Reverse mortgage: a home loan that provides cash payments based on home equity. Homeowners normally defer payment of the loan until they die, sell, or move out of the home.
As our population ages and retires they become more prominent to help finance retirement years. In certain situations, a reverse mortgage is a very good product for people. There are some changes occurring to reverse mortgages in the next few months so we want to keep everyone informed of these changes and how to qualify for a reverse mortgage currently versus how to qualify in the future. To qualify for a reverse mortgage right now, the borrower must be at least 62 years of age and must occupy the property as his or her principal residence. In addition, any mortgage on the property must be low enough that it will be paid off with the reverse mortgage proceeds.
Income and Credit Qualifying
With the upcoming changes, there is going to be a new financial assessment to qualify for a reverse mortgage that never used to be considered. Currently there are not any income or credit qualifications. A person with a credit score of 350 qualifies the same as someone with a credit score of 800: within the next 90 days that is going to change. An even bigger impact is going to be the income qualifying. A financial assessment will be coming out that will determine primarily that you have the ability to make your taxes and insurance payments, a requirement of the reverse mortgage product.
Increased Reverse Mortgage Fees
Reverse mortgages are generally more expensive than other home loans. Another upcoming change is the increase in fees that make them even pricier than before. Fees you can expect to pay when taking out a reverse mortgage can include lender fees, mortgage insurance and closing costs.
The mortgage insurance payment goes directly to the FHA and is an ongoing fee for the life of the loan. If you withdraw 60 percent or less of the available funds in the first year, you will be charged a mortgage insurance premium of 0.50 percent of the appraised value of the home. If you take more than 60 percent of your equity, the upfront payment will be 2.5 percent. The annual premium is 1.25 percent of the outstanding loan balance.
Overall, with the changes in income and credit requirements, on top of the costs of reverse mortgages, it is looking better to jump on board of the reverse mortgage train now versus later. Once those changes go into effect, it may impact about 20% of the people that are currently eligible for a reverse mortgage now but may not be once that program comes into effect.