Changes Make Reverse Mortgages Harder to Get
Last October, the President signed HR 2167 – “The Reverse Mortgage Stabilization Act of 2013”. As a result, changes have been made to make it harder to qualify for a reverse mortgage.
To be eligible for a reverse mortgage you must be at least 62 years old, own your own home (or owe a relatively small balance) and currently be living there. You 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. Below are some of the changes that have recently occurred:
- Increased Lender Scrutiny: Now, 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 still have enough cash left to live on, you will be denied.
- Only HECM Reverse Mortgages Are Insured: Currently, the only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender.
- Enhanced Qualification Criteria: The amount you can 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. To calculate how much you can borrow, visit reversemortgage.org.
- Additional Fees: Reverse mortgages currently have a number of up-front fees including a 2% lender origination fee for the first $200,000 of the home’s value and 1% of the remaining value, with a cap of $6,000; a 0.5% initial mortgage insurance premium fee; along with an appraisal fee, closing costs and other miscellaneous expenses. In addition, you’ll also have to pay an annual mortgage insurance premium of 1.25% of the loan amount. Most fees can be deducted for the loan amount to reduce your out-of-pocket costs at closing.
- More Ways to Receive Funds: You can receive the money in a lump sum, a line of credit, regular monthly checks or a combination. In most cases, however, you cannot withdraw more than 60% of the loan value during the first year. If you do, you’ll pay a 2.5% upfront insurance premium fee.
- Counseling Requirement: 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. For more details, visit hud.gov or call 800-569-4287.
For additional details on why new rules have gone into effect, please read our blog post on the subject. Keep in mind that keeping money in a reverse mortgage line of credit in Virginia, and in most other states, will not count as a resource for Medicaid eligibility purposes so long as the house itself is an exempt resource. (For Medicaid payment of long-term care, the applicant’s principal residence is excluded from countable resources for the six months of continuous institutionalization provided the applicant intends to return home and provided the equity in the home property does not exceed $536,000. Regardless of the amount of home equity, after six months of continuous institutionalization the nursing home resident’s home will become a countable resource, unless the home is occupied by a spouse, dependent child under age 21, or a blind or disabled child.)
However, transferring the money from the reverse mortgage line of credit to a bank account and leaving it there past the end of the month would convert the exempt home equity into a countable resource and therefore would affect Medicaid eligibility. This important distinction between countable resources and exempt assets is not a simple black and white issue — if you or your loved one is facing the possible need for long-term care, you should get an opinion from a Certified Elder Law Attorney, such as Evan H. Farr. To make an appointment for an introductory consultation, please call the Fairfax Medicaid Asset Protection Law Firm of Evan H. Farr, P.C.