New FHA Reverse Mortgage Rules
There are new rules concerning Federal Housing Administration’s reverse mortgage that you need to consider if this is something that you are thinking over.
Multiple changes have taken place in April 2013 with regards to the rules of FHA-insured reverse mortgage or regular mortgage. Acting Federal Housing Administration Commissioner Carol Galante revealed in a letter to Sen. Bob Corker (R-Tenn.) in December 2012 that the changes to the rules for FHA-insured mortgage or regular mortgage programs will aid their efforts to reduce losses for the agency. The changes include:
- Suspension of the FHA Home Equity Conversion Mortgage program which provides reverse mortgage borrowers the biggest up-front, lump-sum payment.
- Increasing the minimum downpayment for regular loans with the amount between $625,500 and $729,000 from 3.5% to 5%.
- Toughen underwriting rules for borrowers with low credit scores allowed by the FHA (between 580 and 620).
- Crack down on lenders that imply that borrowers can automatically obtain an FHA-insured loan following a foreclosure.
Changes on reverse mortgage
The Federal Housing Administration announced the consolidation of its Standard Fixed-Rate Home Equity Conversion Mortgage (HECM) and Saver Fixed Rate HECM pricing options which takes effect for case numbers assigned on or after April 1, 2013. The Standard Fixed-Rate Home Equity Conversion Mortgage program allows borrowers to take a large up-front lump-sum payment which was popular. However, there have been some instances in which the borrowers spent the lump-sum amount and then didn’t have sufficient funds to pay for their property taxes or homeowner’s insurance.
Instead, borrowers will be directed to the variable rate or fixed rate Saver HECM programs which have smaller payments and reduced up-front fees. The HECM Saver program has a maximum loan amount that is almost 10% to 18% less than the HECM Standard program of $625,500.
In addition to this, the FHA intends to require lenders to review the finances of borrowers to ensure that they will be able to pay for future property taxes and insurance premiums prior to giving them a reverse mortgage.
Credit score requirements
If you are a borrower with a credit score between 580 and 620, you will need to show that your monthly expenses do not go over 43% of your income. In case it does, there are other factors that the lender will be allowed to consider which may show your ability to pay your mortgage such as a hefty downpayment or a considerable amount of money saved up in the bank.
The FHA will raise the minimum downpayment for its largest balance loans (loan amount between $625,000 and $729,000) from 3.5% to 5% which means homeowners in high-priced areas will be required to produce larger downpayments.
FHA loans following a foreclosure
Borrowers don’t automatically obtain an FHA loan following a foreclosure, contrary to what some lenders imply. Acting FHA Commissioner Galante states that borrowers have to meet the following criteria in order to become eligible for FHA-insured mortgage three years after losing a home to foreclosure:
- The foreclosure was due to an isolated economic difficulty, such as a sudden job loss, and the problem has been resolved.
- Good credit has been established by the borrower.
- The borrower has met all the underwriting guidelines, to include the new rules with credit scores between 580 and 620.