Lenders must conduct a mandatory financial assessment of all borrowers as part of the loan application process.

Historically, borrowers qualified for a reverse mortgage based on their:

  • Age: a minimum of 62
  • Home equity: a level deemed substantial enough by the lender based on guidelines provided by the Department of Housing and Urban Development (“HUD”)

Those factors, along with interest rates, were used to determine a loan amount for each borrower. 

The new financial assessment will look at additional criteria to determine whether a borrower is qualified to borrow against their home equity using a reverse mortgage.

ARLO teaching financial assessment

Financial Assessment: The What

The financial assessment is a series of financial criteria for all prospective borrowers. The most basic components are credit and income—components that anyone who has had a forward mortgage is familiar with. 

More specifically, however, the lender will look at credit history, including any delinquencies in recent credit payments on accounts such as credit cards or past mortgages. 

Any delinquent debts will need to be documented and explained as part of the process, along with resolutions or repayment plans that have been established.

The lender will also look at sources of income such as Social Security or employment income but also may ask about rental income, income from a child or non-borrowing spouse, or another person who contributes to the household and lives in the home. 

All financial assessment information must be documented, as is the case with any forward mortgage. You must contact your bank and other loan service providers for copies of account records and loan documents.

Financial Assessment: The Why

HUD designed the financial assessment to protect borrowers, and the government, which is the insurer of most reverse mortgage loans.

It does this by taking extra steps to ensure that borrowers can maintain their financial responsibilities after getting the reverse mortgage, specifically some responsibilities that relate to keeping the loan in good standing.

Under the terms of any reverse mortgage, borrowers must continue to maintain the following:

  • Property tax payments
  • Homeowners Insurance
  • Upkeep the home and property to Federal Housing Administration standards

Failure to meet these loan obligations can result in the loan becoming due and payable, even if the borrower still lives in the home.

The financial assessment aims to ensure that once a borrower gets a reverse mortgage, they will have enough cash flow to keep up with these payments and keep the loan current and in good standing.

What You Need to Know

The lender will conduct the financial assessment during the loan application process. Your loan officer may ask a series of questions, including requests for documentation as part of the assessment. 

If it’s clear, based on the borrower’s history and income documentation, that they will easily be able to meet the needs of the loan obligations after the reverse mortgage has closed, they will likely qualify. 

If unclear, the lender may require a “LESA set-aside” to account for those future payments over time.  The set-aside amount will be calculated by the lender, again based on criteria such as age and financial information. 

The set aside can be taken from the loan amount and held for those ongoing payments over time. Think of it like an escrow account for property tax often used for conventional mortgages.

It’s money that the borrower has essentially set aside for future loan obligations that can only be used for that purpose.

Exceptions to the Rules

Just because you have a loan default in your past or a credit deficiency does not mean you cannot qualify for a reverse mortgage under the new financial assessment. The lender must look closely at your situation to see if particular circumstances have led to these events.

For example, suppose you or your spouse experienced a healthcare event that increased your household spending for a period of time and resulted in not meeting existing loan obligations, but that event has since ended. In that case, it might serve as an extenuating circumstance.

Generally, these situations are beyond the borrower’s control but have had some financial impact. If it’s clear to the lender that the situation is isolated and is unlikely to happen again, it may be considered an extenuating circumstance for the financial assessment.

Ultimately the assessment does not necessarily result in a “yes” or “no” answer for borrowers. It is a comprehensive guide for a lender to decide whether a borrower will qualify.

The financial assessment is meant to be a tool to help the lender determine that a borrower’s decision to get a reverse mortgage will not result in future financial hardship.

While it requires a close look into the borrower’s past finances, most of the criteria are not all that different from the standard “forward” mortgage process.

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