On April 27, 2015, Housing and Urban Development (“HUD”) implemented a new financial assessment requirement to the Home Equity Conversion Mortgage (“HECM”), also known as “Reverse Mortgage,” product. The requirement was established in order to evaluate reverse mortgage borrowers’ financial willingness and capacity to comply with the rules and responsibilities of a reverse mortgage. This Financial Assessment requirement applies to all HECMs including traditional, refinance & purchase reverse mortgages. The Financial Assessment must be performed for each borrower. During the Financial Assessment 3 components are analyzed: 1) Property Charge Payment History; 2) Credit History; and 3) Residual Income. The Property Charge Payment History portion of the review includes analyzing the borrower’s history of maintaining timely payment of property taxes, hazard and flood insurance as well as HOA fees. To pass this stage of the review all property charges must have been current with no property tax arrearages for 24 months from the date of the initial loan application. If a borrower fails this portion of the financial assessment review the borrower is not automatically rejected. Failing the property charge payment history portion of the financial assessment review requires the lender to conduct a more thorough review into the borrower’s accounts to determine the reason for the late payments. The lender may determine that there was extenuating circumstances. If the lender ultimately determines that the borrower has a satisfactory history of managing these property charges on their own, the lender might determine that a Life Expectancy Set-Aside (LESA) is not required. If the lender determines that there is a lack experience in managing these property charges the lender might require a LESA be established.
A LESA is an account that is established by the lender out of the available funds of the borrower to cover the costs of Projected Life Expectancy Property Charge Costs. The amount of the LESA account is the projected sum of the property taxes, homeowners insurance premiums and flood insurance premiums during the life expectancy of the youngest mortgagor on the loan. Borrowers that pass the financial assessment will not be required to establish a LESA.
The second part of the financial assessment is the review of the borrower’s credit history. The purpose of the credit review is to determine responsible management of debt. FICO scores are not a factor to the review. The lender will evaluate the borrower’s payment history in the following order: 1) Current or previous mortgage debt and housing related expenses; 2) Installment debts; and 3) Revolving accounts. In order to pass the Credit History portion of the financial assessment the borrower must have all housing and installment debt paid on time for the previous 12 months AND the borrower must not have more than two 30-day late mortgage and installment payments in the previous 24 months. The borrower must also not have any major credit issues on revolving accounts in the previous 12 months. A bankruptcy does NOT disqualify a borrower for consideration, however, there are some restrictions for HECM for Purchases.
Extenuating Circumstances are designed to address issues of derogatory credit or payment charge history. Extenuating circumstances are isolated issues beyond the borrower’s control and may include, but are not limited to, the following: loss of income due to divorce or death, loss of income due to unemployment or reduction in hours, increase in financial obligations due to emergency medical treatments or hospitalizations, emergency property repairs not covered by insurance or other causes which resulted in late payments. Supporting documentation, include a Letter of Explanation (“LOE”) are required.
The third part of the financial assessment analysis is the Residual Income or Cash Flow Analysis. The purpose of the Residual Income Analysis is determine the borrower’s capacity to meet the documented financial obligations of a reverse mortgage. During the residual income analysis income from all sources is calculated. The following documents may be requested: W2, 1099, VOE, 4506-T, Social Security Award Letters, Annuity Payment Statements, Rental Agreements, VA benefits Letter, Bank Statements, etc. If the borrower is short on income the lender may use residual income from eligible non-borrowing spouses or imputed income from borrower’s assets. In order to determine how much residual income is needed to satisfy the requirements of Residual Income the first step is to count all members of the household. After all income calculations are made and subtracted from their debts California Reverse Mortgage Borrowers must have a residual income of $589 per month if there is 1 member of the family, $998 per month if there are 2 members of the family, $1,031 if there are 3 members of the family and $1,160 if there are 4 or more members of the family. However, failing to achieve these benchmarks does not automatically disqualify a borrower. The lender will consider compensating factors such as debt obligations that will be eliminated as a result of the HECM, increase of monthly income through term or tenure payments as a result of the Reverse Mortgage, etc. There are many compensating factors that may be considered by the lender.
This article was meant as an overview into the financial assessment requirement of HECMs (“Reverse Mortgages”) and is not intended to be an exhaustive analysis. In summary, the financial assessment analysis is a completely different analysis than the credit and income requirements of forward loans. Unlike forward loans, the financial assessment of a reverse mortgage takes into consideration subject reasons for derogatory issues related to credit as well as compensatory factors when determining residual income. If you are interested in a reverse mortgage you are not required to be an expert on Financial Assessment. However, you should be familiar with the process and obtain a reverse mortgage representative that will help you get through the process and that is familiar enough with the guidelines to help you address issues which could potentially affect your ability to qualify for a reverse mortgage.
This article was written by Michael Gaddis, J.D., the CEO and Broker of Frontier Loan Group, Inc. (“FLG”). FLG assists borrowers interested in HECM Reverse Mortgages throughout the State of California. Michael Gaddis, J.D. is unique in the reverse mortgage world as he is not only the NMLS licensed mortgage broker for FLG but also a licensed CA attorney via The Law Offices of Michael Gaddis, APC. FLG’s California Bureau of Real Estate # is 01449152 and the NMLS ID # is 345305. Michael Gaddis, J.D.’s California Bureau of Real Estate # is 01433800 and his NMLS ID# is 345305.