Considering a Reverse Mortgage? Learn About HUD's New HECM Guidelines

This past week HUD instituted a non-HECM lien guideline that may affect some homeowners’ eligibility to take out a reverse mortgage. According to reverse mortgage counselor Carmen Jones-Burke, the new rule is part of an on-going effort to keep the HECM program viable. Jones-Burke, who works for national nonprofit Consumer Credit Counseling Service of Maryland and Delaware, says, “This guideline and the additional financial assessment rules that go into effect next March were instituted to help protect the HECM insurance fund and keep the program sustainable to meet future needs. Seniors who hope to qualify for a reverse mortgage need to be aware of these regulations and how they may influence their ability to qualify for a loan.”

The HUD guideline that was instituted on December 15 mandates that borrowers who have taken out a non-HECM lien on their home in the last 12 months and have received $500 or more in proceeds from that lien must wait a year to apply for a reverse mortgage. Jones-Burke says, “This means that homeowners who have been approved for a home equity line of credit this past year and obtained more than $500 from this loan will have to wait the assigned time before they can apply for a reverse mortgage.”

On March 2, 2015, HUD also will begin requiring lenders to implement Financial Assessment. This new procedure could impact some people’s ability to obtain a reverse mortgage and possibly limit the amount of funds that are available to others.

Jones-Burke says, “This guideline was needed because there’s been a shift in the kind of homeowners who apply for HECMs. Historically, the average applicant was a widow in her 70s who had built up substantial equity and who was taking out the loan in order to have the ability to remain in her home. Today we often see applicants in their 60s who currently owe a significant mortgage balance and who have limited funds to meet their long-term financial needs. These individuals are more likely to take out large portions of their HECM proceeds early on. This puts a drain on the HUD insurance fund. They also may find it harder to meet their HECM obligations and therefore have a greater risk of default.”

To address these issues, HUD will require reverse mortgage lenders to evaluate a borrower’s “willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.” How will HECM providers assess seniors’ capacity and willingness?

HECM Homeowner Capacity

Jones-Burke says, “Homeowners’ assets and income will be used to gauge their capacity. Lenders will consider the amount of financial resources they have to cover real estate taxes, insurance, and maintenance and if the numbers add up over the lifetime of the loan.” Under the March, 2015 guidelines, some homeowners who clearly don’t have the financial resources to cover their HECM obligations over time may no longer qualify for a loan. Others may qualify because once the HECM pays off their traditional mortgages, they will have the money they need to cover living expenses and their long-term loan obligations. Those who lack resources but who have shown a willingness to meet their financial obligations in the past may also qualify provided they participate in a partial or fully funded Lifetime Expectancy Set Aside or LESA.”

These are funds that are set aside for the purpose of paying property taxes and homeowner’s insurance. Under a fully funded LESA, the lender will make the tax and insurance payments. Under the partially funded LESA, the borrower will receive semi-annual payments from the set aside to cover these expenses.

HECM Homeowner Willingness

Lenders will look at borrowers’ credit reports to determine their willingness to meet HECM requirements. Does this mean borrowers’ credit scores will be considered in the same way they are for traditional mortgages? Jones-Burke says, “No, lenders will simply check homeowners’ credit reports to review their payment histories and obligations. If they’ve paid past financial obligations in a timely manner this may predict their willingness to meet financial obligations once they receive a HECM.”

Do the new HECM financial assessment regulations make sense? Jones-Burke says, “Change is never easy, but in order for the HECM program to continue, it’s needed. Hopefully these rules will help keep the program healthy and protect homeowners from taking on a financial obligation they can’t afford.”

Reverse Mortgage Counseling

Given the complexity of the HECM product, all seniors who hope to apply for a loan must first gain HUD-certified reverse mortgage counseling. During counseling sessions at CCCS of Maryland and Delaware, clients receive advice on all the financial options that may be open to them. They also learn about HECM program qualifications, how reverse mortgages work, factors that determine loan amounts, the pros and cons of available reverse mortgage options, and responsibilities and issues to consider. It’s important to note financial numbers offered during counseling are strictly given in illustration. Only lenders can provide clients with the actual loan amounts, costs, and fees.

In light of the new rules, Jones-Burke believes CCCS is particularly suited to help reverse mortgage clients determine their financial readiness. She says, “We take a different approach because of who we are. During counseling, we provide clients with a full financial assessment. We help them look at the big picture. We aren’t here to sell a product. We make sure they’re informed, so they can decide what will work for them.”

To learn more about CCCS’s reverse mortgage efforts, please visit www.cccs-inc.org. To schedule a CCCS reverse mortgage counseling session, call toll-free 1-866-731-8486. Jones-Burke concludes, “We are in the perfect position to help people become better educated consumers. We help them understand reverse mortgages and show them how to become more financially secure. Based on their unique situations, we provide them with the information and resources that are necessary to meet their needs!”

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Consumer Credit Counseling Service of MD & DE, Inc. (CCCS) is an accredited 501(c)(3) nonprofit agency that helps stabilize communities by creating hope and promoting economic self-sufficiency to individuals and families through financial education and counseling. CCCS MD State License #14-01