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Reverse Mortgage Rules & Requirements

Reverse Mortgage Pitfalls: The Truth About 3 Common Misconceptions 5

The reverse mortgage loan has continued to evolve since its introduction in 1961 and only grows stronger and safer with each year.  This is primarily due to rules and regulations set by the Federal Housing Administration (FHA).  The FHA continually updates and regulates reverse mortgages with new guidelines to protect you as a borrower.

FHA-Insured Reverse Mortgage Eligibility

The reverse mortgage loan began as a way to help seniors use their equity to age in their home.  Therefore, the four most important borrower rules for reverse mortgages are as follows:

  • You must be 62 years of age or older.
  • You must own your home.
  • You must own your home outright, or have a substantial amount of equity.
  • You must live in the home as your primary residence.
  • You must complete a financial assessment

Borrower Obligations

Once you satisfy these eligibility requirements and after you obtain a reverse mortgage, you still have obligations to uphold. In order to enjoy all the features of a reverse mortgage loan, and ensure that you do not default on the loan, you are responsible for:

  • Immediately using reverse mortgage loan funds to pay off any other mortgage you may have.
  • Continuing payments on your home insurance, property taxes, and basic home maintenance.
  • Complying with all the loan terms, such as continuing to live in the home as your primary residence.

Beneficial Reverse Mortgage Loan Rules

The regulations about loan payback are quite important as well.  Luckily, the popular government-insured reverse mortgage loan, also called a Home Equity Conversion Mortgage (HECM), is non-recourse.  This means that:

  • If the loan is not repaid after maturity, no assets other than the home can be taken to pay off the reverse mortgage loan.
  • If the loan debt surpasses the value of the home, the borrower will not owe more than the amount the home sells for.

HECM Government Regulations

In addition, the FHA has set some additional safeguards to protect borrowers and encourage responsible reverse mortgage loan use.

  • Before loan approval, part of the process is to complete a counseling session with an FHA-approved counselor. This counselor will make sure you know all your options and have all the reverse mortgage information you need to be able to decide if this loan is best for your situation.
  • In the first year of a reverse mortgage loan, you may only access 60% of your approved loan amount (or the amount required to pay off your current mortgage plus 10%, whichever is greater). After the first year, you may access the remaining amount. This is to encourage you to not pull from your equity too quickly.
  • Lenders are not permitted to require you to purchase other loans or financial products, as a condition of your loan.
  • Lenders are required to complete a financial assessment of prospective borrowers and analyze income against expenses. If the ratio shows that you may have some difficulty in paying recurring taxes, insurance, or other loan obligations, you may set aside money from your loan funds in order to pay your financial obligations.
  • Additionally, the law gives you three business days after loan closing to change your mind and cancel your reverse mortgage loan. Lenders cannot charge you interest during this period of time.

Evolving Reverse Mortgage Rules and Regulations

Two new rules were implemented in 2014 and 2015 for the reverse mortgage loan program. Still in effect, these rules regarding non-borrowing spouses and the borrower’s financial assessment add new layers of protection for all borrowers.

  • Reverse Mortgage Rules for A Non-Borrowing Spouse

This rule makes it easier for the non-borrowing spouse to continue living in the home following the death of a borrower.  The non-borrowing spouse will inherit the responsibility for the reverse mortgage loan as well as the home’s ownership.  Borrowers should be aware, the age of the non-borrowing spouse may affect some loan terms such as the amount available to borrow.

  • Financial Assessment

This rule mandates that lenders financially assess all reverse mortgage loan applicants.  Borrowers are required to submit documentation regarding income, taxes, assets, payment history, and other debt to lenders.  The purpose of this rule is to ensure that borrowers have the financial capability to fulfill their loan obligations, such as continuing to pay property taxes and home insurance.

Although the FHA’s rules and regulations for the reverse mortgage loan may seem stringent to some, they are designed with the borrower’s best interests in mind and are truly beneficial to you as a borrower.  These regulations and rules are meant to encourage borrowers to use this great financial tool as part of an intelligent retirement planning strategy, which in turn solidifies the overall strength of the reverse mortgage loan product.

Sources:

“Reverse Mortgage Issues/Obligations After Closing.” Hud.gov. n.p. n.d. Web. 17 Jul 2014. http://portal.hud.gov/hudportal/documents/huddoc?id=7610-0_5_secE.pdf

“Most Frequently Asked Questions.” ReverseMortgage.org. n.p. n.d. Web. 17 Jul 2014. http://www.reversemortgage.org/GetHelp/MostFrequentlyAskedQuestions.aspx#right

Alderman, Jason. “Rule Changes Tighten Reverse Mortgage Eligibility.” PracticalMoneySkills.com. n.p. n.d. Web. 17 Jul 2014. http://www.practicalmoneyskills.com/personalfinance/experts/practicalmoneymatters/columns_2014/0124_RuleChanges.php

“Reverse Mortgages: New Rules Ensue.” NetEquityMtg.gov. n.p. n.d. Web. 1 Apr 2015. http://www.netequitymtg.com/2015/01/22/reverse-mortgages-new-rules-ensue/

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These materials are not from HUD or FHA and were not approved by HUD or a government agency.

©2023 American Advisors Group/AAG are divisions of Finance of America Reverse LLC which is licensed nationwide* | Equal Housing Opportunity | NMLS ID # 2285 (www.nmlsconsumeraccess.org) | 8023 East 63rd Place, Suite 700 | Tulsa, OK 74133 | AZ Mortgage Banker License #0921300 | Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act | Georgia Residential Mortgage Licensee #23647 | Kansas Licensed Mortgage Company | Massachusetts Lender/Broker License MC2285: Finance of America Reverse LLC | Licensed by the N.J. Department of Banking and Insurance | Licensed Mortgage Banker — NYS Banking Department where Finance of America Reverse is known as FAReverse LLC in lieu of true name Finance of America Reverse LLC | Rhode Island Licensed Lender | Not all products and options are available in all states | Terms subject to change without notice | For licensing information go to: www.nmlsconsumeraccess.org

*Finance of America Reverse LLC does not do business as American Advisors Group/AAG in Nevada and New York.

FAReverse LLC i/l/t/n Finance of America Reverse LLC is Licensed Mortgage Banker in the State of New York, but this site is not authorized by the New York State Department of Financial Services. No mortgage solicitation activity or loan applications for properties located in the State of New York can be facilitated through this site.

For Reverse Loans: When the loan is due and payable, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to borrowers, who may need to sell the home or otherwise repay the loan with interest from other proceeds. The lender may charge an origination fee, mortgage insurance premium, closing costs and servicing fees (added to the balance of the loan). The balance of the loan grows over time and the lender charges interest on the balance. Borrowers are responsible for paying property taxes, homeowner’s insurance, maintenance, and related taxes (which may be substantial). We do not establish an escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must occupy home as their primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan also becomes due and payable (and the property may be subject to a tax lien, other encumbrance, or foreclosure) when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, defaults on taxes, insurance payments, or maintenance, or does not otherwise comply with the loan terms. Interest is not tax-deductible until the loan is partially or fully repaid.

STATE OF ILLINOIS COMMUNITY REINVESTMENT NOTICE The Department of Financial and Professional Regulation (Department) evaluates our performance in meeting the financial services needs of this community, including the needs of low-income to moderate-income households. The Department takes this evaluation into account when deciding on certain applications submitted by us for approval by the Department. Your involvement is encouraged. You may obtain a copy of our evaluation. You may also submit signed, written comments about our performance in meeting community financial services needs to the Department. V2023.06.28

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