Reverse Mortgage Financial Assessment

A hallmark of the reverse mortgage program is that historically, it hasn’t included any credit or income requirements for the borrower.

But that may change, and some lenders have already implemented—and then revoked—guidelines determining applicants’ eligibility for this type of loan. Reverse mortgage financial assessment stems from ongoing discussion about ways to protect HECM borrowers from defaulting on their homeowners insurance or property taxes, which they’re required to keep up-to-date (as with any type of home mortgage) as a term of the loan.

What does that mean for you? Most lenders’ efforts toward a borrower financial assessment, if they’re any indication of what’s to come, have examined applicants’ credit history and monthly cash flow, among other factors, in an attempt to determine willingness and ability to keep up with recurring financial obligations.

What Might a Financial Assessments Look Like?

The Department of Housing and Urban Development (HUD), which administers the federally-insured Home Equity Conversion Mortgage (HECM) program, has long stated its intentions to dispense guidelines for lenders to use in considering a reverse mortgage applicant’s financial capacity and credit history, among other relevant indicators.

In the absence of an official rule, the National Reverse Mortgage Lenders Association released guidance in June 2011 encouraging lenders to conduct a monthly debt-to-income ratio test on applicants, along with assessing a prospective borrower’s willingness or ability to keep up with ongoing financial obligations, like tax and insurance. Determining this information could include checking credit history or documenting income.

Who is Conducting Financial Assessments?

MetLife was the first lender to implement a financial assessment for its reverse mortgage borrowers, based on NRMLA’s suggestions. Their assessment included three criteria that examined an applicant’s residual cash flow, credit history, and principal limit usage (PLU).

Prospective borrowers’ PLU is determined by looking at their outstanding mortgage balance, other debts, and repairs they must do to their home as a term of the HECM program. Simply, it is the percentage of the Initial Principal Limit used to satisfy mandatory payoffs when the loan is funded. For applicants to qualify for a HECM Standard, their PLU must be less than or equal to 75%. For borrowers who want to take out a HECM Saver, which offers smaller upfront origination fees in exchange for a smaller loan amount, their PLU must be less than or equal to 90%.

MetLife introduced these borrower qualifications in November 2011, but later suspended the qualifications after other reverse mortgage lenders failed to implement similar guidelines.

Several other lenders have stated plans to introduce some sort of financial assessment, and some may have their own eligibility requirements they’re already reviewing. But at this point, the HECM program doesn’t have an official financial assessment.

What Do You Need to Know as a Potential Reverse Mortgage Borrower?

Right now, you don’t have to worry about a financial assessment or the documentation it could require. However, you may want to be prepared in the event HUD does begin requiring lenders to conduct certain evaluations of prospective borrowers, or if lenders independently begin introducing their own versions of a financial assessment.

Based on what the industry has already seen in terms of NRMLA’s guidelines and MetLife’s suspended financial assessment, you might need to show proof that you’ve had homeowners insurance for the past 12 months. You may also be asked to provide documentation that you are current on your property taxes.

Some lenders may seek to assess your monthly cash flow, which will depend on factors such as the loan amount for which you qualify, and how much outstanding debt you have, including an existing mortgage balance.

Depending on what’s allowed in terms of assessments and financial requirements, some lenders may require you to set aside funds specifically for paying your tax and insurance. These are costs you’re required to pay anyway, and earmarking funds for these obligations could help make sure you won’t default on your loan for not keeping up with their taxes and insurance.

Leave a Reply

Your email address will not be published. Required fields are marked *