Starting Sept. 30, seniors can tap 60% of the proceeds of a HECM loan at closing or during the first 12 months, according to FHA mortgagee letter 2013-27.
Seniors also have the option to take out a HECM loan to pay for home repairs or other obligations and walk away from the closing table with just 10% of the cash proceeds in their pocket.
These options are designed to encourage seniors to preserve some of the equity in their homes to meet future needs. But they will have to refinance to tap their remaining equity.
FHA is implementing these HECM reforms that were approved by Congress because too many seniors over the past five years took out all of their equity in one lump sum and ended up in financial trouble and defaulted by failing to pay taxes and insurance.
Starting Jan. 13, lenders must conduct financial assessments of HECM borrowers to ensure they have the residual income to benefit from a reverse mortgage.
If not, the HECM applicant may have to set up a “Lifetime Expectancy Set-Aside” reserve to cover property taxes and assessments as well as homeowners and flood insurance.
FHA is also changing the mortgage insurance premium it charges on HECM loans.
HECM borrowers who take out 60% or less of the proceeds at closing or during the first 12 months will pay a 0.5% premium. Borrowers who take out more than 60% will pay a 2.5% premium at closing.