Are you a condo owner that is waiting on your complex approval and needing to do something in the short term? What about a homeowner that is going to open a home equity line of credit (HELOC) before doing a reverse mortgage in a few months?
If you have taken out a loan in the twelve months preceding your reverse mortgage application, you may be impacted by a new rule that HUD recently released.
As of December 15, 2014, a reverse mortgage can only pay off a mortgage or home equity line of credit that is over twelve months old OR resulted in less than $500 cash to you. Since the reverse mortgage can be the only debt against the property, we are required to pay off any existing debts.
Let’s look at what home loans are acceptable for us to pay off at closing:
- A mortgage or home equity line of credit that was taken out over one year ago
- Any recent home loan that resulted in $0 cash at closing.
- A mortgage or HELOC that resulted in less than $500 in cash to you, no matter the closing date
- Any existing reverse mortgage
If your existing home loan doesn’t meet these requirements, the only way for you to proceed with a reverse mortgage is to pay the existing loan back with cash before proceeding. It’s either that or waiting until one year has passed from when the loan closed.
Why would HUD create this new rule?
It stems from a previous rule that they put in place back on September 30, 2013. That rule kept customers from drawing all of their reverse mortgage proceeds out at closing, creating more risk for the FHA insurance fund. Any customer with a free and clear home would only be able to borrow 60% in the first year. It gets more complex for customers with higher debt loads, but that gives you an idea of the limitation.
As always, some customers and loan officers found a loophole and exploited it. These customers were instructed to take out conventional loans or home equity lines of credit to evade the reverse mortgage draw limitations. The new loan would be paid off in full by the reverse mortgage and thus a fully drawn reverse mortgage was created. It took HUD nearly fifteen months to close the loophole, but they managed to do so.
Unfortunately, well intentioned customers that recently opened and used a line of credit before having a major life event, will now be kept from doing a reverse mortgage until their loan is one year old. We are going to ask HUD why customers that won’t exceed the 60% first year draw limitation on their reverse mortgage are being negatively impacted by this new rule. It’s an unintended consequence for sure.