Reverse Mortgage Glossary
HECM reverse mortgage borrowers are required to keep certain property charges current, including (but not limited to) property taxes, homeowner’s insurance, flood insurance (if required), HOA dues (if applicable), ground rents, special assessments, etc.
Keeping required property charges paid up is a key requirement of the reverse mortgage program. As long as at least one borrower is living in the home and paying property charges, no payback is required on the loan balance. If property charges are not paid, the borrower risks default, which could make the reverse mortgage due and payable in full.
Defaults had been a growing problem since the late 1990s and were creating bad headlines for the HECM program and losses for the FHA Mutual Mortgage Insurance (MMI) fund, which insures HECMs (see non-recourse). The long-term financial viability of the MMI fund is key to the long-term health of the HECM program, so FHA finally chose to tighten lending guidelines in 2014 to address the problem.
Reverse mortgage lenders are now required to more extensively analyze an applicant’s credit history and income in a process called financial assessment. The intent of financial assessment is to reduce defaults by making sure reverse mortgage borrowers have adequate financial resources and a reasonably good credit history as a condition of loan approval.
HECM applicants that fail financial assessment could still qualify with a life expectancy set-aside, or LESA, which carves out a portion of the reverse mortgage proceeds for the payment of property charges. A LESA doesn’t solve all credit or income issues, however. If an applicant fails financial assessment badly enough, it’s possible they won’t be approved for the reverse mortgage at all.