New reverse-mortgage rules kicking in Aug. 4 should provide peace of mind to married couples considering taking out these loans.
Reverse mortgages (home loans for people 62 and older that let them convert home equity into cash) can be a useful way for homeowners to receive extra income in retirement; the loan must be repaid when the borrower dies, moves or sells the home.
But there has been a big problem: In some cases, husbands have taken out reverse mortgages and their wives then faced foreclosure when they couldn’t pay off the loans after their spouses died. AARP filed a class-action suit against the U.S. Department of Housing and Urban Development (HUD), saying that HUD didn’t protect the women.
How the Rules Will Help
The new HUD rules, welcomed by consumer advocates, aim to prevent this from happening to new borrowers taking out reverse mortgages, sometimes known as HECMs (Home Equity Conversion Mortgages).
Starting Aug. 4, if one spouse takes out a reverse mortgage and then dies, the survivor can continue living in the home without fear of foreclosure as long as she or he continues making the tax and insurance payments and keeps up the maintenance.
“The National Council on Aging applauds HUD for taking a leadership role so the most vulnerable seniors, including widows, are well-protected and can stay in their homes as they want,” says Ramsey Alwin, vice president of Economic Security for the nonprofit group.
When One Spouse Isn’t Yet 62
The new rules also say that a couple can get a reverse mortgage after Aug. 4 even if only one of the spouses is 62 or older.
Previously, says Peter Bell, president of the National Reverse Mortgage Lenders Association, every reverse-mortgage borrower had to be 62 or older. That’s why some couples with one spouse younger than that only put the older spouse’s name on the reverse mortgage.
However, starting Aug. 4, the size of a married couple’s payout (calculated using actuarial tables) will be based on the younger spouse’s age, even if that person isn’t on the mortgage’s title — the younger the person, the smaller the loan.
Colin Cushman, president and CEO of the reverse mortgage lender Generation Mortgage, offers up the following example for a husband, age 65, and a wife, age 60 where the husband is the sole borrower:
In the past, when the size of the loan was based on the husband’s age (65), he would’ve had access to about 54.1% of the home’s equity. Starting Aug. 4, when the wife’s age (60) is factored in, he’ll only be able to receive a reverse mortgage equal to about 51.1% of the home’s equity.
“Because this issue [non-borrowing spouses] has been a point of confusion within the home equity conversion mortgage industry for many years, any additional clarity that helps resolve the matter is welcomed,” says Cushman.
Alwin says the two changes will mean less risk for lenders and for non-borrowing spouses.
Why A Spouse’s Name Got Left Off
Why would couples put just one of their names on a reverse mortgage?
Some did it because one spouse was under 62 and by not revealing that on the loan contract, they’d get a bigger loan. While this sounds shady, the reality is it happened in some instances because older couples suddenly found themselves in dire financial straits and desperate for money.
“We encourage individuals to think early and often about how to use their home to stay at home,” says Alwin. “Unfortunately, some individuals don’t have that chance and find themselves in crisis situations and then look to their home equity to get out of a financial bind. So some have taken a spouse off a deed to maximize the draw on a reverse mortgage.”
The new rules, Alwin adds, strengthen the original intent of reverse mortgages as financial planning tools rather than crisis-management tools.
Continue reading by clicking on the link provided below:
By: Eisenberg, Richard. “2 New Reverse Mortgage Rules For Couples.”
Forbes. 07/18/2014. Web: 2 New Reverse Mortgage Rules For Couples – Forbes.
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