Federal Government Is Getting Rid of Popular Reverse Mortgage Option

The federal government is eliminating its most popular reverse mortgage. Soon homeowners will no longer be able to get a lump-sum payment if they apply for a reverse mortgage under the Home Equity Conversion Mortgage (HECM) Standard program.

A reverse mortgage allows a homeowner aged 62 or older to receive a sum of money from the lender, usually a bank, based largely on the value of the house, the age of the borrower, and current interest rates. The loans do not have to be repaid until the last surviving borrower dies, sells the home, or permanently moves out. The HECM is the only reverse mortgage program insured by the Federal Housing Administration (FHA), and the FHA sets a ceiling on the amount that can be borrowed against a single-family house.

As of April 1, 2013, the federal government is no longer going to allow home owners to apply for a HECM Standard fixed-rate, lump-sum reverse mortgage. Borrowers still can apply for a line of credit or monthly payments at an adjustable interest rate under the HECM Standard program.

The reason for the change is that there were more defaults with this type of loan as opposed to other loans. While it isn't possible to default on a reverse mortgage payment, home owners must make timely payments of property taxes and homeowner's insurance in order to keep the loan in place. If taxes and insurance aren't paid, the loan can default. The high number of defaults on these types of loans indicates that homeowners in serious financial trouble may have been using the loans as a last resort rather than as part of a financial plan.

Borrowers will still be able to get a lump-sum loan using the HECM Saver program, which pays out a smaller percentage of a home's value compared to a Standard loan.

For more information on reverse mortgages, click here.