HUD’s New Rules on Reverse Mortgages Could Impact Borrowers
In mid-2017, the U.S. Department of Housing and Urban Development, or HUD, announced new rules that limit the amount of of money reverse mortgage borrowers can get from their homes, as well as increasing the upfront costs for reverse mortgages. The rules took effect on Oct. 2nd, 2017, and while they aren't retroactive, they do affect all reverse mortgages issued after that date.
How These Rules Will Affect Reverse Mortgage Borrowers
In general, it’s been calculated that HUD’s new rules reduce the amount a borrower can draw from a reverse mortgage by 11-12%. However, this varies greatly due to factors including the size of a borrower’s loan and the amount of equity they currently have in their home. HUD’s updated rules also increase the upfront fee that borrowers are required to pay. Before the rules were instituted, most borrowers were charged an upfront fee of 0.5% of the appraised value of their home. That fee has been increased to 2% for all reverse mortgages. This is a significant increase for most people, but a slight decrease for the small amount of people who were being charged 2.5% upfront for larger reverse mortgages.
However, despite the increase in upfront fees, MIP for reverse mortgages has fallen significantly due to the new regulations. Before the change, MIP was set at 1.25% of the loan amount, but it now has been reduced to 0.5% of the loan amount.
Why HUD Changed the Rules
Reverse mortgages are federally insured— so if someone defaults on them, the government has to pay back the lender for part or all of their loss. In recent years, too many reverse mortgages have gone into default, leading to excessive expenses for the government and making their insurance program unsustainable. By tightening the rules, HUD hopes to bring the program back to financial health.