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 take a look at additional criteria to determine whether a borrower is qualified to borrow against his or her home equity using a reverse mortgage.
Financial Assessment: The What
The financial assessment is a series of financial criteria that applies to 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 other 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. This means you will need to contact your bank and other loan service providers for copies of account records and loan documents.
Financial Assessment: The Why
The financial assessment was designed by HUD 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 will be able to maintain their financial responsibilities after getting the reverse mortgage, and some responsibilities specifically that relate to keeping the loan in good standing.
Under the terms of any reverse mortgage, borrowers must continue to maintain:
- Property tax payments
- Homeowners insurance
- Upkeep of 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 is still living in the home.
The financial assessment’s aim is to make sure that once a borrower gets a reverse mortgage, he or she 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 financial assessment will be conducted by the lender 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 he or she will easily be able to meet the needs of the loan obligations after the reverse mortgage has closed, he or she will likely qualify.
If it is not as clear, the lender may require a “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 you would an escrow account for property tax that is 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. It just means the lender will need to take a closer look at your situation to see if there are special circumstances that have led to these events.
For example, if you or your spouse experienced a health care event that led to an increase in your household spending for a period of time and resulted in not meeting existing loan obligations, but that event has since ended, it might serve as an extenuating circumstance.
Generally, these situations are beyond the control of the borrower, 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 purposes of the financial assessment.
Ultimately the assessment does not necessarily result in a “yes” or “no” answer for borrowers. It is used as a comprehensive guide for a lender to make the decision as to 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 is not all that different from the standard “forward” mortgage process.
Trusted 3rd Party Sites