New rules for reverse mortgages

The federal government has tightened the rules for reverse mortgages, making it harder for some seniors to get these types of mortgages and reducing the amount of a home’s value that can be tapped.

Reverse mortgages allow elders who are house-rich but cash-poor to use their housing equity. Homeowners who are at least 62 years old can obtain a loan that doesn’t have to be repaid until the homeowner moves, sells, or dies. The homeowner receives a sum of money from the lender, usually a bank, based largely on the value of the house, the borrower’s age, and current interest rates.

Homeowners can get the money in one of three ways (or in any combination): a lump sum, a line of credit, or a series of regular payments, called a “reverse annuity mortgage.” Seniors sometimes use the loans to pay for home care while they remain in the home.

Almost all such loans are insured by the U.S. government. The government says that in recent years, default rates have been rising, and many seniors are losing their home when they are unable to continue paying for insurance and property taxes.

To address this problem, the government recently eliminated the most popular type of reverse mortgage, which was the “standard,” fixed-rate lump-sum mortgage.

This spring, the government is adding some new restrictions, including:

• Seniors must now undergo a financial assessment to make sure they can afford insurance and property taxes. If a lender determines that there’s a risk of default, the borrower might be required to set aside money for these items.
• Until recently, homeowners had a choice of two programs: the “standard,” which allowed for larger loans, and the “saver,” which offered smaller loans and smaller fees. The government has now merged the two programs. The new maximum loan amount is about 10-15 percent less than in the standard, but slightly higher than in the saver.
• Previously, the upfront fee to take out a standard loan was 2 percent of the property’s value, while the saver fee was .01 percent. The new fee is .5 percent. However, seniors who borrow more than 60 percent of a home’s value will instead pay a 2.5 percent fee.

During the first year of a loan, homeowners can withdraw a maximum of only 60 percent of the loan amount.

In general, proceeds from a reverse mortgage are not subject to income tax and generally won’t affect your ability to receive Social Security or Medicare. However, it’s possible that they could affect your eligibility for Medicaid.