While the Department of Housing and Urban Development (HUD) has tightened lending criteria for reverse mortgages, the new standards are designed to reduce defaults — which at one time represented about 10% of outstanding reverse mortgage loans, the AARP writes in a recent article.
The changes, which stem from the Financial Assessment that took effect April 27, “require that lenders determine whether would-be borrowers have enough income to keep up with property taxes and homeowner’s insurance so they don’t default on the loan and, possibly, lose their home,” AARP writes.
Maintaining ongoing property charges, such as taxes and insurance, has been a problem for some borrowers in the past.
According to Lori Trawinski, director of banking and finance at the AARP Public Policy Institute, about one in 10 outstanding loans were in technical default in 2012 because borrowers couldn’t keep up with those bills.
“The new lending standards are designed to reduce defaults,” the article notes. “Lenders will be required to look at credit reports, assets, income and the borrower’s history of paying taxes and homeowner’s insurance.”
While the changes will make it more difficult for people who are struggling with income flow to meet the criteria, Trawinski says, a borrower could still qualify by having the lender set aside some of the loan’s proceeds to cover property charges down the road.
Prospective borrowers in high-tax states, however, will need to determine whether a set-aside will still make a reverse mortgage worthwhile.
“We think reverse mortgages can be a useful tool for some people,” Trawinski says. “That’s where it becomes difficult. Everybody is in a different financial circumstance.”
To read the AARP article, click here.
Written by Emily Study