New changes to the Department of Housing and Urban Development’s reverse mortgage program are presenting new hurdles to qualify, but should ultimately strengthen the Federal Housing Administration’s insurance fund, writes a Kiplinger article this week that includes input from industry participants as well as AARP and financial advisor Michael Kitces.
Kiplinger explains the distinction between the old reverse mortgage product and the new one, as of October 1, that offers less of an upfront draw and two different mortgage insurance premiums based on the upfront amount. Borrowers will receive about 15% less as a result, Kiplinger writes.
“The changes were made to ensure the program is open for business tomorrow,” One Reverse Mortgage CEO Gregg Smith told the publication, which cited a recent $1.7 billion treasury draw made by FHA in order to shore up its insurance fund as a reason for the changes.
Forthcoming changes including the introduction of a financial assessment and mandatory set asides for some borrowers that will hold funds to pay for property tax and insurance will add an additional hurdle, Kiplinger writes.
“Because the set-aside may need to last for 20 years or more, the amount could be very large. For some, the proceeds may end up paying only loan expenses, taxes and insurance—but covering those costs could enable the senior to stay in the home,” Kiplinger writes based on input from Kitces. “And it would free up cash in a retiree’s budget to pay for other expenses.”
Some interested borrowers will be denied the loan as an option because they won’t pass the financial assessment, AARP’s Lori Trawinski told Kiplinger.
And while affluent borrowers will likely pass that assessment, the elimination of the Saver could be seen as a deterrent for those who are looking to use a reverse mortgage to extend the life of their investment portfolio, Kitces says.
“Spending a few more thousand dollars upfront isn’t a deal killer, but it takes a little value off the strategy,” he says.
Written by Elizabeth Ecker