Due to the raised concern over possibly misleading sales presentations and advertisements for reverse mortgages, the Federal Housing Administration (FHA) has made it a priority to shed light on the program rules. Borrowers will thus receive accurate information on these loans, from an official source.
The FHA has taken measures to make sure that senior borrowers are informed on the full range of options that they have available in addition to a reverse mortgage. The need for such clarifications became as clear as daylight due to the concern that lenders could give seniors the impression that they have very limited options, cornering them to make a decision in favor of a reverse mortgage.
Lenders are required by the new rules to clearly and consistently describe the FHA’s Home Equity Conversion Mortgage (HECM) program. Borrowers need to understand that there are limitations and restrictions on such loans that are required by the FHA. And lenders’ product presentations should not imply something else.
Senior borrowers’ freedom of choice is thus respected, as they need to make an informed decision when it comes to contracting a reverse mortgage. Marketing and advertising practices should not be used to convince borrowers in favor of reverse mortgages, thus preventing them from exploring the alternatives.
Fixed rates are possible only for lump sum payouts!
Here are some of the most important aspects that borrowers need to be informed about:
• FHA-backed loans – including HECMs – could have a fixed or an adjustable rate. For ARMs, the rate could be reset monthly or yearly.
• Borrowers may get a fixed-rate only on reverse mortgages with a single lump sum disbursement. Irregular or regularly scheduled draws are available only on adjustable-rate loans.
• For adjustable-rate loans, the borrower may select from five options to receive the money: term, modified term, tenure, modified tenure or line of credit.
• It is possible for borrowers to change their method of receiving payment on any adjustable-rate reverse mortgage at any time. This can be done for as long as there are funds.
• The maximum funds that can be borrowed depend on the age of the youngest borrower on the mortgage.
No claim of FHA endorsement
Lenders cannot claim that they have been authorized to participate in FHA loan programs. Claims of FHA or HUD endorsement are also a NO-NO. Such measures prevent lenders from using black marketing strategies to steer borrowers towards reverse mortgages.
The costs and fees of reverse mortgage loans are higher than on other types of loans, and the interest rate charged accumulates over the time period that the homeowner resides in the house. In the majority of cases, the debt is covered by selling off the property when it is vacated or the debt is paid by the heirs from other funds.