This past April (2015), the Department of Housing and Urban Development imposed new rules for the Home Equity Conversion Mortgage (HECM) program. Under the updated guidelines, homeowners must now pass a financial assessment before they can qualify for a FHA insured reverse mortgage. Read on to learn what the assessment entails and how…it impacts your chances of being approved.
Why the assessments are necessary
The primary goal behind the rule change is to minimize the amount of risk to the FHA mortgage insurance fund. Essentially, the assessment is designed to screen out homeowners who show signs of being unable to maintain the insurance and property tax payments on their home. You must be making these payments on time to avoid defaulting on a reverse mortgage.
What lenders are looking for
Homeowners who apply for a reverse mortgage will be evaluated on several key points. Specifically, you must be able to show that you’re capable of keeping up with any financial obligations associated with the reverse mortgage, such as taxes and insurance and that you’re willing to comply with the mortgage requirements.
Reverse mortgage lenders will also consider your overall financial situation to look for trouble spots, such as a high amount of outstanding debt or late payments on credit cards. The lender will take into account whether a reverse mortgage is an appropriate solution for resolving your individual financial needs.
Documenting your finances
There are several specific pieces of information that a lender will use to gauge whether you’re a suitable candidate for a reverse mortgage. First, there’s a credit check to see how much debt you’re carrying and whether there are any delinquencies on your credit report. While underwriting guidelines allow for certain credit issues, you may be asked to document any extenuating circumstances that may have caused the delinquencies.
Next, you’ll need to provide proof of your income and assets. That includes Social Security, income earned from a job or self-employment, alimony, pension plans, retirement plans and military benefits. You’ll also need statements for your bank or retirement accounts.
As far as the home itself goes, you’ll be expected to show proof of insurance along with a copy of your property tax bill. If there are any liens against the property or ground rents associated with the home, you’ll need to document these as well.
Getting approved with a set aside
One of the most important parts of the assessment process is the residual income analysis. This is where the lender uses all the information you’ve provided to determine whether you have enough money to pay for the home’s property taxes and insurance after you’ve met all of your other financial obligations.
If the underwriter has concerns about your residual income, they may require you to have a set aside. This means that the lender will take part of the reverse mortgage proceeds and earmark it for the payment of your homeowner’s insurance and property taxes. A set aside may cover all of the expense or just a portion, based on your credit history and income.
Life expectancy is a significant factor to consider in determining whether a set aside is worth it. If, for example, your property taxes and insurance payments are $1,500 a year and your life expectancy is another 20 years, a set aside would come to $30,000. Having to take such a large chunk out of your reverse mortgage proceeds may outweigh its usefulness in the end.
Will you qualify?
If you’re not sure whether you’re in a position to pass the financial assessment, consulting a certified reverse mortgage specialist like iReverse Home Loans can put you on the right track. Contact us today to get answers to your reverse mortgage questions.