Before financial assessment went into affect, professionals in the reverse mortgage field were predicting that the new rules starting on April 27th would
only negatively impact between 3% to 15% of the people applying for one.
Unfortunately, I seem to have already talked with the 15% who are going to have challenges with these rule changes.
The new rules state that the lender is now required to verify that the borrower’s credit is good and that they have enough income to pay for their housing
expenses, (homeowner’s insurance, property tax, maintenance, etc…), as well as the rest of their financial obligations.
Lenders are not concerned with credit scores, but they want to see that the borrower has kept his/her homeowner’s insurance current and has not been late
paying the property taxes or HOA dues in the last two years.
They also need verify a good payment history on the mortgage as well as no major derogatory credit on other bills, like credit cards or car payments.
These are the basic ideas behind financial assessment but there are a lot more details that could come into play if some-one is self employed or has had
some credit issues.
Here are a few examples: I met with a couple who have a beautiful $600,000 home with a $300,000 mortgage. Before April 27th, I could have loaned them enough
to pay off their mortgage and a $10,000 IRS lien.
However, since they have had some credit issues, and the husband has been self employed with numerous businesses over the years, we have to use the wife’s
income only. Neither one is receiving Social Security yet so in addition to credit challenges, they also have issues verifying enough income.
I can still help this couple out but it would require a large Life Expectancy Set-Aside (LESA). A LESA is an amount withheld from the reverse mortgage
proceeds for the payment of property charges during the life of the homeowners. There is a formula for calculating this amount, but the younger the
home-owners are, the more money is set-aside.
In cases where credit worthiness is an issue, the lender has to set aside enough to cover the full property taxes and insurance. If the borrowers are on
the younger side (early 60’s), this amount can be tens of thousands of dollars.
In the case of this couple, I can loan them about $315,000 (enough to cover the payoff and the IRS lien), but with a $30,000- $50,000 set-aside requirement,
they will not have enough money to do the loan.
In another situation a couple in their early 70’s have had a year from hell with medical issues. They have kept their credit perfect, but have used credit
cards to cover the medical expenses.
They own a beautiful home that they have completely re-modeled that is worth about $300,000. Without including their mortgage payment, their bills and
housing expense equal 100% of their Social Security income.
However, they do have income from a family farm that they have owned with siblings and do report this income on their tax returns. I do have to inconvenience
them by collecting two years tax returns, but it looks like we can at least get it done.
We should also keep in mind that these new requirements are put in place to help the home-owner. If someone cannot afford their home, getting a reverse
mortgage will only delay the inevitable because they will eventually lose their home if they cannot pay the taxes. In this case, the home should probably
be sold.
