We live in an area with an HOA we had a dispute with them that was settled but that has come back to bite us big time. We have excellent credit have paid our insurance, taxes and mortgage on time but apparently it is not enough to satisfy HUD according to our mortgage dealer. They wanted $70,000. Up front for down payment to pay insurance and taxes even though we full well would have done so anyway after all who would want to lose their home. No, you cannot take out a loan for the $70,000.
Since HUD implemented the Financial Assessment Guidelines (announced in 2014), they do require an assessment of borrowers’ overall credit as well as a specific review of the borrowers’ most recent 24 months’ current mortgage payment history, history of payment of taxes, insurance and any HOA dues.
HUD was experiencing an extremely high incident of default on taxes, dues and non-payment of insurance and felt they had to do something since many borrowers defaulted on these items after having taken a full draw of all funds available to them leaving no money left for the payment of these expenses.
Since the Taxes and HOA fees both can take priority over the mortgage or, in the case of the insurance, protect the security for the loan, HUD can’t allow borrowers to become delinquent on these items and must make sure that borrowers continue to pay them as they become due. If borrowers do not pay them, the lender must advance funds on the borrowers’ behalf to pay these items.
Since HUD was seeing losses climb on loans with defaults due to non-payment of taxes, insurance and HOA fees, HUD was faced with a decision to make on how best to serve all borrowers with the program. The decision was either to decline to allow borrowers with non-acceptable histories of payments or find another way to help serve them.
Borrowers with a history of non-payment or late payment of these items (and some other ongoing credit items as well I might add – it may be required for other patterns of delinquent credit without extenuating circumstances) can still get a reverse mortgage under the new HUD guidelines but HUD does require lenders to set funds aside to pay for the taxes and insurance from the proceeds.
This is called a Life Expectancy Set Aside or LESA. Some borrowers actually prefer a LESA. The money set aside costs nothing to be set aside and no interest accrues on the funds until the lender actually sends a check to the tax assessor, or insurance company to pay the current assessment.
The borrower no longer has to budget for these items and if your credit line is sufficient to pay off any existing loans and do whatever you planned to do even after some funds are set aside, it costs nothing to establish and borrowers can even repay the amount paid if they do not wish to accrue interest on those payments (there is never a prepayment penalty on a reverse mortgage so any amount may be paid at any time without penalty).
There can be a time though when a LESA may make the loan no longer feasible for borrowers through. The LESA is a lifetime set-aside so the higher the amount of the taxes and insurance and the younger the borrowers, the higher the LESA will be.
If you planned to use most or all your proceeds just to pay off your existing loan, then the LESA could put you short of that goal causing you to have to bring money in to close. The money you bring in is not a fee, it goes directly toward paying down your existing loan balance on your existing loan but that doesn’t soften the blow if it puts it out of reach due to monetary requirements.
And you are correct, HUD will not allow you to “Rob Peter to pay Paul” in this instance. You may not use borrowed funds as the source of the needed cash. However, you can use a gift from a family member if that is an option.
This is one of the reasons we ask borrowers on their initial application if they have had any delinquencies on any of these expenditures in the past 24 months. If there has been a documentable issue that caused a break in an otherwise good payment history, we can often get the LESA waived.
Borrowers have to write a letter of explanation explaining what the circumstances were that were beyond their control that caused the late payments and what has transpired so that this will not be a recurring issue – and then the circumstances must be documented with letters received from third parties, etc. that support the borrowers’ contentions.
Getting the LESA waived is an exception and not the rule but we have been able to accomplish this in many cases when warranted. If you are aware of late payments in these areas before starting your loan, tell your lender from the very beginning.
This gives them a chance to discuss the options with you right up front. No one can make any promises without seeing the explanation and the documentation, but let your lender know from the start and they can be honest with you about the prospects for the need of a LESA or whether or not they think they can get the loan closed without one.