Due to changes implemented on January 13, 2014, HUD now requires a review of HECM applicants' finances and credit to determine if "set-asides" are required. Borrowers whose credit history suggests that they might neglect to take care of their taxes, insurance and maintenance, or those whose income is insufficient to pay those expenses will have their costs paid by their reverse mortgage lender. The payments will be withheld from the proceeds of the reverse mortgage to ensure that the lender's interest in the property is protected.
The U.S. Department of Housing and Urban Development (HUD) has changed its guidelines for its Home Equity Conversion Mortgage (HECM) program. Previously, an applicant's credit and income weren't considered, because reverse mortgages don't require borrowers to make monthly payments. However, homeowners are required to maintain their property and keep up the tax and insurance payments. HUD altered its guidelines because some elderly homeowners ended up in foreclosure because they didn't keep up with these obligations.
Options for Reverse Mortgage Set-Asides
The method used to set aside funds depends on how the borrower chooses to receive his or her reverse mortgage proceeds.
Reverse mortgage borrowers who select a lump sum distribution of funds will have some of that money withheld by the lender for future payment of taxes and insurance. The formula used to calculate the amount of the set aside includes estimated costs of property charges and the life expectancy of the youngest borrower.
The second option for a reverse mortgage set-aside applies to borrowers who elect to receive their reverse mortgage payout on a monthly basis or as a line of credit. Mortgage lenders can arrange for reverse mortgage borrowers to authorize withholding of property charges from monthly payout funds or to pay property charges from their lines of credit as amounts become due. HUD guidelines don't allow reverse mortgage borrowers to cancel set-asides required by reverse mortgage lenders.
Due to potential variables that can occur over time, it's possible that the amount set aside from reverse mortgage payout funds won't last throughout the life of a reverse mortgage. If this happens, the borrowers become directly responsible for paying property charges as they become due, or risk foreclosure.
Optional Set-Aside Offers Convenience
Borrowers who are not required to have funds set aside or deducted from their reverse mortgage payouts or credit lines can elect to have their mortgage company pay for property charges with a set-aside or withholding, similar to the impound account with a traditional "forward" mortgage. This provides a convenience and assurance that property charges are paid on time.
LendingTree's network of reverse mortgage lenders and HUD-approved reverse mortgage counselors can answer questions and provide details about set-asides for property charges.