Reverse Mortgage Borrowers: Have No Fear as Financial Assessment Nears
In short time, homeowners who are considering taking out a reverse mortgage will run into a few changes. But industry experts say these changes are nothing to fear.
In an effort to better protect borrowers and the reverse mortgage program, the Department of Housing and Urban Development (HUD) has issued new guidelines that will impact who can qualify for a reverse mortgage loan.
Though an exact date has yet to be set, the newly released financial assessment will take effect for all reverse mortgage borrowers starting in 2015. Following these rules, reverse mortgage borrowers will need to provide documentation regarding their income, assets and debts.
Like conventional mortgages, reverse loans will now require a little more work on the borrower’s end, but will still offer the same benefits, says Certified Reverse Mortgage Professional Beth Paterson, executive vice president of Minnesota-based Reverse Mortgages SIDAC.
“Don’t let the financial assessment scare you off. The big change is that we’re going to have to collect more documentation, which just means more paperwork,” she says. “A reverse mortgage can still benefit you by allowing you to stay in your house, purchase a new home and access all the benefits of a reverse mortgage.”
Here’s how to prepare for the financial assessment, including what you need to know about qualifications, income, credit and set-asides.
What Will Change?
Eligibility for a reverse mortgage will now take into account a number of factors related to the borrower’s finances, such as credit history and income.
Prior to the financial assessment, borrowers could typically qualify for a reverse mortgage if the following requirements were met:
- At least one title holder was 62 years of age or older.
- The borrower owned their home outright, or had a low mortgage balance that could be paid off at closing with proceeds from the reverse mortgage
- The borrower had the financial resources to pay ongoing property charges including taxes and insurance
- The borrower lived in the home as his or her primary residence.
In addition to these requirements, homeowners who take out a reverse mortgage after the financial assessement takes effect will be more closely evaluated on their ability and willingness to pay property charges.
The financial assessment will require lenders to verify borrowers’ financial information, including:
- Income, assets, monthly living expenses and credit history
- Timely payment of real estate taxes, hazard and flood insurance premiums
“HUD wants to make sure that reverse mortgage borrowers are able to pay for property taxes and insurance on the home going forward as best as they can,” Paterson says. “There are always unexpected circumstances, but we need to make sure that they are willing to do that.”
Take a closer look at income and credit requirements to learn what you will need to prepare for the new guidelines.
How Will My Income Be Assessed?
Even though you will not be making monthly mortgage payments with a reverse mortgage, you are still required to pay property charges, including taxes and insurance, and are expected to perform upkeep on the home.
Similar to applying for a conventional mortgage, you will be required to provide your lender documentation that shows proof of income. The following types of income will be verified by your lender:
- Overtime and bonus
A two-year history is required, and borrowers must be able to verify their employment through pay stubs and either a written verification from their employer or tax returns.
- Rental income
- Military, VA, SSI, other public assistance
- Investment income
- Other sources
Non-employment-related income must be documented by award letters or other documentation from the source of the income.
Additionally, boarder income must be documented and government assistance non-cash benefits — such as Supplemental Nutrition Assistance Program or SNAP (food stamps) — may also be considered.
After taking these into account, lenders will determine the borrower’s “residual income,” which is calculated by subtracting the borrower’s total monthly expenses from his or her monthly income.
Borrowers’ residual incomes will then be evaluated based on their family size and location in the U.S. For example, a single borrower in the Northeast needs to have a residual income of $540 per month. For a couple in the Northeast, that amount is bumped up to $906.
Talk to your lender to learn more about how your income fits into the financial assessment.
What Do I Need to Know About My Credit?
Reverse mortgage lenders must also evaluate the credit history of all borrowers, with a credit report required for each.
However, Paterson says borrowers may still qualify even if they don’t have “stellar” credit.
“We’re just going to be looking a little closer,” she says.
Satisfactory credit history will be determined if:
- The borrower has made all housing and installment payments on time for the previous 12 months, and has no more than two 30-day late housing or installment payments in the previous 24 months.
- The borrower has no “major derogatory credit” on revolving accounts in the previous 12 months.
Major derogatory credit is defined by HUD as any revolving credit payments within the last 12 months being more than 90 days late, and/or three or more revolving credit payments within the last 12 months being more than 60 days late.
Specific credit issues that will be evaluated include, among other items:
- Collections and charge-off accounts
- Disputed derogatory accounts
- Delinquent federal debt
- Delinquent Federal Housing Administration-insured mortgages
In assessing a borrower’s creditworthiness, lenders will also evaluate payment histories in the following order:
- Current or previous mortgage debt and housing-related expenses
- Installment debts
- Revolving accounts
Failure to prove satisfactory credit is not necessarily a reason to reject a borrower, HUD says. Instead, it means that lenders must conduct a further analysis of the borrower’s accounts to determine the reason for the late payments or overdue accounts, and whether there are extenuating circumstances.
What Happens If I Don’t Have Satisfactory Income and Credit?
If your residual income, credit and payment histories don’t meet satisfactory standards, you may still be able to qualify for a reverse mortgage.
If this is the case, you may be required to use proceeds from your reverse mortgage to cover the costs of property taxes and insurance down the road, so you don’t become delinquent on those payments. These funds are called “life expectancy set-asides,” and can be partially or fully funded.
The amount of set-aside required is based on a formula that includes:
- The sum of the borrower’s current property taxes, homeowners/hazard insurance premiums and flood insurance premiums, if applicable.
- A factor to reflect increases tax and insurance rates
- The expected mortgage interest and annual mortgage insurance premium (MIP) rate
- The life expectancy of the youngest borrower
A fully funded set-aside, according to HUD, is required when the borrower has not demonstrated a willingness to meet his or her financial obligations, even if residual income is sufficient.
Alternatively, a partially funded set-aside is required when the borrower has demonstrated a willingness to meet his or her financial obligations but residual income is not sufficient.
How Can I Prepare for the Assessment?
The first thing borrowers should do to prepare for the assessment is to call a reverse mortgage specialist, Paterson says. Doing so will make the process easier for all parties involved.
“Borrowers will need to be forthright in providing details of their income and debts when talking with the reverse mortgage specialist. By them providing the information we will be able to determine what documentation is needed and make assessing their ability to qualify easier,” she says.
While the financial assessment may disqualify some homeowners from getting a reverse mortgage, you won’t know if you qualify until you call, she says.
“Make the phone call. Don’t stop and think, ‘I’m not going to qualify because I have delinquent debt.’ Maybe a reverse mortgage will help you to [get rid of that] debt,” she says.
Ultimately, homeowners shouldn’t be scared of the financial assessment. Instead, they should understand that these new guidelines are meant to help — not hurt — reverse mortgage borrowers in the long run.