Qualifying for a reverse mortgage used to be easy for anyone who was the right age with enough home equity. Sadly, the credit crunch and recession wreaked havoc with this sector of the home loan market, and by 2012, ten percent of all reverse mortgages were in default, according to The Los Angeles Times. That year, more than $1 billion of taxpayers' money was poured into a bailout, and, unsurprisingly, tougher regulations soon followed.
It's important to note that the rules described below apply only to reverse mortgages that are backed by the Federal Housing Administration (FHA). These are called home equity conversion mortgages, or HECMs (pronounced "heck 'ems"). Although these make up the large majority of this type of home loan, private-sector lenders also offer competing products, known as "proprietary" or sometimes "jumbo" reverse mortgages, and each of these has its own individual lending criteria. This means those who can't or don't wish to borrow with the HECM, or those with more expensive property who want larger loans may still be able to get a proprietary loan.
HECM Requirements for Borrowers
In order to qualify for an FHA-backed HECM, borrowers must fulfill all the following criteria:
- The youngest, younger or sole applicant must be 62 years of age or older. Although in practice these are most frequently spouses, anyone can apply, including siblings, friends and others.
- The home on which the reverse mortgage is to be secured must be the principal residence of the applicants.
- No other debts -- including a traditional mortgage -- may be secured by that home. However, a small remaining mortgage balance can (and must be) paid off if necessary from the proceeds of the new HECM.
- No applicant can be delinquent on any debt owed to the federal government, for example a government-backed student loan. Applicants must pass what is called a CAIVRS check, which is a screening for these delinquencies.
- Applicants must have sufficient financial resources to manage housing-related costs, including property taxes, insurance and homeowner association fees.
- All applicants must attend a counseling session with a HECM counselor approved by the U.S. Department of Housing and Urban Development (HUD). These sessions are low cost, and may be free for certain borrowers. Local ones can be found on HUD's website.
HECM Requirements for Properties
For a home to secure a HECM, it must be one of these property types:
- A single-family home
- A residential building comprising two to four units, one of which must be occupied by the applicants
- A unit in a HUD-approved condominium project
- A manufactured home that meets HUD's standards for such dwellings
There is a general requirement for homes that secure HECMs to be in a reasonable state of repair, though it may be possible to use some of the proceeds of the loan to make necessary improvements.
New and Recent Requirements for HECM Borrowers
Qualifying for an FHA reverse mortgage became more difficult following the introduction of new creditworthiness regulations, which were introduced between September 2013 and March 2015. These financial assessments must include:
- A check of credit reports from all the three major credit bureaus
- The review of borrowers' payment histories for continuing housing-related costs, such as property taxes, insurance premiums and homeowner association fees
- The assessment of applicants' regular and occasional incomes from most sources, including private pensions, social security entitlements, IRA and 401(k) accounts, investments and any continuing employment
- A comparison with those incomes of continuing outgoings, such as payments on credit cards, alimony and medical bills, so as to gain a realistic picture of the household's cash flow
If applicants are not deemed sufficiently creditworthy, they may still be able to get a HECM. First, lenders are allowed to consider extenuating circumstances and compensating factors. HUD states in its lender guidelines that in many cases, HECM borrowers are applying for the mortgage because they're experiencing financial difficulties, which may be reflected in their poor credit history. According to HUD, "The extent to which the HECM may provide the solution to these financial difficulties must be taken into account during the financial assessment." In other words, if the cash flow generated by the HECM would enable the applicants to pay their obligations, the lender must consider that as a compensating factor.
Second, applicants with poor payment histories or limited resources can still be approved for HECMs if their lenders are willing to withhold some of the loan proceeds and use them to pay their housing-related costs for them. This reduces the amount of money available to the borrowers, but protects both the borrower and lender.
As mentioned earlier, some private-sector lenders may operate with less stringent criteria, and it may be possible for someone who does not qualify for a HECM to be approved by one such company. However, these reverse mortgages tend to be complex products, and it is usually a good idea both to comparison shop for the best deal and to obtain reverse mortgage counseling or speak with a reliable financial professional before committing to a loan.
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