Let’s throw it back to the year 1961 – the year the first reverse mortgage was reportedly written. In this year, John F. Kennedy was sworn in as the 35th President of the United States, Yuri Gagarin became the first human in space, the price of gas averaged just $0.27 per gallon, and a dozen eggs would run you just $0.301. It goes without saying – but wow, how the times have changed.
Over these past 62 years, the reverse mortgage program has certainly evolved and changed as well. Yet despite regulations and provisions since then, one of the top questions surrounding the program remains: “Is a reverse mortgage safe?”
Today’s reverse mortgages have come a far way since their initial inception and are now regulated by the federal government to include several borrower protections. In fact, the Home Equity Conversion Mortgage (HECM) reverse program has been federally insured by the FHA for over 30 years now. And during this time, the US Department of Housing and Urban Development (HUD) and other agencies have enacted additional safeguards to protect older Americans.
So, what exactly do these safeguards and protections entail? Read on for 5 unique reverse mortgage protections for consumers.
Perhaps the top consumer protection of HECM reverse mortgages is that they are insured by the Federal Housing Administration (FHA). Introduced as part of the Housing and Community Development Act of 1987, this insurance protects you against lender insolvency and ensures you have access to the available equity in your home. Even in the event something was to happen to your lender or they go out of business, this FHA insurance ensures you’ll still receive loan payments as outlined in the terms of your loan.
Designed to protect you and your heirs, this insurance also guarantees that you will not owe more than what your home is worth at the time of its sale. In order to gain this protection, as a borrower, you will pay an up-front mortgage insurance premium (MIP) at loan closing, and an annual fee on the loan balance over the life of the loan.
Reverse Mortgage Counseling
In learning about the reverse mortgage program, by now, you’ve likely heard of the reverse mortgage counseling requirement. But what exactly does this entail? Under federal law, as a borrower you are required to meet with an independent third-party counselor approved by the US Department of Housing and Urban Development (HUD).
The session is meant to provide an unbiased look at the pros and cons of a reverse mortgage loan for your unique situation. And that’s just one of the key purposes of the counseling session. Designed with you in mind, reverse mortgage counseling will equip you with the education and resources to help you make an informed decision, provide an opportunity to explore alternative financial solutions that may also meet your needs, and above all else – offer guidance to help you navigate the reverse mortgage program. Typically about an hour long, these sessions also provide a chance for you to ask any and all remaining questions you may have about the loan. And by the end of your session, you’ll walk away with a thorough understanding of all aspects of the reverse mortgage – applied to your specific situation.
Upon completing reverse mortgage counseling, you will be issued a Counseling Certificate which will become part of your loan application. You’ll provide this certificate to your lender so that they can move forward with accepting your application and processing your loan.
Non-Recourse Loan Protection
As mentioned previously, with a HECM reverse mortgage, you (or your heirs) will not have to pay the lender more than the value of your home at the time of repayment. This safeguard is called non-recourse protection. Under this protection, if your loan balance grows greater than the value of your home, the FHA will pay the difference at the time of repayment – via the mortgage insurance premium (MIP) that you’ve paid into over the life of the loan. In addition, the lender may not seek any assets other than the home to repay the loan and home maintenance costs.
Required Financial Assessment
Since 2015, reverse mortgage borrowers have been required to undergo a HUD Financial Assessment. The purpose of this assessment is to protect you against the risk of default and foreclosure. In working with your lender, this assessment will ensure that you are able to meet your responsibilities and obligations that come with a reverse mortgage – keeping up with property taxes, homeowners’ insurance, and general home maintenance. During the financial analysis, your lender will also ask your permission to conduct a credit check to determine that you have a proven history of paying bills on time and verify that you have adequate financial resources to meet these loan requirements.
Eligible Non-Borrowing Spouse Protection
In order to qualify for a HECM reverse mortgage and receive the safeguards that come with the loan, you must be at least 62 years of age. But what happens if you have a spouse younger than this age? Thanks to HUD provisions introduced in 2014, they still may qualify as an eligible non-borrowing spouse (NBS).
For HECM loans, an eligible non-borrowing spouse (NBS) is defined as an individual married to a reverse mortgage applicant and living in the home as their primary residence. If your spouse qualifies as an NBS, they can remain in the home even if you leave or pass away and continue to defer loan payment. Just as the case with any borrower, they will still need to keep up with loan requirements – including paying taxes, homeowners’ insurance, and maintaining the home.
So, let’s revisit the question at hand: Is a reverse mortgage safe? As outlined above, today’s reverse mortgage loans provide extensive consumer protections to help older homeowners live their golden years to the fullest and enjoy a brighter financial future.
Want to see if a reverse mortgage is right for you? At Longbridge, our goal is to give you peace of mind about your finances. Our team of Loan Officers is committed to recommending the reverse mortgage program only after making certain that the program is right for you and meets your needs. We’ll get to know you, your goals, you home, and your finances as we discuss your options. We will help you determine what reverse mortgage solution is right for you. Not all lenders make this commitment.
See why over 1.2 million Americans have already made a reverse mortgage part of their retirement plan2. For more information, contact the Longbridge team today.