How to Qualify for a Reverse Mortgage

Financial planners, CPAs, and estate planning attorneys continue to ask about the new HECM requirement called Financial Assessment and how their clients can Qualify for a Reverse Mortgage.It has been described as the biggest change to ever happen to the reverse mortgage program.

Now, unlike before, lenders must analyze the borrower’s credit history, liabilities, debts, and income to determine their willingness and capacity to meet their financial obligations to qualify for a reverse mortgage. . 

In the past, the only two requirements were age (over 62) and the home being in satisfactory condition. Starting April 27th, if a borrower has not demonstrated the willingness to meet their financial obligations, and there are no extenuating circumstances, the lender will require a fully-funded Life Expectancy Set-Aside to pay for property taxes and insurance. All other household maintenance expenses will remain the responsibility of the borrower.

Financial Assessment looks at:

• Credit history
• Income verification
• Asset verification
• Property tax verification
• Homeowners and flood insurance verification
• Residual income calculation
• Document extenuating circumstances
• Document compensating factors

The intent of the assessment is to ensure that seniors who qualify for a reverse mortgage have enough cash flow to keep current with their property taxes, insurance and living expenses. However, just because a senior doesn’t qualify per the assessment, doesn’t mean they can’t qualify for a reverse mortgage.  Rather, they will be required to have a partial or full shortfall set-aside; but they can still get the loan. In conventional terms, a set-aside is like an escrow account or impound, which automatically pays taxes and insurance.

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But, since there are no payments on a reverse mortgage, this ‘impound’ account if you will has to be funded up front to cover payments for the likely duration the borrower will live in the home. The Department of Housing and Urban Development has a term for this account; it’s called a LESA, which stands for Life Expectancy Set-Aside.

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The back story on Financial Assessment is this…on November 10th, 2014 HUD issued a letter establishing revised financial assessment rules and a property charge set-aside for all FHA-insured reverse mortgages; also known as a HECM (Home Equity Conversion Mortgage).  Implementation of this rule was scheduled for March 2nd, 2015 but was delayed until April 27th. The assessment was actually first announced by HUD in 2013 in response to heavy losses sustained in 2012 when nearly 10% of all HECMs that year ended in foreclosure because borrowers failed to make property tax and insurance payments.  Defaults caused a serious drain on FHA’s insurance fund, which required a $1.7 billion Treasury bailout.

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When a loan goes into T&I (taxes and insurance) default, there is only about a 30% chance for cure. Without question, people misused their reverse mortgage proceeds and/or they were not properly advised that they had to continue to pay their property taxes, hazard and flood insurance, and general upkeep and maintenance.

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Recent changes to the reverse mortgage program were designed to protect seniors from getting into an arrangement that is not suitable, sustainable, or good for them.  A reverse mortgage is not always the best answer, which is true for any wealth management product or strategy.  So with Financial Assessment, HUD is trying to make sure that those who choose this strategy can afford it over the long run.  Unfortunately, some people do not have enough cash flow to maintain a home. That likely includes some of the 27% of Americans who count on Social Security as their only source of income.

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Financial Assessment Details

HUD issued an 87-page guide on how to interpret and apply the new rules.  It will require more effort, paperwork, and documentation for seniors to qualify for a reverse mortgage and underwriting will take longer.
While going through this process is new for the reverse mortgage industry, most borrowers have been through this process in the past when they bought or refinanced their homes.

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The assessment looks at a borrower’s willingness to pay their housing bills by reviewing their credit report.  The analysis is not credit score driven; rather there are limits to the amount of late payments that are allowed:

• Housing installment debt – no late payments in previous 12 months and no more than two 30-day lates in the previous 24 months
• No major derogatory credit on revolving accounts in previous 12 months; major derogatory defined as three 60-day lates or one 90-day late.
• No late property charges (taxes or insurance) in the previous 24 months

Income is qualified based on the most recent 2 years of employment and/or income from other sources.  Gift funds are not allowed and credit cards and non-title lien debt cannot be paid through HECM proceeds to qualify. Extenuating circumstances are considered and might include income loss due to death, a medical situation, or job loss.  Also, temporary increased financial obligations may have been due to hospitalization or medical treatments.  Every loan is considered individually.

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The bottom line is if the senior does not appear to have the capacity or willingness to pay their property taxes and insurance, a reserve set-aside will be set up to take care of it – they can usually still get the loan; however, their proceeds will be less (because of the money used to for the set-aside).

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These changes, like several of the other bigger ones of late are logical and beneficial.  Ohio State economics professor, Stephanie Moulton, explains, “Minimal credit-based underwriting criteria combined with property tax and insurance set-asides for those not meeting the criteria can significantly reduce the occurrence of technical defaults without substantially restricting access to the product.  These changes are important to ensure the long-term viability of the program.”  And Peter Bell, CEO at NRMLA says, “Financial Assessment will help determine if the product is right for the potential borrower.  By implementing this process, HUD is responsibly making the HECM reverse mortgage a safer product.”

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Until now, reverse mortgage specialists did not review credit reports, tax returns, or other income and asset statements.  For most, this will be a significant challenge and explaining all of it will take time and patience.  My team and I have been reviewing credit, income and asset documentation since 1993 as we’ve completed over 2,000 conventional and jumbo purchase and refinance loans.  Our passion is teaching and explaining complex financial issues in simple, understandable terms.  We know we’ve succeeded when our clients can explain how to qualify for a reverse mortgage themselves to a neighbor or loved one.
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