As I mentioned last month, beginning March 2nd, the reverse mortgage industry will begin to use a credit and income evaluation as part of the qualification
process for reverse mortgages.
I also went over a high level review of how HUD wants lenders to evaluate customer’s credit and income. In this issue, I want to review special circumstances
and what happens if you don’t meet the new requirements.
What happens, for in-stance if you qualify in one part of the financial assessment, but not the other part? Say you have great income but have had credit
issues, or visa-versa?
Or what if you just miss on the income qualifica-tion and also have some spotty (but not terrible), credit?
HUD has tried to address these issues by allowing underwriters some leeway in the decision process. In their 87 page guide that there is a whole section
called Compensating Factors and Extenuating Circumstances”.
HUD states: “Where the borrower’s credit and/or property charge payment history does not meet the criteria, lenders must consider extenuating circumstances that led to the credit/financial issues”.
This statement does not mean that the underwrit-er simply pretends not to see it, or if you have a sad story that all is forgiven.
The situation must be documented and you need to demonstrate that the “likelihood that these circumstances will not recur”.
Since I don’t want to bore you with too many details, suffice it to say that we can consider most situations as long as the you can document the circumstance.
I don’t want you to think that you don’t qualify for a reverse mortgage just because you have poor credit or low income. Depending upon your situation
and circum-stances, we may still be able to help you.
If you do have issues with poor credit or low in-come, HUD allows us to do the loan as long as we set up a “Life Expectancy Set-aside” (LESA), account
to cover the taxes and insurance on your home.
HUD says: “Where the lender determines that the borrower has NOT demonstrated the will-ingness and/or the capacity to meet his or her property charge obligation, a Life Expec-tancy Set-Aside is required“.
A Life Expectancy Set-Aside is an amount with-held from the borrower’s loan proceeds for the payment of property charges during the life of the borrower.
There is a formula that HUD requires lenders to use to calculate the amount that needs to be set aside. This amount can be substantial, espe-cially if
the borrower is close to 62 years 0ld. The older he or she is, the less money that will need to be set-aside.
The LESA may be required to be fully funded or partially funded depending upon the circumstances.
Once again HUD provides the details: “Where the lender determines that the borrower has NOT demonstrated the willingness to meet his or her financial obligations
(i.e. very poor credit or poor history paying property charges), even where residual income is sufficient, or where the borrower has not demon-strated
the willingness and capacity to meet his or her financial obligations, the Life Expectancy set-aside must be fully funded“.
What this means is that the lender will hold back enough money from the proceeds of the reverse mortgage to pay property taxes and homeowner’s insurance
premiums on behalf of the borrower for the life of the loan.
The borrowers remain responsible for all other property charges (i.e. HOA dues, maintenance, etc…).
However, when the lender has determined that the borrower HAS demonstrated the willingness to meet his or her financial obligations, but has not demonstrat-ed
the capacity to do so, (good credit but low in-come), the Life Expectancy Set-Aside must be partially funded”.
What this means is that the lender will hold back the Monthly Residual Income Shortfall (MRIS), and send the borrower semi-annual payments to cover this
shortfall in the bor-rower’s income. It is the borrower’s responsibility to pay their own property taxes and homeowner’s insurance.
For instance, if you fall short of the income requirements by $200 per month, the lender will set-aside $2,400 per year and send you $1,200 every six months
to cover the shortfall.
As you can see, if you have poor credit, the lender will have to set up a larger LESA account than if you just have low income.
This money comes from proceeds from the reverse mortgage that will not be available to you. This could stop you from getting the reverse mortgage if there
is now not enough money to pay off a current mortgage due to the fact that the lender had to set-aside money to cover the taxes and insurance.
As long as you get the counseling completed and sign the application papers by the end of February, you will not have to worry about these changes.