New rules make it harder to get a reverse mortgage

The federal government has tightened the rules on reverse mortgages, making it harder for some seniors to get these types of loans and reducing the amount of a home’s value that can be tapped.

Reverse mortgages allow elders who are house-rich but cash-poor to use their housing equity. Homeowners who are at least 62 years old may use the equity in their home to obtain a loan that doesn’t have to be repaid until the homeowner moves, sells, or dies. The homeowner receives a sum of money from the lender, usually a bank, based largely on the value of the house, the age of the borrower, and current interest rates.

Homeowners can get the money in one of three ways (or in any combination): in a lump sum, as a line of credit that can be drawn on at the borrower’s option, or in a series of regular payments, called a “reverse annuity mortgage.” Seniors sometimes use these loans to pay for home care while they remain in the home.

Almost all such loans are insured by the U.S. government. The government says that in recent years, default rates have been rising, and many seniors are losing their home when they are unable to continue paying for insurance and property taxes.

To address this problem, last year the government eliminated the most popular type of reverse mortgage, which was the “standard,” fixed-rate lump-sum mortgage.

This year the government is adding new restrictions, including:

  • Who can borrow. Seniors are now required to undergo a financial assessment to make sure they can afford insurance and property taxes. If a lender determines that you’re at risk of defaulting on these payments, you might be required to set aside money for them.

• Amount you can borrow. Until last year, homeowners had a choice of two programs: the “standard,” which allowed for larger loans, and the “saver,” which offered smaller loans and smaller fees. The government has now merged the two programs. The new maximum loan amount is about 10-15 percent less than in the standard, but slightly higher than in the saver.

• Fees. Previously, the upfront fee to take out a standard loan was 2 percent of the property’s value, while the saver fee was a tiny .01 percent. The new fee is .5 percent. However, seniors who borrow more than 60 percent of a home’s value will instead pay a hefty 2.5 percent fee.

• First-year limit. During the first year of a loan, homeowners can no longer withdraw more than 60 percent of the total loan amount.

In general, proceeds from a reverse mortgage are not subject to income tax and generally won’t affect your ability to receive Social Security or Medicare. However, it’s possible that they could affect your eligibility for other government programs such as Medicaid.

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