Right now, practically anyone who is breathing can qualify for a reverse mortgage – no underwriting or credit scores necessary. But that might be about to change.
Declining home prices after the housing crisis took a big toll on the federal program. So did the popularity of one type of mortgage, which allowed homeowners to withdraw the maximum amount of money available in a big lump sum.
The FHA eliminated that type of loan this year.
Now, the FHA says it will need to take even bigger steps by the beginning of its new fiscal year in October.
It wants to make the loans contingent on the financial assessment, which would look at how much cash a borrower had left over after paying typical living expenses, in addition to property taxes, homeowners insurance, any homeowner association dues, utilities, taxes and other debts. Credit scores would be considered though would not be a predominant factor.
If borrowers were deemed risky, the FHA would require them to set aside money from the loan proceeds to cover property taxes and insurance. The amount would depend on the borrower’s circumstances, the agency officials said. Some homeowners might be required to set aside enough tax and insurance payments to cover the entire life of the expected loan, which might be impossible for some potential borrowers who didn’t have enough equity. But less risky borrowers might need to set aside as little as two years’ worth of payments.
The agency also said it would like to cap the amount borrowers would be able to pull out at 60 percent of the maximum sum they were eligible for, or the amount needed to pay off their current mortgage, whichever was greater. (Reverse mortgage borrowers need to pay off their regular mortgage to obtain the reverse mortgage).
The agency is trying to fast-track these changes through Congress. The House gave its OK last month; it’s unclear whether the Senate will do so.
If the FHA fails to get Congress’ blessing, it may have to take more draconian actions by Oct. 1, which means yet another of its reverse mortgage products will probably be eliminated, leaving borrowers with options that would allow them to get access to 10 percent to 15 percent less cash than they can now.