Qualifying for a reverse mortgage used to be a credit-free arrangement: income and debts didn't matter, and neither did credit scores, because Home Equity Coversion Mortgages (HECMs, the FHA product that has about 90 percent of the reverse mortgage market) do not require borrowers to make monthly payments -- the loans are typically repaid from proceeds of the home sale when the borrower leaves. That arrangement is now at an end, replaced with a new HUD standard for financial assessments.
What's a Financial Assessment?
If the term "financial assessment" sounds suspiciously like "loan application," you have the right idea. HUD decreed that after March 2nd, 2015, lenders must check borrower credit reports and get their tax returns directly from the IRS. However, HUD recently announced that it is delaying the financial assessment requirement because its systems aren't yet ready for prime time. The new date will be announced soon after the old March 2nd deadline, and it will probably be between the first week of April and the first week in May.
Why Is Assessment Needed if Borrowers Aren't Required to Make Payments?
The new financial assessment requirement is meant to address a very sticky problem: since a borrower with an FHA reverse mortgage cannot be foreclosed for failing to make a monthly payment – remember no monthly payment for principal and interest is required – it might seem as though the borrower cannot be foreclosed.
That's not the case, however. Borrowers who don't pay their property taxes, homeowner insurance premiums, HOA fees or water bills in some cases can lose their home. That means elderly people who lose track of their bills or are just not good at financial management could find themselves out in the street. As it's not in the best interest of the borrowers, society or taxpayers to have these foreclosures, HUD has taken action to ensure that seniors who are at risk for foreclosure are protected.
How Is the Assessment Conducted?
The financial assessment involves looking at your credit history, current income and assets. It's notable that underwriters are directed to consider the fact that homeowners who take out HECM loans may be under a lot of economic stress, which could have made it difficult to pay their bills. HUD says:
In conducting this financial assessment, mortgagees must take into consideration that some mortgagors seek a HECM due to financial difficulties, which may be reflected in the mortgagor's credit report and/or property charge payment history. The mortgagee must also consider to what extent the proceeds of the HECM could provide a solution to any such financial difficulties.
Note: the term "mortgagee" refers to the lender, and the term "mortgagor" refers to the borrower. The financial assessment is not as rigorous as underwriting a traditional "forward" mortgage. The most important factor in the financial assessment is that you have consistently paid your housing-related expenses on time.
Qualifying for a Reverse Mortgage
With the new standard, HUD requires lenders to determine if an HECM applicant has "demonstrated the willingness to timely meet his or her financial obligations by analyzing the mortgagor's credit and property charge payment history."
As part of the assessment process, the lender must obtain your credit report and verify your financial information. HUD says your credit history is "satisfactory" if:
- All housing and installment debt payments have been on-time for the previous 12 months;
- There have been no more than two 30-day late mortgage or installment payments during the previous 24 months;
- The borrower has had no major derogatory credit on revolving accounts during the previous 12 months;
- "Major derogatory credit" on revolving accounts includes any payments made more than 90 days after the due date, or three or more payments more than 60 days after the due date.
And what happens if the borrower's credit check is not satisfactory?
You Can Still Get a Reverse Mortgage if You Fail the Assessment
If it turns out that your credit is unsatisfactory, the lender does not have to decline your loan. It can withhold some of your reverse mortgage proceeds as a Life Expectancy Set-Aside. This is essentially an escrow fund which the lender will draw on to pay property taxes and insurance premiums on your behalf for the expected life of the loan.
The bottom line looks like this:
- First, reverse mortgages are no longer "fog a mirror" financing. While credit underwriting is quite flexible and forgiving, it could shut some homeowners out -- probably the ones who need reverse mortgage proceeds the most.
- Second, if the financial assessment is not satisfactory, the lender will only make the loan if it can or wishes to withhold tax and insurance payments for the expected life of the loan.
- Third, by withholding tax and insurance payments a smaller amount will be available to the borrower.
- Fourth, there is some wiggle room in the assessment requirements. If the lender you're working with is unwilling to escrow taxes and insurance, you can try with other reverse mortgage lenders.
If you have good credit the new financial assessment standard will be easy to pass, but if your credit history reveals serious issues, it will be harder to get a reverse mortgage, and the reverse mortgage you do get could be smaller. To get an idea of how much you could qualify for use a reverse mortgage calculator.
For details and specifics speak with a lender for more information.