Reverse Mortgage Information: What You Need to Know About New Product Coming in April

reverse mortgage

A new reverse mortgage is debuting in late April and, in some ways, how to qualify for a reverse mortgage will soon look a lot like that of getting a traditional “forward” mortgage.

Historically, reverse mortgages have been known as loans that did not require credit or income requirements — but that’s changing.

Come April 27, reverse mortgage borrowers will need to provide documentation proving their income, assets and debts, in order to qualify for the loan.

The new rules are part of the Department of Housing and Urban Development’s (HUD) “financial assessment” guidance, which was issued in an effort to better protect borrowers and the reverse mortgage program.

And, despite some of the hype surrounding the changes, industry professionals say the new requirements won’t be more than an small inconvenience for most reverse mortgage borrowers, likening the new process to that of applying for a conventional mortgage or other loans.

“Most of our clients have probably been through the process of applying for a loan in the last five to 15 years, so the demographic has a lot more familiarity with what’s required to apply for a loan,” says Dennis Loxton, regional vice president at Plymouth, Michigan-based 1st Financial Reverse Mortgage. “For them, it’ll be a little bit of an irritant, but it’s not a significant deal breaker.”

So if you’re planning to tap into your home equity in the future, here’s what you need to know about the “new” reverse mortgage:

How Do I Qualify for a Reverse Mortgage — New Loan Requirements

Traditionally, borrowers could qualify for a reverse mortgage if at least one title holder was 62 or older, if they owned their home outright or had a low enough mortgage balance and lived in the home as their primary residence.

However, after the financial assessment takes effect on April 27, borrowers will be more closely evaluated on their ability and willingness to meet their ongoing reverse mortgage loan obligations including property tax and homeowners insurance.

Eligibility will take into account a number of factors related to the borrower’s finances, including income, assets, monthly living expenses and credit history; and timely payment of real estate taxes, hazard and flood insurance premiums.

Financial Analysis: What You Need to Know to Qualify for a Reverse Mortgage

While you won’t be making monthly mortgage payments with a reverse mortgage, you are still required to pay ongoing property charges, including taxes and insurance, and are expected to maintain upkeep on the home.

Because of this, you will need to provide your lender with documentation that shows proof of income in order to qualify for the loan—even if you are no longer working full or part time.

“Most of the documentation they’ll require is bank statements verifying your income [and] assets — this is all just part of the normal process of applying for a loan in today’s world,” Loxton says.

After taking into account all income streams, reverse mortgage lenders will determine your “residual income,” which is calculated by subtracting total monthly expenses from monthly income. This residual income will then be evaluated based on your family size and location in the U.S.

“In most parts of the country, if you’re a single person, you generally want to have more than about $560 a month [in residual income],” Loxton says. “If you’re a couple, you generally want to have more than about $880 a month.”

In addition to income evaluation, lenders will analyze all borrowers’ creditworthiness by taking a look at their credit reports and payment histories.

No minimum credit score is required to qualify for a reverse mortgage, but lenders will still evaluate borrowers’ credit to gauge their prior track record.

“If you have a history of paying your property taxes, insurance and mortgage on time, generally speaking, the new credit criteria won’t be much of an issue to you,” Loxton says.

How Do I Qualify for a Reverse Mortgage if I Have Bad Credit or Other Financial Issues? 

If you don’t have stellar credit or enough residual income, you may still be able to qualify for a reverse mortgage.

It’s important to know that if for some reason you fall short [of the requirements], that’s not an automatic bar to qualifying for a reverse mortgage,” Loxton says. “There is an alternative path to qualifying.”

That alternative path is called a “life expectancy set-aside,” which is a reserve that is partially or fully funded, depending on your financial situation.

As the name implies, these funds are set aside from the reverse mortgage’s proceeds in order to cover property charges down the road.

A partially funded set-aside is required if you have demonstrated a willingness to meet your financial obligations but your residual income is insufficient.

“Let’s say the lump sum required to set aside at the closing of the loan is $9,500. That would be set aside and then periodically the servicer would send a check to the borrower to pay the taxes and insurance,” Loxton says. “My gut tells me that the partial set-aside for most people isn’t going to be a deal breaker [for getting a reverse mortgage].”

A fully funded set-aside is required if you have not demonstrated a willingness to meet your financial obligations, even if your residual income is sufficient.

“If you don’t have a propensity to pay taxes and insurance, or if you have several negative credit events in your history that can’t be addressed, then you would require a full set-aside and for a lot of people that could be an issue,” Loxton says. “I just don’t see that being a significant percentage of [borrowers].”

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