Although recent changes to the federal reverse mortgage program make the product safer for seniors, the loan still has its problem areas—specifically the issue of non-borrowing spouses, says a recent CNN Money article.
The Federal Housing Administration, which insures Home Equity Conversion Mortgages, has already addressed a problem some borrowers encounter: spending down their loan proceeds without leaving enough to cover the costs of property taxes, homeowners insurance, and homeowner’s association fees and forcing them to default on their loan, CNN Money says.
Almost 10% of reverse mortgage borrowers had defaulted on their loans and had either lost or were in danger of losing their homes as of September, according to FHA data cited by the article.
But new changes to the HECM program limit the amount of loan proceeds borrowers can access up front, with further changes looming in the form of a financial assessment that will also consider borrowers’ ability to pay their loan obligations, including taxes and insurance associated with the property.
“New federal rules have made reverse mortgages safer, but there are still some major pitfalls,” says CNN Money. “One big issue the new rules don’t address… is that many couples take out reverse mortgages in the name of the older of the two spouses, in order to maximize payouts.”
Because HECM loan proceeds are based in part on the borrower’s age and life expectancy, loan amounts typically increase the older the borrower. As a result, some borrowers leave younger spouses off the title of the home, thus excluding them from consideration when determining the amount of the loan.
“We heard from a lot of surviving spouses getting evicted from their houses; lots of folks didn’t even know they were taken off the deed and found out when [their] spouse died,” Jean Constantine-Davis, an attorney with AARP, told CNN. “[Reverse mortgages] are counterintuitive and much more complicated than regular mortgages, which are complicated enough. A lot of people sign them without thinking, ‘I could be put out of my house.'”
AARP sued the Department of Housing and Urban Development, which administers the HECM program, regarding non-borrowing spouses getting evicted from their homes after the loan term ends. A judge has sided with the plaintiffs in the case, tasking HUD with finding a solution for the issue, which has not yet been determined.
Read more at CNN Money.
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