Interested in a reverse mortgage without a lot of hassles? Better get your application in fast. As of April 27, the federal government is imposing a series of extensive "financial assessment" tests that will make applying for a reverse mortgage tougher — much like applying for a standard home mortgage.
Reverse mortgages always have been different: They're available only to those 62 and older who have equity in their homes that they want to convert into cash. There are no repayments required until the borrower sells the house, moves out or dies. Loan recipients' main responsibilities are to keep current on local property taxes, pay hazard insurance premiums and keep the place in reasonable condition.
But during the recession and mortgage bust years, thousands of borrowers fell into default because they didn't pay their required property taxes and hazard insurance premiums. On top of that, real estate values plunged, producing huge losses on defaulted and foreclosed properties for the FHA. The losses got so severe that the Treasury Department had to provide the FHA with a $1.7-billion bailout in 2013, the first since the agency was created in the 1930s.
All of this led to the dramatic changes coming April 27. Applicants are now going to need to demonstrate upfront that they have both the willingness and the capacity to meet their obligations. Reverse mortgage lenders are going to pull borrowers' credit reports from the national credit bureaus, just as they do with other mortgages.
Applicants are going to have to show that they paid their real estate taxes, homeowner association fees and other property-related charges on time for at least the last 24 months. They will be asked to produce documentation of their employment status (if they're still working), income and financial assets, as well as undergo a "residual income" analysis that examines all their monthly expenses and cash flow.
If they get inadequate marks on these tests, they may be required to create a "life expectancy set-aside" — essentially a reserve account or escrow funded wholly or in part from their loan proceeds. For some borrowers, the set-asides may be so substantial they'll be left with minimal cash at closing, making the entire reverse mortgage process a waste of effort.
The changes, say reverse mortgage industry experts, will exclude potentially thousands of older homeowners from obtaining a reverse mortgage, especially those who are on the margins economically and need the cash to help pay for ongoing household expenses.
Reza Jahangiri, chief executive of American Advisors Group, the highest-volume reverse mortgage lender, said his company expects a decline in loan activity of 8% to 10% after the financial assessment rules take effect. He also expects a countervailing shift toward "mainstream" borrowers who seek to use a reverse mortgage as part of their overall retirement financial planning, including raising money to purchase a new house or to establish a flexible line of credit they can draw from as needed.
Many older Americans currently can't qualify for bank home-equity credit lines, he said, but with adequate credit, income and assets, can qualify for a reverse mortgage in the form of a credit line.
Maggie O'Connell, who originates FHA-insured reverse mortgages for the Federal Savings Bank from offices in Reno and Danville, Calif., says she's been scrambling "to get people in before the deadline" who might encounter difficulty — or be turned off by all the required documentation — under the new rules.
Although she may do fewer loans in the short term, O'Connell said in an interview, in the long term the tougher rules "are probably all in all a good thing" because they will prevent financially weak borrowers from taking out loans they can't handle and that will eventually end up in default, "which is bad for them and bad for us."
Bottom line: Tougher credit standards have come to reverse mortgages — finally. Before applying, be aware of the types of documentation you'll need. And when you talk with a lender or financial counselor about a reverse loan, make sure you involve the entire family, so everybody knows what you are getting into.