Updated 9/17/2025

When it comes to reverse mortgages, a crucial step in the process is the financial assessment – a set of guidelines developed by HUD (the U.S. Department of Housing and Urban Development). This assessment is more than just a formality; it’s a safeguard designed to protect both the borrower and the government, which insures most of these loans.

ARLO teaching financial assessment

Why a Financial Assessment?

The main goal of the financial assessment is to ensure that, as a borrower, you’re in a strong position to manage specific financial responsibilities after you receive your reverse mortgage. These responsibilities are key to maintaining the good standing of your loan. They include:

  1. Keeping Up with Property Taxes: Staying current on property tax payments is essential.
  2. Maintaining Homeowners Insurance: Ensuring your home is insured is a must.
  3. Upkeeping Your Home: It’s important to maintain your home and property according to the standards set by the Federal Housing Administration.

The Consequences of Not Meeting Obligations: Failure to meet these responsibilities could lead to serious consequences. For instance, the reverse mortgage loan might become due and payable immediately, which can be a significant concern, especially if you’re still living in the home.

The Objective of the Assessment: The financial assessment’s objective is to verify that you have sufficient cash flow to handle these essential payments, ensuring the loan remains current and in good standing. It’s a step towards confirming that a reverse mortgage is a viable and sustainable financial solution for you.

In summary, the financial assessment is an integral part of the reverse mortgage process, designed to ensure that borrowers are well-equipped to fulfill their loan obligations and maintain their financial health post-mortgage.

Expert Insight from Michael Branson, CEO: “The financial assessment is not meant to deny people — it’s designed to make sure the loan remains sustainable for the borrower.”

Key Elements and Requirements

When you apply for a reverse mortgage, the person reviewing your application (called an underwriter) has an important job: they need to ensure you can comfortably pay your property taxes and home insurance. This is a big part of what they look for, as instructed by HUD (the U.S. Department of Housing and Urban Development), which oversees these loans.

Why Paying Taxes and Insurance Matters: The underwriter needs to verify that you can afford these payments. Why? Being able to pay your property taxes and home insurance is a requirement when you have a reverse mortgage. If you can’t keep up with these costs, it could cause the loan servicer to call your loan due and payable within the loan maturity event agreement.

Did You Know? Falling behind on property taxes or insurance can cause your reverse mortgage to become due immediately.

What This Means for You: When applying for a reverse mortgage, the underwriter will examine your residual income. They want to ensure that, in addition to enjoying the benefits of the loan, you’re also well-positioned to pay your property taxes and home insurance without any stress. This helps everyone involved – it keeps you secure in your home and ensures that the reverse mortgage works as it should.

Extenuating Circumstances to Financial Assessment

Reverse mortgages have specific financial assessment rules, but there’s room for flexibility, especially if your past includes loan defaults or credit issues. This doesn’t automatically disqualify you. Lenders must examine your unique circumstances closely to understand the reasons behind these financial challenges.

Extenuating Circumstances: Take, for instance, a situation where you or your spouse had a significant healthcare event that temporarily increased your expenses, leading to difficulties in meeting loan obligations. If this event is in the past and it’s clear that such an issue is unlikely to recur, the lender may view this as an extenuating circumstance. This means they recognize that these events were beyond your control but impacted your finances significantly.

Expert Insight from Michael Branson, CEO: “HUD wants to ensure that homeowners can stay in their homes long-term by keeping up with taxes, insurance, and basic maintenance.”

Assessment Beyond a Simple Yes or No: It’s essential to understand that the financial assessment for a reverse mortgage isn’t just a straightforward “yes” or “no” decision. It’s a comprehensive process that helps lenders evaluate your ability to handle a reverse mortgage without future financial strain.

Purpose of Financial Assessment: This assessment aims to ensure that opting for a reverse mortgage is a sound financial decision for you. The goal is for the lender to determine before it’s too late that the reverse mortgage won’t lead to financial difficulties.

Compared to Traditional Mortgages: While this assessment thoroughly reviews your financial history, the criteria used are similar to those for a standard mortgage. This familiarity can be reassuring, as the assessment process is not entirely foreign to those who have previously dealt with mortgages.

Overcoming Financial Assessment Challenges with a LESA

During the financial assessment process of your reverse mortgage application, there might be concerns about your ability to meet future loan obligations, particularly if your financial assessment raises questions. However, this doesn’t automatically disqualify you from obtaining a reverse mortgage. This is where the Life Expectancy Set-Aside (LESA) may be required.

Implementing a LESA Set-Aside:
A LESA allows a portion of your loan proceeds to be reserved specifically for paying property taxes and homeowners’ insurance. The lender calculates the amount by multiplying your annual property charges by your life expectancy, based on HUD actuarial tables. These funds are then set aside and disbursed directly toward your taxes and insurance as they come due.

Important to Know:
If you live longer than the life expectancy used to calculate the LESA, the set-aside funds could eventually be exhausted. At that point, responsibility for paying property taxes and insurance would return fully to you as the homeowner.

Did You Know? A LESA doesn’t reduce your eligibility — you still receive your full principal limit, minus mandatory obligations like loan costs and any existing liens. The set-aside simply earmarks part of those funds to ensure taxes and insurance are paid on time.

How LESA Helps:
By requiring a LESA, lenders can approve reverse mortgages that might otherwise be denied due to financial risk. It provides a safeguard that ensures your essential housing expenses are covered, helping you remain in your home without the fear of default for unpaid taxes or insurance.

Reverse Mortgage Financial Assessment: What It Means and How LESA Can Help

ScenarioWithout LESAWith LESA (Life Expectancy Set-Aside)
You have strong income and credit historyLikely approved without additional conditionsNot necessary if assessment passes
You’ve missed past mortgage or tax paymentsMay be denied without additional safeguardsLESA can be required to approve loan
Responsible for property taxes & insuranceYou pay these directly each yearLESA pays taxes and insurance from set-aside until funds run out
Loan proceeds available to borrowerFull principal limit (minus mandatory obligations: costs + existing liens)Same full principal limit (minus mandatory obligations + LESA reserve)
Risk of loan default from unpaid taxes/insuranceHigher if income or credit history is uncertainSignificantly reduced while LESA funds remain available; if funds are exhausted, responsibility returns to homeowner
Note: A LESA is calculated using actuarial life expectancy tables. If a borrower lives longer than projected and the set-aside funds are depleted, paying property taxes and insurance reverts back to the homeowner.

Expert Insight from Michael Branson, CEO: “Think of the financial assessment as a protection, not a hurdle — it safeguards both you and your home.”

Unsure If You’ll Qualify for a Reverse Mortgage? Call All Reverse Mortgage, Inc. (ARLO™) at (800) 565-1722 to speak with a specialist, or use our reverse mortgage calculator for a no-obligation quote tailored to your situation. We’re here to help you stay secure in your home.

Financial Assessment FAQ: Key Questions and Answers

Q.

What is the financial assessment for a reverse mortgage?

Financial Assessment for a reverse mortgage is the income and credit guidelines in place, as determined by HUD. Financial Assessment was put in place to determine a potential borrower’s willingness and capacity to meet their financial obligations in a timely manner.
Q.

Why was financial assessment created for reverse mortgages when there’s no mortgage payment?

Financial assessment was created for reverse mortgages because, even though there is no mortgage payment on the reverse mortgage loan, the borrower is still responsible for their taxes, insurance, and upkeep of the home. Before the financial assessment, many people obtained a reverse mortgage loan but ultimately found themselves unable to keep up with the ongoing costs of taxes and insurance.
Q.

How much residual income do you need for a reverse mortgage?

The residual income you need to qualify for a reverse mortgage will depend on which region of the country you reside in, as well as the number of occupants of the property. For example, a Single Person living in the Western region (AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY) would require a residual monthly income of just $589. Residual income is calculated by adding up all the expenses a borrower has (taxes, insurance, utilities, and consumer debt) and subtracting them from their total income. For example, if this single person in the West had a monthly income of $3,000 and total expenses of $2,000, they would have a residual income of $1,000 and qualify for the income requirements under Financial Assessment. To see the entire chart for all regions of the country and the FA requirements, please click here.
Q.

What kind of general credit requirements do you need for a reverse mortgage?

The general credit requirements needed for a reverse mortgage are very similar to those of a traditional mortgage. They are looking at the overall credit history, with the most emphasis placed on the most recent 24-month period before the date of application. The payment history for Taxes, Insurance, and HOA dues (if any) also factors into the credit requirements to determine eligibility.
Q.

What would disqualify me from a reverse mortgage?

There isn’t much that can disqualify you from getting a reverse mortgage. The Financial Assessment guidelines allow for what is known as a Life Expectancy Set-Aside (LESA) for those borrowers who do not meet the credit guidelines. For example, if you do not meet the credit guidelines but you have sufficient income to meet the Residual Income requirement, a LESA can be implemented in the loan, and you can still qualify. However, borrowers who do not meet the required income level or have an existing government loan delinquency or default may be disqualified.

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