Reverse Mortgage Income Q&A – Ask ARLO™

HUD continues to use a financial assessment for underwriting loans, employing a residual income method.  This approach is based on the principle that after paying all obligations, borrowers must have sufficient residual cash available each month to live on, or else the loan isn't beneficial.

The required amount of residual income varies depending on where you live and the size of your family.  If, after accounting for all your debts and property charges, you lack the minimum amount of money needed to sustain your living expenses each month, it could lead to a situation where all your equity is depleted without improving your monthly financial situation.

However, there are methods to meet the residual income requirements, and it's advisable to consult with another lender to ensure no possibilities have been overlooked.  The last thing you want is to secure a loan that doesn't truly aid your financial situation. I f it can be beneficial, exploring all options is crucial.

If you'd like to discuss your circumstances with us, we're here to help review your situation. It's possible we may conclude, just as another lender might have, that meeting HUD's requirements isn't feasible, and downsizing could be the best path forward.  Ultimately, the decision is yours.

Hello Lisa,

You must be 62 or older to qualify for a HUD HECM reverse mortgage, but some private or proprietary reverse mortgages accept borrowers as young as 55.  I would suggest that you start by using a reverse mortgage calculator to enter your information and see whether the funds available to you would be adequate for your needs. 

Your credit may or may not be an issue depending on your health, and it may require some explanations along with supporting documentation, but you may find that private programs work for you or that you really need to wait until your 62nd birthday.

Hello Dee,

Reverse mortgages use residual income for approval, which is based on family size and the area of the country where the property is located.  When you say “What is the residual requirement on a first mortgage”, are you asking about other loans?  Because most loans do not use a residual income method for qualification purposes. 

The reverse mortgage does because there are no mortgage payments to consider, whereas with other traditional loans, the lender must consider the mortgage payments for which you are applying plus the taxes, insurance, and any other property charges and other debts in your qualification. 

Therefore, the typical qualification method for other loan types is a ratio method, whereby the lender uses a percentage of your total income as the determining factor for your housing qualification, and then a second ratio of your housing and all other debts. 

Each lender and each loan type are different, and you should check with the lender you are considering to determine their ratio requirements. 

Hi Jan,

There is no problem with family members living in the house, but I do have a few things to warn you about.  Firstly, the loan becomes due and payable as soon as the borrower is no longer living in the property as her primary residence.  With a 95-year-old borrower, that may mean that her grandson and family may be in a position, in a relatively few years, to face the decision about what they will do for living quarters. 

If there is any concern at all about mom possibly needing to move to assisted living or if her health is in question, the loan would be called due and payable by the lender, and the family living in the home would not stop that action.

Secondly, with the additional family in the home, the qualification is a little tougher.  HUD uses residual income to determine the borrower’s ability to qualify, and the family size living in the home is taken into consideration to determine the amount of residual income required for the financial assessment qualification. 

The amount required varies by area based on the cost of living, but it can mean needing several hundred dollars more in income to qualify, with 4 more people living in the home.  If mom’s income is high and she has no other debts, this may not even be an issue, but you would probably want to know before proceeding.

Hello,

You have several issues to consider, and I would not want to try to answer them all in a blog post.  Lenders must consider what constitutes a beneficial transaction in many states, and refinancing a loan with such a low interest rate may not be considered beneficial (even though you would eliminate your payments; I don’t know what your current loan balance is).  The reverse mortgage does require about 40-60% equity in the property, so that may be the answer to everything there – you said you don’t have much equity, so you may not be eligible from that standpoint.

There are no debt ratios, but HUD uses “residual income,” whereby the borrower must have a minimum amount of money left over after paying all obligations each month to live on.  This is how HUD determines qualification.  Your on-time payment history is great, and that helps if the other things I discussed previously are ok.

There is no “escrow account” with a reverse mortgage, but there are Life Expectancy Set-Aside (LESA) requirements at times.  The LESA is money set aside from the reverse mortgage to pay the taxes and insurance for the life of the loan.  It’s set aside because no payments are being made on a reverse mortgage, and therefore nothing is being collected to make those payments.  If you were required to have the LESA account, that would cover your taxes and insurance, but it would mean less money available to you, and if you already do not have much equity, it would probably mean this is not the right loan for you. 

However, I would encourage you to use our online calculator to see whether the amounts available to you under the HUD program would work for you, based on your age, the property value, and the amount you owe.  If that looks promising, you can then decide if you would like to discuss your circumstances further with a loan officer to see if this is a good option for you.

Hello Josie,

No one needs to see your renters’ tax returns.  The lender will need to request your returns to assess the income and expenses you have for the property but no lender should ever ask for documentation That does not pertain to the property or you personally.

Hello Carolyn,

HUD uses a residual income method to qualify borrowers.  The residual requirement is higher depending on how many people are living in the home.  Utilities, food, and all living costs are higher for 4 people than for 2.  Yes, you absolutely can have your daughter and grandson living in the home with you, but the income required under HUD financial assessment guidelines to qualify for a family of 4 is higher than for a family of 2.  The lender should not have told you not to say anything to the appraiser; that indicates that they may not have been truthful on your loan application.  It is okay to have someone there temporarily, and you do not have to claim them as permanent occupants. However, if they live in the home permanently, you should list them as occupants, and the originator should work to ensure that you qualify under HUD rules.

Hi Donna,

There are financial assessment requirements but they are not really difficult to meet. If you cannot, you would not in all likelihood be able to pay your taxes and insurance and still be able to live comfortably in the home even with the reverse mortgage.  Please feel free to visit my calculator here and you can get a free no obligation proposal to see if the loan will work for you.

Hi Joyce,

The HUD HECM is a loan, not a government grant program.  There are financial assessment guidelines to be certain that borrowers can still afford to pay the taxes and insurance once the loan is in place (not paying them is a default under the program and HUD does not want the loans to default).  There is no maximum borrowers can make or maximum net worth borrowers may have since this is not a needs-based program. 

Hi Julie,

Your question is not for us but for a conventional mortgage lender.  The question has nothing to do with the reverse mortgage and everything to do with qualification for a second home on a traditional loan (which we do none of working solely with reverse mortgages).  And since I have not originated a forward loan in more than 10 years now, I would not be much of a qualified source to answer your question on what you can and cannot do on that loan.

I would think that they would have to use the taxes and insurance you have to pay on the primary residence even though there is no mortgage payment to determine whether or not you qualify with whatever mortgage payment and other obligations there are on that property, but I would not think they would use any kind of minimum payment even though there is no payment on the loan itself.   However, as I stated to begin with, I could not make this statement as fact and would suggest you contact a lender who would make this type of loan.

Hello Leroy,

We really don't have a minimum credit score requirement but we will be looking at your last 24 month credit history to make sure that there aren't any serious delinquencies such as late payments on your property taxes, credit card debts or mortgage obligations. If there are those problems present we would present you with an updated proposal including what's called a LESA - (Life expectancy set aside). This is an account we use to maintain your property taxes and homeowners insurance should you not meet the minimum credit standards for the program. As far as income you will be required to meet a minimum residual income requirements set forth by the FHA. It's not a full debt to income ratio type qualification but more of an ability to maintain taxes and insurance for your expected lifetime. You can learn more about the residual income requirements here.

Hello Annie,

I can't really give you a full proposal without knowing all the parameters, but under the best of circumstances, running the information that you have given me tells me that the reverse mortgage would still leave you at least $87,500 short to pay off your current mortgage, and that is assuming a value of $625,500 or more and that your 67th birthday will fall within 180 days of the anticipated closing date.  If your value is $625,500 or greater and you think bringing in this much money is an option and want to discuss the programs, please let us know.  You might also contact your current lender and ask if there are any options for a lower payoff under the circumstances.