Understanding Reverse Mortgage Financial Assessments
In addition to the standard reverse mortgage loan requirements—being 62 years or older, having enough equity in your home, and living in the home—borrowers must undergo a financial assessment by the lender, to ensure they have the financial means to cover property taxes, homeowner’s insurance, and wind and hail insurances policies, if necessary, as mandated in their reverse mortgage loan agreement.
During the assessment, the lender will obtain information on income, expenses, assets, and liabilities; likely perform a credit history analysis, cash flow/residual income analysis; and evaluate extenuating circumstances and compensating factors. In conducting the financial assessment, the lender will take into consideration that in many cases, the borrower is interested in a reverse mortgage loan due to financial difficulties, which may be reflected on the borrower’s credit report and/or property charge payment history. The extent to which the HECM may provide the solution to these financial difficulties will be taken into account during the financial assessment.
During the credit history analysis, the lender will determine if the borrower has demonstrated responsible management of debt, finances and homeownership obligations by looking at delinquent Federal debt, unpaid liens against the property from a State or court-ordered judgment, satisfactory payment history on revolving credit, installment accounts, and timely payment of property charges like school, city, county, and state taxes, insurance, HOA, PUD fees, etc.
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Cash Flow/Residual Income Analysis
The purpose of the cash flow/residual income analysis is to determine the capacity of the borrowers to meet their documented financial obligations with their documented income. Combined with the credit history review, the cash flow/residual income analysis is required to determine whether and under what conditions the borrow meets FHA eligibility criteria. The lender will verify and document all income sources, including: employment income, rental income, pension/retirement benefits (based on period of continuance), VA benefits, social security, disability, workman’s compensation, and public assistance. Other sources of income may be included. Speak with one of our lenders for details on precise documentation rules.
As part of the cash flow/residual income analysis, lenders will also document any extenuating circumstances beyond the borrower’s control like loss of income due to the death of a spouse or the financial support from family members; unemployment, reduced work hours and furloughs, or emergency medical treatment or hospitalization.
Property Charge Funding Requirement
If, based on the results of the financial assessment, the lender determines that the borrowers do not have the capacity or willingness to meet these property charge financial obligations, the borrower must establish a Life Expectancy (LE) Set Aside for payment of property charges, or the lender must require the borrower to pay the property charges out of mortgage proceeds by withholding funds from the monthly disbursement due the borrower or by charging funds to a line of credit.
The LE Set-Aside calculation would be the net present value (NPV) based on life expectancy discounted using an annual discount rate equal to the sum of the expected rate plus annual mortgage insurance premium (MIP) rate. Much like the financial documentation and verification needed for a traditional mortgage loan, the reverse mortgage financial assessment is crucial in helping borrowers and their lenders make the best decisions for their personal situations. Always consult with a qualified, experienced lender who specializes in reverse mortgages.