Pursuing a Home Equity Conversion Mortgage (HECM, also referred to as a Reverse Mortgage Loan) is a big decision. While it allows you to convert your home’s equity into non-taxable cash that you can use to supplement your retirement income, “borrowers must continue to pay for property taxes”, you may be wondering what types of protections are in place for you, the borrower. A very common misconception about reverse mortgage loans is they take advantage of the elderly and result in borrowing loosing their home. Reverse mortgages are in fact very well-regulated by the federal government and include consumer protections to help put your mind at ease.
Here are six protections that will increase your confidence in the financial stability and safeguards of a reverse mortgage loan.
1. The Reverse Mortgage Loan is a non-recourse loan
As a borrower, you will never have to pay the lender more than the amount borrowed or the current value of the home, whichever is less. Should the loan balance grow greater than the value of the home, the Federal Housing Administration (FHA) will pay the difference when it is time for repayment.
2. You will complete a financial assessment
Federal Housing Administration (FHA) requires you to work with your lender to examine your income and expenses before pursuing a HECM loan, to protect against the prospect of default and foreclosure. This step serves to help you make a careful decision about whether the reverse mortgage loan will be an effective part of your retirement planning strategy. The priority is to ensure that you will be financially able to meet your responsibilities with the reverse mortgage loan, including paying property taxes and home insurance.
3. The Right of Rescission
The right of rescission is the ability to cancel your reverse mortgage loan. Federal law allows you three days to cancel most types of HECM loans after they close. Unfortunately, right of rescission does not apply to HECM for Purchase transactions.
4. You must complete a counseling session with a HUD-approved counselor
Federal law requires that reverse mortgage loan borrowers meet with a third-party counselor that has been trained and approved by the Department of Housing and Urban Development (HUD) for an unbiased look at the pros and cons of borrowing. They will explain how reverse mortgages work including payment, costs, taxes, advantages, your obligations, and any potential drawbacks—all of the information you need to make an informed decision. Once you complete the session, you will receive a certificate that will become a part of your loan application.
5. Protections for Eligible Non-Borrowing Spouses
In 2014, HUD made additional provisions for the eligible non-borrowing spouses of borrowers, to protect them in such a case. After your passing, your spouse may remain in the home, continuing to defer loan repayment, as long as all loan and FHA requirements continue to be met, including maintenance of the home and payment of all property taxes, fees, and homeowner’s insurance.
6. Initial Principal Limit
To help you make your money last longer and contribute to your long-term financial security, under the most common payout scenario, you will only be able to access 60% of your approved loan amount for the first year after closing. A formula is used to calculates the age of the youngest borrower or eligible non-borrowing spouse, interest rate, and lesser of home value or HECM lending limit to determine the initial principal limit. Any additional loan money must be used to pay off your existing mortgage or make those repairs deemed necessary by the lender. After the first year, you will be able to access to the remaining loan amount.
As you can see, today’s reverse mortgage loans are well-regulated and provide extensive consumer protections to help seniors enjoy their retirement by eliminating many of the financial concerns you could face in your golden years. These loans offer numerous advantages for those who wish to enjoy financial independence, so take the time and call us at 805-738-8326 and let us help you determine if a reverse mortgage loan is right for you!
Article by: Rick Underwood
Written: 8/16/19
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