“The mortgagee (lender) must evaluate the mortgagor’s (borrower’s) willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.”
– Mortgagee Letter 2014-21
The federally insured reverse mortgage program is modified more regularly than other financial tools. And once again, we have another major change on the horizon called “Financial Assessment” that makes it imperative for many older homeowners to apply before the changes become effective.
The implementation of Financial Assessment was delayed to April 27, 2015. With this change, reverse mortgage lenders will, for the first time, be required to assess each borrower’s credit history and monthly residual income. This is a dramatic change for an industry where historically the focus has been on the value of the home.
Why the change?
The first question many will ask is, “why does a homeowner’s payment history matter for a loan that doesn’t require monthly payments?” After all, the value of the home and the age of the borrower are the primary factors in qualifying.
The answer is that these loans should not be viewed as an emergency, short-term access-to-cash program. Home equity conversion should accomplish more than that. It should always leave the borrower with the ability to pay their property taxes, property insurance, and monthly bills. Therefore, we need to document that ability with this assessment. The reverse mortgage MUST be a sustainable solution for each homeowner.
According to HUD Mortgagee Letter 2014-21, “The mortgagee (that is us, the lender) must evaluate the mortgagor’s (that is the borrower’s) willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.”
The critical borrower obligations and mortgage requirements are as follows:
- Upkeep of the home in good condition
- Payment of property taxes
- Payment of homeowners insurance
- Payment of other property charges (flood insurance, HOA dues, condo dues, etc.)
These are FHA requirements, and we need to document every borrower’s ability to meet these obligations. The results of Financial Assessment are simply used to determine whether a life expectancy set-aside is needed or not.
What are the results of Financial Assessment?
The lender’s underwriter will perform two tests, a credit (payment) history test and a residual income test. If the underwriter determines that one or both of the financial assessment tests have failed, a Life Expectancy Set-Aside (or LESA) will be required. These are funds that are removed from the borrower’s principal limit and set-aside for the purpose of paying property charges over a calculated time period.
Financial Assessment is NOT necessarily a “yes or no” qualification of the borrower. But if homeowners do not have sufficient equity to set-aside for those property charges, they may not qualify for the program. Unfortunately, the result is less homeowners will qualify for reverse mortgages after April 27. The clock is ticking.
For more information on other changes designed to strengthen Home Equity Conversion Mortgages, make sure you purchase the book, Understanding Reverse, and subscribe to my blog in the right-hand margin.