From the desk of San Francisco lead attorney Alison Cordova.
According to the New York Times, new rules go into effect on September 30th that will effectively block reverse mortgages from being a debt crisis management tool.
The Federal Housing Administration insures most reverse mortgages and is hoping the changes will strengthen the reverse mortgage program, which allows people 62 years old and up to tap their home equity line of credit without making payments.
Here is a rundown of the changes:
– There is now a limit on the amount of money that can be withdrawn in the first year of eligibility. Only 60% of the total money a homeowner is eligible to withdraw can be accessed in the first year. There is an exception if a borrower’s existing mortgage and other debts exceed the 60% limit, so that borrower can pay down those debts immediately. However, credit card debt is NOT factored into this equation.
– “Many prospective borrowers will have access to about 15 percent less home equity, on average, than the maximum amount available now.”
– Those borrowers who take out more than 60% in the first year will have to pay a higher upfront fee, i.e. 2.5% of the appraised value of the property. (Everyone else pays 0.5 %.)
Also, early next year (Jan. 13th) another change will go into effect: borrowers will have to prove that they have the wherewithal to pay property taxes and insurance over the life of the loan. This includes analyzing all income sources, including earnings, pension income, Social Security, individual retirement accounts, 401(k)’s, etc. If the lender determines that the borrower cannot keep up with the taxes and insurance, then they will be required to set aside money from the home equity line to do so. All in all, this means less money to the borrower to pay off other debts.
If you are struggling to pay an existing mortgage or other debt, such as credit card or medical bills, contact an attorney who can advise you of your options and whether utilizing a reverse mortgage is the best way to address your mounting debt.
Kevin Fallon McCarthy
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