Up until the free fall on declining values, many seniors who had previously done a Reverse loan, were refinancing them into a new one. There are several advantages to doing this, because the loan amount is based on the seniors age and the HUD lending limit that recently increased to $625,500. Plus there is no prepayment penalty to contend with, allowing them to payoff their current loan without any issues.
Obviously if you did a Reverse loan several years ago and with the new increased HUD lending limit, that meant by redoing the loan, the senior could receive a larger line of credit and also have a lower start rate on the new one. And who wouldn’t want that?
HUD recently published Mortgagee Letter 2009-21 to clarify the guidelines for borrowers who might be thinking of refinancing their existing FHA-Hecm Reverse mortgage. It’s important to understand what they are in order to complete the transaction because in some situations, it wouldn’t work or make any sense for the borrower.
There has been for some time an “Anti-Churning Disclosure” that must be provided to the borrower. This document is included within the loan application package, indicating that borrower is not being pressured to redo their loan for the benefit of the lender or anyone else for that matter. And they must have 5 times the amount of the cost of the refinance remaining in their new line of credit, otherwise a transaction cannot be completed.
But with the drop in property values that we’ve been experiencing these last 18 months, sometimes refinancing a Reverse loan can’t be done and I have a number of clients who are waiting for the market to turn around. And when it does, then we will be able to move forward on refinancing their current Reverse loan and give them more cash to use to supplement their income.