Seniors looking for a big cash payout from a reverse mortgage will have to look elsewhere for needed funds.
A small but increasing number of defaults on the loan product has prompted a crackdown by the Federal Housing Administration (FHA) on the biggest payout loan to homeowners.
The basic theory behind reverse mortgages — you must be 62 or older to apply — is that instead of making payments to a lender like in a traditional mortgage, the borrower receives non-taxable money from the lender, which does not have to be paid back for as long as the person lives in the home.
Borrowers are now restricted in how they get one type of reverse mortgage known as the standard fixed rate Home Equity Conversion Mortgage Loan, or HECM.
The HECM has been the most popular with borrowers because it yields the greatest amount of money — often in the hundreds of thousands of dollars — in one lump sum. HECM loans are still available — but instead of having fixed mortgage rates, they are offered only with variable rates, which yield less immediate cash.
"The standard HECM loans have proven to have an unusual number of defaults," said Delores Conway, associate dean and professor of real estate at the University of Rochester.
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