The implementation of the Financial Assessment in reverse mortgages has forced many reverse mortgage lenders to impose a Reverse Mortgage LESA for seniors that do not meet the requirements or fail one or more of the 3 Financial Assessment tests. For many seniors, the imposition of a Reverse Mortgage LESA can literally be the difference maker on whether or not the senior qualifies for the reverse mortgage.
In 2014, the Federal Housing Administration (“FHA”) rolled out new Financial Assessment guidelines for the Home Equity Conversion Mortgage (“HECM”), otherwise known as a “Reverse Mortgage.” The Reverse Mortgage LESA, which stands for Loan Expectancy Set Aside, was introduced by the FHA to evaluate a would-be mortgagor’s willingness and ability to meet his/her financial obligations and to comply with the reverse mortgage requirements. In other words, seniors with less than perfect credit and limited income would be evaluated to determine whether or not, based upon the FHA criteria, the senior would be able to remain current with their property tax and insurance payments. Borrowers that fail the Financial Assessment are required to carve out portions of their eligible principal limit for future payments of property taxes and insurance. The Reverse Mortgage LESA is held in reserve by the reverse mortgage lender who then makes the annual property tax and insurance payments on behalf of the borrower.
The exact amount of the Reverse Mortgage LESA is subjective and differs from borrower to borrower due to the fact it is based on the youngest borrower’s age and the amount of the property tax and insurance payments. The primary problem with Reverse Mortgage LESAs is that the imposition of a LESA can literally knock an otherwise eligible borrower out of eligibility. If there is not enough free eligible principal limit then the borrower either has to bring in money to close the reverse mortgage or not qualify for the reverse mortgage all together. The problem is that the FHA requires the reverse mortgage lender to withhold enough eligible principal limit to be able to pay the required property charges for the borrower’s remaining estimated lifespan. For younger borrowers, especially those in their 60s, the amount required to be withheld for the Reverse Mortgage LESA can be substantial.
The Reverse Mortgage Financial Assessment has three (3) main areas that are reviewed. First, the reverse mortgage lender will review the borrower’s property charge history. In other words, it will look at the borrower’s payment history on property taxes, insurance, HOA payments, etc. for the past 24 months. Late payments on any of these could cause the imposition of a Reverse Mortgage LESA. Second, the reverse mortgage lender will review the borrower’s credit history. The credit review portion of the reverse mortgage financial assessment is not based on credit score but on a subject review of the borrowers payment history for the past 24 months. If the borrower has a few blemishes on their credit, that alone does not require the imposition of a LESA. If the blemishes on the borrower’s credit are not too serious the borrower can possibly avoid a Reverse Mortgage LESA. A 30-day late payment on a credit card alone does not usually cause concern for reverse mortgage lenders. However, if the borrower has 30-day late payments or worse for mortgages or installment loans, a Reverse Mortgage LESA may be required. Finally, the reverse mortgage lender will assess the borrower’s financial ability by calculating the borrower’s residual income. In other words, the reverse mortgage lender will determine how much money the borrower has left after paying their bills. In California, a borrower living alone will need to have at least $598 left at the end of each month in order to pass while households with 2 borrowers will need at least $998 left at the end of each month.
The Reverse Mortgage Financial Assessment is not an OBJECTIVE review but allows for extenuating circumstances and compensating factors to be taken into account. The Property Charge History and Credit History Review portions allow for extenuating circumstances to be taken into consideration. In other words, if the borrower can explain and provide supporting documentation for blemishes discovered during either one of these reviews, the reverse mortgage lender may waive the requirement for a Reverse Mortgage LESA. For example, if a borrower made a late payment on a property tax payment within the past 24 months but the borrower claims that the late property tax payment was a result of an illness or death in the family, the reverse mortgage lender may overlook the late property tax payment and approve the reverse mortgage without a Reverse Mortgage LESA. The key to extenuating circumstances is documentation. Reverse mortgage lenders will not merely take the word of the borrower, the borrower must be able to provide documentation to support their claims. Likewise, if the borrower comes up short during the Residual Income Review the borrower can use Compensating Factors to help overcome the deficiency. Examples of Compensating Factors might be the amount of money available in the borrower’s line of credit, savings and investment accounts, future payoff of debt, etc. If properly presented, the use of Compensating Factors might assist the borrower in overcoming a residual income shortage.
The truth is that the imposition of a Reverse Mortgage LESA is not necessarily a bad thing. If the borrower has enough eligible principal limit available to absorb the LESA the good news is that the borrower will not have to worry about the payment of their property taxes and insurance for the remainder of their expected life span. While most borrowers prefer to make their property tax and insurance payments on their own, the imposition of the LESA is not the end of the world. The LESA was created for the borrower’s benefit. The imposition of a Reverse Mortgage LESA becomes an issue when the borrower does NOT have enough eligible principal balance left to absorb the Reverse Mortgage LESA thus leaving the borrower short to close.
The key is to make sure that you are utilizing a reverse mortgage broker that really understands the intricacies of reverse mortgages and the financial assessment test. Not all reverse mortgage brokers are created the same. The key to success is presentation and persuasiveness. Many would-be reverse mortgage borrowers are unable to obtain reverse mortgages because of the reverse mortgage broker that they chose to use. Choosing a reverse mortgage broker is not a beauty contest, you need to choose someone that you believe will be able to guide you through all of the potential pitfalls that might arise during the process.
If you or someone you know is considering a reverse mortgage in the near future please tell them to call Frontier Loan Group, Inc. Michael Gaddis, J.D. is the CEO & Broker of Frontier Loan Group, Inc. He is a frequent speaker on the topic of reverse mortgages conducts reverse mortgage workshops throughout the State of California. Michael Gaddis, J.D. has extensive experience working on more challenging reverse mortgage scenarios. For more information please call Michael Gaddis, J.D. today at 760-692-5950 or email Michael Gaddis, J.D. at Michael@FrontierLoanGroup.com. Frontier Loan Group, Inc. CA BRE #01449152 NMLS#345305 Michael Gaddis, J.D. CA BRE #01433800 NMLS#280011. For more information on Frontier Loan Group, Inc. please visit http://www.frontierloangroup.com or visit Frontier Loan Group, Inc.’s YouTube page at Frontier Loan Group YouTube.