Concerned over potentially misleading advertising and sales presentations for reverse mortgages, the FHA is clarifying the rules of the program to ensure that borrowers are given accurate information about these loans.
In particular, the FHA is concerned that lenders could give seniors the impression that their options are more limited than they actually are, rather than informing them of the full range of choices available to them.
The new rules require lenders to use clear, consistent language in describing the FHA's Home Equity Conversion Mortgage (HECM) program and prohibit them from implying that such loans have limitations or restrictions that are not required by the FHA. HECMs are the FHA's official term for reverse mortgages.
"Senior borrowers deserve freedom of choice when considering whether a reverse mortgage is appropriate for them," said FHA Commissioner Carol Galante. "This guidance is intended to make sure lenders know we're keeping a watchful eye on their marketing and advertising practices that might steer borrowers toward reverse mortgage options that limit their available choices."
Fixed-rates available for lump sum payouts only
Among the specific details borrowers must be told are:
- FHA-backed loans - including HECMs - can be fixed- or adjustable-rate, and adjustable-rate loans can adjust annually or monthly.
- On reverse mortgages, fixed-rates are only available on loans with a single lump sum disbursement. HECMs that provide for regularly scheduled or irregular draws are only available as adjustable-rate loans.
- Borrowers choosing an adjustable-rate reverse mortgage may choose from one of five options for receiving payment from the loan: line of credit, term, tenure, modified term or modified tenure.
- Borrowers may change their method of receiving payment on any adjustable-rate reverse mortgage at any time, provided there are funds available to be withdrawn.
- The maximum funds available to be borrowed depend on the age of the youngest borrower on the loan.
Cannot claim FHA endorsement
In addition, lenders who are authorized to participate in FHA loan programs may not claim that their products have been endorsed by the FHA or its parent agency, the Department of Housing and Urban Development (HUD).
Reverse mortgages are a type of equity loan that allow homeowners age 62 and above to borrow against the equity in their home without having to pay it back as long as they reside there. Expenses tend to be higher than on other home equity loans and interest charges accumulate as long as they reside in the home. The loans are often paid off through the sale of the home once it is vacated, although the borrowers or their heirs may also pay it off using funds from other sources if they so desire.