If you’re considering a reverse mortgage in the near future you need to be aware of one part of the new HUD guidelines that are effective for all new Case Numbers issued on or after December 15, 2014, NOT March 2, 2015 when the rest of Financial Assessment is implemented.
HUD has a new requirement that for borrowers to use reverse mortgage proceeds to pay off an existing lien on which the borrower received $500 or more, the loan must have been in effect for at least 12 months.
This includes any liens on which the borrower took out additional draws of $500 of more in the past 12 months such as Home Equity Lines of Credit (HELOC). This includes a single draw or cumulative draws that total $500 or more over a 12 month period.
This is something that all homeowners considering reverse mortgages need to think about as this is not something borrowers normally consider.
If you took out a loan on your property within the last 12 months or if you received an advance on a Home Equity Line of Credit in the past 12 months, after December 15th you will not be eligible for a reverse mortgage loan if you need the proceeds of the reverse mortgage to pay off those loans.
If you refinanced and did not take any money out at the time, there is no seasoning requirement on the loan.
For a borrower who did take money out of a refinance transaction, after December 15th you will just have to wait for 12 months under the new guidelines to apply for your reverse mortgage to pay off the loan.
Borrowers with HELOCs really need to take care. Many borrowers use their HELOC as additional funds for living, to repair their homes and for a source of needed funds for unexpected expenses.
The 12 month seasoning requirement could hurt these borrowers in that they may not be in a position to wait for 12 months between needed draws and the seasoning will begin anew after each time they reach cumulative draws of $500 in any 12 month period.
Therefore, borrowers who actually use their HELOC would start a new 12 month seasoning period before they could get a reverse mortgage every time their cumulative draws in a 12 month period reached $500 if they needed the reverse mortgage to pay off that HELOC loan.
If you have no draws on your line of credit, then there is no problem and you just have the same income and credit requirements to consider as all other borrowers beginning in March.
However, if you know that you want a reverse mortgage and you have a recent loan or a line of credit against which you have taken advances in the past 12 months that you wanted to pay off with your reverse mortgage, you need to be sure to have your counseling completed and your loan application back before December 15, 2014.
What if you cannot locate a HUD-1 Settlement Statement for a lien on title?
If the borrower does not have the HUD-1 from the closing, they should be able to obtain a copy from the title company who closed the loan, or from the lender or the servicer. As a service to the customer, you should review the prior lien (a copy should be provided by the title company upon request) and help the borrower figure out who would have a copy of this document.
Under the current requirements, if the HUD-1 cannot be located, the lien cannot be paid through the HECM loan. The borrower would need to satisfy the lien through other methods and document the payoff of the loan prior to closing. However, ALL REVERSE MORTGAGE believes that FHA will clarify this point with additional options in future guidance.
If a lien has been in place for more than 12 months, is a HUD-1 Settlement Statement required?
Yes. At this time, FHA requires a HUD-1 Settlement Statement for all liens that will be paid through closing. However, we anticipate FHA will update this guidance soon.
If the lien is ineligible to be paid through closing, but the existing lender will subordinate the lien to 3rd position behind the HECM, is that an acceptable alternative?
Yes, if the lien is not a first mortgage lien and meets all subordination requirements, the lien may be subordinated instead of being paid through closing.
If the borrower took out a loan in the past 12 months but drew less than $500 at closing or through draws after closing, can the lien be paid off through closing?
Do these new requirements include closed ended/non-HELOC liens?
Yes, this requirement includes all existing liens tied to the subject property, except existing HECM loans that will be paid off through the new HECM.
If a borrower took out a HELOC over 12 months ago, but has taken a draw of more than $500 in the last 12 months, can that lien be paid off through closing?
Yes, HELOCs that have been taken out over 12 months ago are not subject to the $500 draw restriction.
When does the 12 month time frame begin and end?
The time frame begins from the date of the closing shown on the HUD-1 through the application date of the HECM loan.
If a lien was taken out in the past 12 months and the borrower received $500 in proceeds, is the borrower ineligible?
No, the borrower may pay the lien outside of closing but prior to the final approval being issued. Any funds used to pay the lien outside of closing must be documented using normal funds to close required documentation.
If a borrower obtained a mechanic’s lien for repairs to the property within the past 12 months, what are the requirements?
Under the current requirements, all liens taken out in the past 12 months require the HUD-1 Settlement Statement and a payoff statement. ALL REVERSE MORTGAGE understands that most mechanic’s liens will not have a HUD-1 Settlement Statement; however, that is the current requirement. We believe that FHA will clarify this point in future guidance.