The Federal Housing Administration (FHA) is tightening the rules of reverse mortgages.Â With a reverse mortgage, as opposed to a conventional mortgage, the borrower is not required to make payments right away. The banks capitalize the interest so that the borrower will pay both interest on the interest and then ultimately the payments themselves.
Senior citizens commonly use reverse mortgages
as means of dealing with more immediate needs, like trying to avoid foreclosure or paying off household debts. And, unfortunately, some senior citizens have landed themselves in a difficult financial situation by using this method â€” which is why the government is now stepping in and trying to make for a situation where fewer and fewer individuals will put themselves in a compromising position.
According to the National Council on Aging, one third of their client base consists of senior citizens who are struggling with mortgage debts that surpass 50 percent of the total dollar value of their home. Because reverse mortgages are used so frequently to clear other debts, the borrowers have little financial cushion to fall back on.
And itâ€™s because of this that the FHA has been struggling, as more and more borrowers fail to pay their home insurance and property taxes. The money lost as a result of borrowers defaulting on their payments is covered by the FHAâ€™s mortgage insurance fund. So the FHA is now imposing more stringent criteria on prospective borrowers of the FHA-insured reverse mortgages. The agency calls their new approach a home equity conversion mortgage (HECM).
The FHA plans to start imposing a financial assessment test on prospective borrowers.
The chief aim of the test will be to help determine whether or not the prospective borrowers have sufficient cash flow to cover all of their major expenses after they have met their obligation to pay all of the insurance and taxes of their HECM.
The primary concern for consumer groups, of course, is to make sure that thereâ€™s still enough flexibility for low-income seniors.