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New Rules: Reverse Mortgages Will Be Harder to Get

One tool that seniors can use to receive funds for long-term care are known as “reverse mortgages.” A reverse mortgage works by converting home equity into cash–either a line of credit, monthly payments, or lump sum. The individual can remain in the home at this time, with the loan (and interest) due either upon the borrower’s death or moving out of the home. Reverse mortgages are only available to those who are at least 62 years old.

Shifting Rules
As reported recently in the Wall Street Journal, the rules about reverse mortgages are about to change. The U.S. Federal Housing Administration insures these mortgages and has power to regulate how they work. Not long ago the FHA decided to modify the program. The underlying goal of the changes are apparently to lower default rates and ensure borrowers are not unknowingly biting off more than they can chew.

More specifically, borrowing limits are changing. The FHA is enacting a lower cap on the amount a borrower can take in the first year–up to 60%of the appraised value of the home. This is down from a previous high of 75%. There are some exceptions to this rule, which will allow homeowners to borrow 75% of the appraised value immediately, but doing so will trigger a high loan fee.

Also changing are requirements on lenders before approving these loans. For example, lenders will now be required to evaluate the borrower’s ability to pay property taxes, homeowner’s association fees, and similar costs. Not only that, but the lenders may require those receiving the loans to set aside money to cover those costs.

In short: The new rules will make it a bit tougher to obtain a reverse mortgage and may limit the size of the loan. There is not much time before these rules go into effect. The FHA is pushing to have some (or all) of the changes take effect on October 1, 2013. To work under the older system, borrowers would need to finish the preliminary steps–a counseling session on receipt of case number–within the next month.

Get Professional Help
There is a lengthy list of New York seniors who have taken on these loans with rather harsh terms only to find that they are unable to live off the loan for long or pay it back entirely. When researching all options regarding long-term care, it is important to visit with an elder law estate planning attorney who can walk you through the details of each and help you make informed decisions to ensure goals are met in the most prudent fashion possible.

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