Reverse Mortgage Financial Assessment Set to Begin in April: What it Means to You
The reverse mortgage Financial Assessment, which was originally supposed to take effect March 2, 2015, has been pushed back several weeks to allow both lenders and prospective borrowers more time to prepare for the upcoming rule change.
Now, borrowers who get a reverse mortgage on or after April 27, will be subject to the Financial Assessment, according to the Department of Housing and Urban Development (HUD), which backs many of the reverse mortgages found on the market today via the Federal Housing Administration. These federally-insured reverse mortgages are known as Home Equity Conversion Mortgages, or HECMs.
It is important to note that borrowers who already have a reverse mortgage will not see their loan affected by the rule slated to take effect in late April.
Reasons for postponing the Financial Assessment, according to HUD, included giving the federal agency more time so that its systems could adequately support certain requirements mandated by the rule.
While the delay only pushes back the effective implementation date of the Financial Assessment, it does not change the rule itself.
Why a Reverse Mortgage Financial Assessment?
Like its name implies, the Financial Assessment analyzes a prospective HECM borrower’s ability and willingness meet his or her loan obligations including property taxes and homeowner’s insurance on the property.
The rule was born out of HUD’s efforts to reduce the possibility of default among reverse mortgage borrowers, while also increasing longevity of the federal HECM program so that it may continue to help seniors age in place.
With a reverse mortgage you don’t make monthly payments toward the ownership of your home as you would in a traditional “forward” mortgage, but as with any loan you are still required to uphold mandatory obligations — namely property taxes and homeowner’s insurance associated with your property.
HUD devised the Financial Assessment as a way to safeguard borrowers by making sure they have sufficient funds to pay these necessary expenses.
In other words, it prevents lenders from setting borrowers up to fail, says Barry Scoles, national sales manager for Colorado-based Reverse Mortgage Focus, a division of Texas-based Georgetown Mortgage LLC.
“It helps avoid putting a senior into this program when it’s clear that they don’t have the financial capacity to remain in their home long-term,” Scoles says. “And so we determine sooner, rather than later down the road, that it may not be practical for them.”
Will The Reverse Mortgage Financial Assessment Rule Borrowers Out?
Two central components characterize the Financial Assessment. These relate to a prospective reverse mortgage borrower’s capacity and willingness to meet the obligations of the loan.
As of April 27, lenders will be required to undertake a more comprehensive analysis of borrowers’ financial situations to determine if their income, as compared to their debts, provide them with sufficient residual income to meet their financial obligations.
This means prospective borrowers will have to provide documentation that details their proof of income, debt information and even submit a credit report. If you have retirement accounts, lenders will also consider these asset statements along with other evidence of income in their calculations.
The amount of documentation you’ll be required to provide depends on how many assets or debts you have. For some borrowers, it may be as simple as providing a tax return and one asset statement that contains their retirement accounts, says Scoles.
“For those who obtain income from a variety of sources and have their assets spread out in a variety of accounts, we could be obtaining many documents to do calculations to show a borrower has the residual income necessary to meet monthly obligation, including keeping property charges current,” he says.
For more information about the reverse mortgage financial assessment, refer to “Have No Fear as Financial Assessment Nears.” The article provides a detailed list of how your income is determined, what you need to know about your credit, how your credit is assessed, more details about the set asides and a guide for how to prepare for the assessment.
Of course the best way to prepare for the assessment is to talk with a reverse mortgage lender — ask lots of questions.
Coming Up Short in Reverse Mortgage Financial Assessment? Now What?
Say you’ve provided all of the necessary documentation asked of you when applying for a reverse mortgage and a lender determines you might not be able to maintain current on paying things like property taxes and insurance.
That doesn’t mean you will necessarily be denied your reverse mortgage on or after April 27. If a lender comes to this conclusion, the Financial Assessment authorizes them to “set-aside” a certain amount from your loan proceeds to pay for future charges.
“The Financial Assessment is the culmination of documents related to willingness and capacity,” says Scoles. “Those who fall short of certain thresholds, rather than denying the loan, the underwriter will then need to require what’s called Lifetime Set Asides.”
These set-aside funds will be based on the life expectancy of the youngest borrower on the loan and can be used to pay property taxes and homeowner’s insurance.
It’s critical to note that if these set-aside funds run out, however, you will be responsible for continuing to pay property charges using whatever funds are at your disposal.
Even if you don’t need a set-aside, you can still choose to have one established voluntarily, where a lender may pay your property charges either from a line of credit or by withholding monthly disbursement from your reverse mortgage. Whatever method you may so choose is entirely up to you.
If you are interested in using a reverse mortgage to supplement your retirement, it’s important you speak with a lender to see if the loan is right for your financial situation.