This year, reverse mortgages will undergo yet another transformation in a long line of recent program changes designed to make these loans safer retirement planning mechanisms for the borrowers they serve.
Starting on April 27, 2015, borrowers age 62 and older will be subject to a financial assessment before they can take out a reverse mortgage. This is true only for new borrowers who decide to get the loan on or after April 27 and does not extend to current borrowers who have taken a loan prior to the effective date.
Established by the U.S. Department of Housing and Urban Development (HUD), which administers federally-insured reverse mortgages (known as Home Equity Conversion Mortgages) via the Federal Housing Administration, the rule was created to minimize the risk of borrowers defaulting on their loans.
Mandatory loan counseling has long been required for all HECM loans before a borrower can obtain a reverse mortgage. But now with the financial assessment, that counseling will be a more in-depth look into your finances that will require you to present a variety of documentation.
What you’ll need for the reverse mortgage financial assessment…
Essentially, the cornerstone of the financial assessment is for lenders to determine whether applicants have the assets or resources to cover loan costs, particularly property taxes and homeowners insurance that all borrowers must maintain.
This means lenders may ask you to provide records like:
- Proof of income — pay stubs, W2 forms, and if applicable, documentation for Social Security, pensions or any other types of income
- Information on your assets such as checking and savings accounts, IRAs or other investment accounts
- Due to the nature of the financial assessment’s qualification conditions, borrowers may also have to be prepared to provide a chronological list of all their debts, including home mortgages, car loans, credit cards—anything that has fixed terms and payments, says Mike Gruley, a reverse mortgage lender with Plymouth, Michigan-based 1st Financial Reverse Mortgages, a division of Success Mortgage Partners.
“From a borrower’s standpoint, it’s a lot more information that is now going to be required,” Gruley says.
Does spotty credit impact my ability to pass the reverse mortgage financial assessment?
Unlike with a traditional mortgage, where poor credit can ultimately prevent you from getting a loan, with the financial assessment subpar credit won’t necessarily restrict you from obtaining a reverse mortgage.
“People assume that if they have bad credit then they can’t get a reverse mortgage, but that’s not true,” Gruley says. “With the financial assessment, you still have a chance to get a reverse mortgage, but a lender will have to factor in set asides.”
What is the reverse mortgage financial assessment for? Why is it necessary?
Just because you’re not making monthly payments, as you would for a traditional “forward” mortgage loan, reverse mortgages require borrowers to remain current on your home’s taxes, insurance and upkeep — or else run the risk of default and subsequent foreclosure.
The financial assessment is meant to assess your ability to pay for these mandatory costs since if these costs are not kept current, then the home could be foreclosed on. The reverse mortgage financial assessment is designed to protect you from foreclosure.
What if I can not afford ongoing taxes, insurance and upkeep?
If — during the financial assessment — it is determined that you will not be able to afford these ongoing housing costs, it may still be possible to secure a reverse mortgage — depending on the loan amount you are eligible for. If you are eligible for enough money but your income suggests that you will be unable to pay for the ongoing housing costs, then lenders may be directed to take a portion of the borrowers loan proceeds to be “set aside” for the payment of these costs.
This means that a portion of your loan amount will be “set aside” and will be used to fund taxes, insurance and upkeep.
The amount that is set aside is calculated from your the total proceeds you may be eligible to receive, which includes factoring in your age, current interest rates and the value of your home. This figure will vary from borrower to borrower, depending on individual’s unique situations.
What you can do to prepare for a reverse mortgage financial assessment
If the provisions of the financial assessment seems like a lot to process, don’t worry. There are several things you can do to learn more about how to qualify for a reverse mortgage under the new rule.
Let’s say you’ve thought long and hard about the prospect of getting a reverse mortgage and are ready to take the next steps, but you’re still unsure how the new changes fit into your situation.
Talk to a lender: To better help you navigate the financial assessment, along with all the documentation you’ll need to provide, contact a reverse mortgage lender. These changes have been long-awaited by many reverse lenders who have been developing various educational resources and strategies on how to better serve borrowers as this new rule takes effect this year.
A large part of their efforts has been to facilitate a dialogue to dispel fears and misconceptions of how the financial assessment stands to impact borrowers.
Get an estimate of your loan amount: “It’s always important to preface every conversation about the financial assessment by saying that it alone will not be a determination of whether a borrower qualifies for and will be able to obtain a reverse mortgage,” says Gruley.
Gather your information: A proactive approach for borrowers who are serious about reverse mortgages can be something as simple as making a list of all of their debts and gathering key information like proof of income, bank statements and other asset verification.
Lenders may even provide you in advance with a checklist detailing all of the necessary paperwork and documentation that you’ll need when applying for a reverse mortgage.
It’s important to remember that reverse mortgages, just like any other financial instrument, are complex assets that, when used properly, can be a valuable wealth management tool that provides borrowers with extra cash flow during their retirement years.
Not only is it important for you to do your own homework on reverse mortgages, but it’s even more important you work with a certified reverse mortgage professional who can help answer your questions and help you find a loan that best suits your needs.