Extenuating Circumstances Can Help You Qualify for a Reverse Mortgage
Under the new reverse mortgage rules set to take effect April 27, lenders will be required to conduct a thorough analysis of your financial profile before you can qualify—an analysis known as the reverse mortgage “financial assessment.” This assessment weighs things like proof of income and credit history in its determination.
But even if you’ve struggled with bills or debts that are included in this analysis, you may still be able to qualify for a reverse mortgage, depending on the circumstances around your financial history.
Starting April 27, all reverse mortgage borrowers will be subject to the Financial Assessment, a rule instituted by the Department of Housing and Urban Development as part of its efforts to make reverse mortgages stronger and safer for the borrowers they serve.
As with any “forward” loan, reverse mortgage borrowers will now be subject to credit history checks and income verification when applying. The financial assessment takes a close look into past debts, payment history, and various sources of income—including income from other household members, if that scenario applies. But this may work out in your favor if you have what’s known as “Extenuating Circumstances” that influenced your financial past.
If you’ve had instances beyond your control in the past that caused you to lose income, rack up debt or make late payments on existing obligations, such as paying a mortgage, lenders will now consider those circumstances in their analysis of your financial situation.
HUD defines extenuating circumstances as certain events that have occurred beyond a borrower’s control, which as a result, have led to credit or financial shortfalls.
It’s important for lenders to evaluate this because these events, and their resulting financial implications, can impact a reverse mortgage borrower’s capability to pay mandatory obligations associated with the loan, including the ability to remain current on property taxes and homeowners or hazard insurance.
Extenuating circumstances beyond the borrower’s control that resulted in a loss of income may include, but are not limited to:
- The death or divorce of a spouse that directly resulted in late payment of obligations
- A result of the borrower’s or spouse’s unemployment, reduced work hours or furloughs
- Emergency medical treatment or hospitalization that directly resulted in late payments of obligations
Extenuating circumstances can also be triggered by events that have lead to an increase in financial obligations, including but not limited to:
- Emergency medical treatment/hospitalization for yourself or your spouse
- Emergency property repairs not covered by homeowners or flood insurance
- Other causes that directly resulted in late payments
There are, however, some stipulations in justifying these circumstances and their impact on your finances. When documenting extenuating circumstances, lenders must demonstrate:
- The connection between the specific occurrence(s) and their measurable impact on a borrower’s finances.
- That no other actions taken by the borrower contributed to the derogatory incident(s) (e.g. assuming new financial obligations, voluntarily terminating employment or reducing hours, etc.)
- The borrower demonstrates financial liquidity through non-reverse mortgage assets, additional sources of income, access to revolving credit or other factors that enhance his/her ability to endure financial challenges.
- The likelihood that these circumstances will not recur.
What this means for me
To further illustrate what these requirements and stipulations mean and how they may affect you, consider this scenario: you are a prospective borrower who cites loss of income due to unemployment as the cause of having made late payments on your financial obligations in the past.
For this to count as an extenuating circumstance, you will have to provide documentation (e.g. credit report, W-2s, tax returns, financial statements, etc.) to show:
- A credit report that indicates you had satisfactory credit prior to being unemployed.
- Your documented income, including any unemployment compensation received, was insufficient to make timely payments on all outstanding accounts.
- Your credit report indicates that you did not incur new debt that contributed to your inability to meet all obligations in a timely manner.
- You are employed again and/or has alternate sources of income.
HUD deems “satisfactory credit” as a borrower who has made all housing and installment debt payments on-time for the previous 12 months and no more than 30-days late mortgage or installment payments in the past 24 months.
A borrower can also be considered as having satisfactory credit if they have no major derogatory credit on revolving accounts in the previous 12 months.
But let’s say you’re in the market for a reverse mortgage and it turns out that, after a lender has conducted a financial assessment, you have not demonstrated the willingness to meet financial obligations and no extenuating circumstances can be documented on your behalf.
This doesn’t necessarily make you ineligible to qualify for a reverse mortgage. In the event this occurs, you will require what’s known as a fully-funded Life Expectancy Set-Aside.
A Life-Expectancy Set-Aside (LESA) is an amount withheld from the reverse mortgage proceeds to be used for the payment of property charges during the life of the borrower. How much funding you may need for the LESA to cover these expenses are based on the results of the lender’s financial assessment of you.
The formula for determining the LESA is based on a number of factors, including the projected sum of current property taxes; homeowners and flood insurance premiums; a factor to reflect increases in tax and insurance rates; the reverse mortgage expected average mortgage interest rate; and the life expectancy of the youngest borrower.
The amount required to fund a LESA largely depends on your particular situation and whichever extenuating circumstances apply to you, if any.
To learn more about how you can qualify for a reverse mortgage, or if you have questions about extenuating circumstances, call us Toll Free at (800) 565-1722 or request a quote.
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