Qualifying for a Reverse Mortgage
Prior to April of2015, the only qualifications to get a reverse mortgage were that you were 62 or older, had enough equityin your home and that the home met FHA guidelines. In April of 2015, FHAimplemented something called Financial Assessment. This is the process andguidelines to identify the borrower’s willingness and ability to pay property taxes,insurance and other property charges.
The reason for this change was because of what I would refer to as an epidemic of foreclosures, mainly due to homeowner’s inability to pay their taxes and insurance. It was estimated that 10% to 12% of reverse mortgages were in default or foreclosure due to non-payment of taxes and insurance.
The Financial Assessment looks at your credit history for the last 2 years, your mortgage, property tax and insurance payment history, as well as HOA dues payment history. It also looks at residual income based on what region of the US you live in and household size.
If you fail the Financial Assessment, you may still be able to obtain a reverse mortgage but you will be required to set up a life expectancy set aside, or LESA, for short. The LESA requires that you set aside a portion of your equity to pay property taxes, homeowner’s insurance, flood insurance (if applicable) and HOA dues (if applicable), based on the number of years of your life expectancy.
This following is what is looked at for the Financial Assessment:
Satisfactory Credit: Verify you have made all housing and installment debt payments on-time for the previous 12 months and no more than two 30-day late mortgage or installment payments in the previous 24 months, AND the mortgagor has no major derogatory credit on revolving accounts in the previous 12 months. This 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.
If you fail the Financial Assessment due to credit, you may still not need to set up a LESA. If there were extenuating circumstances that caused you to miss payments, a strong letter of explanation along with documentation to support the letter will be required. Common extenuating circumstances are medical issues, loss of a spouse or loss of job.
Disposable Income: The disposable income is the other major portion of the assessment. Oregon is in the west region, and residual income requirements are as follows.
Residual Income: To calculate residual income we take your gross income and then start deducting expenses. These expenses include property taxes, homeowner’s insurance, debt payments (excluding current mortgage) and maintenance / utilities, which are calculated at $0.14 a square foot per month.
What Happens if You Fail Financial Assessment?
If you fail the residual income portion of the Financial Assessment, you may still not be required to set up a LESA. The main way to do this is through dissipation of assets. With dissipation, savings and retirement accounts are given a monthly income amount based on life expectancy. For example if you had $120,000 in savings and your life expectancy is 120 months, $1000 could be added to your monthly income for qualification purposes. We can also dissipate the reverse mortgage line of credit. Finally, if there are other members in the home with income that are non-borrowers, that income can be used to reduce family size.
I am not going to cover how they calculate the amount of equity to set aside for the LESA. They do not set aside the exact dollar amount for each month. This is because the amount set aside grows in availability in the same way the line of credit grows. Regardless, it can still be a very large chunk of your equity set aside to pay your taxes and insurance.
Unless you really need that equity for something else, it almost does not matter. You are going to have to pay your taxes and insurance one way or another. At least with the LESA, you no longer need to worry about it, and it just frees up additional cash for you.
One very important part to this is if you live beyond your life expectancy and the LESA has been used, you will be required to start paying taxes and insurance on your own again.
There are some people that want to set up the LESA even if it is not required. That is an option, and something to always consider.