Dear Savvy Senior,
What can you tell me about reverse mortgages? I was considering one last year, but now I hear they are more difficult to get.
--Ready to Reverse
That's correct. Tighter rules on reverse mortgages that have recently gone into affect have made them harder to get, especially for seniors with heavy debt problems.
The reason the Federal Housing Administration (FHA) made these changes was to strengthen the product, which has suffered from a struggling housing market and a growing number of defaults by borrowers. Here's a rundown of how reverse mortgages now work in 2014.
Overview: The basics are still the same. A reverse mortgage is a loan that allows senior homeowners to borrow money against the equity in their house. The loan doesn't have to be repaid until the homeowner dies, sells the house or moves out for at least 12 months. It's also important to know that with a reverse mortgage, you, not the bank, own the house, so you're still responsible for property taxes, insurance and repairs.
Eligibility: To be eligible for a reverse mortgage you must be at least 62 years old, own your own home (or owe only a small balance) and currently be living there. You will also need to undergo a financial assessment to determine whether you can afford to make all the necessary tax and insurance payments over the projected life of the loan.
Lenders will look at your sources of income, assets and credit history. Depending on your financial situation, you may be required to put part of your loan into an escrow account to pay future bills.
If the financial assessment finds that you cannot pay your insurance and taxes and have enough cash left to live on, you will be denied.
Loans: Nearly all reverse mortgages offered today are Home Equity Conversion Mortgages (HECM), which are FHA insured and offered through private mortgage lenders and banks. HECM's also have home value limits that vary by county, but cannot exceed $625,500. See hud.gov/ll/code/llslcrit.cfm for a list of HUD approved lenders.
Loan amounts: The amount you get through a reverse mortgage depends on your age, your home's value and the prevailing interest rates. Generally, the older you are, the more your house is worth, and the lower the interest rates are, the more you can borrow. A 70-year-old, for example, with a home worth $300,000 could borrow around $170,000 with a fixed-rate HECM. To calculate how much you can borrow, visit reversemortgage.org.
Loan costs: Reverse mortgages have a number of up-front fees including a 2 percent lender origination fee for the first $200,000 of the home's value and 1 percent of the remaining value, with a cap of $6,000; a 0.5 percent initial mortgage insurance premium fee; along with an appraisal fee, closing costs and other miscellaneous expenses. Most fees can be deducted for the loan amount to reduce your out-of-pocket cost at closing.
In addition, you'll also have to pay an annual mortgage insurance premium of 1.25 percent of the loan amount.
Payment options: You can receive the money in a lump sum, a line of credit, regular monthly checks or a combination of these. But in most cases, you cannot withdraw more than 60 percent of the loan during the first year. If you do, you'll pay a 2.5 percent upfront insurance premium fee.
Counseling: All borrowers are required to get face-to-face or telephone counseling through a HUD approved independent counseling agency before taking out a reverse mortgage. Some agencies are awarded grants that enable them to offer counseling for free, but most charge around $125 to $250. To locate a counseling agency near you, visit hud.gov or call 800-569-4287.
Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of "The Savvy Senior" book.