Are Reverse Mortgages Becoming More Mainstream?
Throughout its existence, the reverse mortgage has been treated more like a fringe loan product. Lenders historically would keep these loans as separate lines of business from their more mainstream products such as conventional fixed rate loans, government mortgages and adjustable rate mortgages (ARMs). For a long time, Home Equity Conversion Mortgages (HECMs) were sitting on the sidelines. Now it seems things are changing, and some lenders are finding ways to include HECMs into a broader customer service strategy.
As the view of HECMs evolved, mortgage professionals began marketing these lending products more accurately — as a unique loan product that, while not an ideal financing program for everyone, may offer greater financial stability and the ability to age-in-place for older homeowners.
See related page, “Top Reasons People Are Taking Out Reverse Mortgages.”
Reverse Mortgages Safer Than Ever
Reverse Mortgages got a negative reputation years ago, mainly due to the mistaken belief that they were used as a loan of last resort. Senior homeowners who were in danger of losing their homes would sometimes take out a reverse mortgage as a last ditch effort to keep a property they couldn’t realistically afford. Likewise, the regulations surrounding reverse mortgages weren’t as consumer-friendly and left too much room for unethical lending practices. Now that consumer education has grown around reverse mortgages and federal laws have tightened, there is substantially less risk to both consumers and lenders.
Equity & Age Requirements
In order to qualify for a reverse mortgage, homeowners must be 62 years of age or older and have substantial equity in their homes. This means they need to either own their home outright (i.e., have their purchase mortgage paid off), or have an existing mortgage balance that can be paid off with the proceeds of a reverse mortgage. Typically, the total amount of the reverse mortgage loan should be less than 80% of the value of the home.
HECMs are exempt from TRID consumer-disclosure regulations and Qualified Mortgage (QM) rules; however, they are still subject to policies designed to verify the borrower’s ability to repay and willingness to comply with the loan. Additionally, three key regulatory changes all but eliminated the former risks:
1.) U.S. Department of Housing and Urban Development (HUD) set limits on how much a borrower can draw at closing or during the first 12 months following closing.
2.) HUD set up protections that enable qualified, non-borrowing spouses to continue living in the home and defer loan repayment when the borrowing spouse passes away.
3.) Financial Assessment rules added to ensure HECMs are only offered to borrowers who are financially qualified.
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Not all senior homeowners are alike, and therefore a one-size-fits-all reverse mortgage product wouldn’t be very useful. Fortunately, HECMs can come in a variety of terms to help meet borrowers where they are.
HECM for Purchase – Designed to help qualified senior homeowners use a reverse mortgage to purchase a new home.
Fixed Rate HECM – Offering homeowners a reverse mortgage with a single lump sum dispersement.
Adjustable Rate HECM – Offering homeowners a reverse mortgage with the option of monthly proceed payments or a line of credit.
Reverse Mortgages are unlike typical forward mortgages in many ways. Therefore, even the most well-educated home buyer may be unfamiliar with the unique requirements associated with HECMs. Fortunately, HECM borrowers are protected from risk by participating in required HECM counseling sessions. HECM borrowers obtain independent, third-party counseling from highly qualified professionals through HUD. These added educational sessions greatly reduce default risk for both borrowers and lenders.