Recent Protections For Seniors Wanting A Reverse Mortgage

The reverse mortgage was created for seniors who were cash-poor and house-rich

. They could use the reverse mortgage loan for anything. But most seniors wanted the money to help pay living and medical expenses.

You'll recall that a reverse mortgage allows people who are 62 or older to borrow against their home equity. But unlike traditional home loan products, no payment is due on a reverse mortgage until the homeowner moves, sells or dies. If the home is sold, any equity that remains after the loan is repaid is distributed to the borrower or the borrower's estate. The repayment amount can't exceed the value of the home.

However, fees for such loans were significantly higher than traditional mortgage loans, and other incentives to sell them took advantage of seniors. So the Housing and Economic Recovery Act of 2008 made provision to help seniors by reining in those fees and any fraud associated with reverse mortgages.

Importantly, the law reduces fees on reverse mortgage loans. It cuts the origination fee to 2 percent of the first $200,000 borrowed and 1 percent for any amount after that. The maximum origination fee can't exceed $6,000. The fee is currently capped at 2 percent of the loan limit or of the home's value. The law does allow for the cap to adjust, based on the annual percentage increase in the consumer price index.

Signed into law in 2010, Public Law 111-229 allows the option of FHA that lowers borrowing costs further for those who wish to take out smaller home equity conversion mortgages.

The housing act also includes a provision for reverse mortgages partly because of concerns that seniors were inappropriately being sold other financial products. In some cases they were encouraged to use their reverse mortgage proceeds to buy annuities or long-term care insurance.

The Financial Industry Regulatory Authority (FINRA), which regulates the securities industry, has issued several warnings about reverse mortgages, particularly cautioning seniors about doing business with financial professionals who want them to obtain a reverse mortgage in order to fund a particular investment product.

So, except for title, hazard, flood or other such insurance products, lenders are prohibited from requiring borrowers to purchase insurance, annuities or other similar products as a condition for obtaining a reverse mortgage. The law also restricts lenders who are originating reverse mortgages from working with, employing, or providing incentives to other professionals trying to sell seniors other financial products as part of the application process.

Also under the new law, the amount a senior can borrow through a reverse mortgage has been increased to $417,000 nationally. However, that limit could be pushed to $625,000 if the borrower lives in a high housing-cost area. Currently, the amount a senior can borrow varies by county. The range now is $200,160 to $362,790.

by: Shane Flait

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