We got a lot of response to our last article on reverse mortgages —and a boatload of flak from readers who saw parents and grandparents with reverse mortgages lose their homes to lenders during the real estate crisis of 2008. And those readers are right. There was a lot to hate about earlier incarnations of these complicated products. That’s why Congress stepped in.
New rules were introduced through the Dodd-Frank Wall Street Reform and Consumer Protection Act to help safeguard borrowers from earlier predatory practices and to help simplify these loans for homeowners who want to age in place. Is a reverse mortgage a good idea for seniors? Judge for yourself: Here’s how reverse mortgages have changed since 2014.
1. Better Preservation of House Value
With a reverse mortgage, the borrower is still responsible for paying any remaining mortgage on the house, taxes, and insurance, and for maintaining the property. Before Dodd-Frank, the only thing lenders considered when writing the loan was the equity in the house, not the borrower’s ability to continue paying for its upkeep. Today, lenders need to consider eight financial factors—including income, current debt levels, and credit history—before approving a loan. This means seniors with a reverse mortgage are more likely to be able to maintain the house.
2. Limited Withdrawals
Under the earlier rules, borrowers could take all their equity in one big payout. That caught many borrowers short when the real estate market collapsed, triggering The Great Recession. Today, you can only take 60 percent of the value of the loan in the first year, unless you’re using the proceeds of the loan to pay off an existing mortgage. This rule ensures that homeowners aging in place will have guaranteed income after the first year.
3. No Age Restrictions
Originally, if a reverse mortgage was being taken out by a married couple, both spouses had to be at least 62 years old, even if the younger spouse’s name wasn’t on the loan. Today, there are no restrictions on the spouse’s age, but there is a catch: The size of the reverse mortgage payout is based on the life expectancy of the younger spouse, regardless of whether they are on the loan. The younger the spouse, the lower the payout.
4. No More Evictions
The eviction rules under earlier iterations of these loans really gave the reverse mortgage industry its black eye. Before 2014, the loan became due upon the death of the borrower. Period. Surviving spouses who weren’t on the loan, typically elderly widows, had to come up with the cash quickly or face eviction. Today, if the borrower dies or moves into assisted living, the spouse can stay in the home until they die or move—as long as they can keep up with the taxes and insurance. Do we think a reverse mortgage is a good idea for seniors? This is not a blanket endorsement of reverse mortgages. There are still caveats to consider. For example, reverse mortgages come front-loaded with additional fees and expenses. As a result, they cost more than other types of credit. And they can complicate an estate after the borrower dies.
That said, nearly half of all workers approaching retirement have no savings to fall back on, and for those already in retirement, the equity in their homes makes up nearly 80 percent of their net worth. Today’s reverse mortgages can provide a critical safety net for retirees on shaky financial footing who want to age in place. And these reverse mortgage updates can help preserve a house’s value for future generations, as long as those generations understand this financial tool and know how to use it.