must be the borrower’s primary residence.
- Other eligibility rules may apply. Talk to one of our reverse mortgage specialists for details.
Additional Eligibility Requirements
- Borrower must receive reverse mortgage counseling from a HUD-approved housing counselor.
- Limits set in place on borrower’s first-year access to loan proceeds.
- Borrower must complete a Financial Assessment (FA) with their lender to confirm financial capability of taking on the reverse mortgage.
The FHA has put into place some additional measures to protect borrowers and urge responsible reverse mortgage loan use, including a counseling session, limits on first-year access to loan amount, and a financial assessment.
The counseling session, with an FHA-approved counselor, is completed prior to loan approval in an effort to make sure the borrowers understands all of their options and payback requirements so they can make an informed decision whether or not the reverse mortgage loan is right for them.
In an effort to encourage responsible financial decisions, the FHA limits borrowers to 60% of their loan amount, or the amount required to pay off their current mortgage, plus 10%, whichever is greater, in the first year. After the first year, borrowers may access the remaining loan amount.
In 2015, the FHA implemented a required borrower financial assessment (FA) for the reverse mortgage program in an effort to add another layer of protection for borrowers. As part of the reverse mortgage application process, borrowers must undergo FA to certify that they have the financial resources to cover property taxes, homeowner’s insurance, and wind and hail insurances policies, if necessary, as mandated in their reverse mortgage loan agreement.
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Lenders who conduct the financial assessment understand that some borrowers are pursuing a reverse mortgage loan because of financial struggles, and that may be reflected in the borrower’s credit report. The lender must also consider to what extent the proceeds of the HECM could provide a solution to any such financial difficulties.
During the financial assessment, lenders will ask about credit history, cash flow/residual income analysis, and they’ll evaluate extenuating circumstances and compensating factors.
Borrowers can expect a fairly stringent reverse mortgage loan application process, but the strict guidelines are there to protect the borrower. Among some of the documents a borrower must complete or have on hand include insurance options, appraisal reporting, purchase contract transactions, HUD settlement statements, closing statements, recent payoff demands, evidence of age, social security information, spouse certifications, occupancy certifications, just to name a few.
No different than the financial documentation and income verification needed for a traditional mortgage loan, the reverse mortgage requirements and rules are crucial in helping borrowers and their lenders make the best decisions for their personal situations. Always consult with a qualified, experienced lender who specializes in reverse mortgages.